ISSN 1347-9156

JBICI

Working Paper

Policy Coherence in Development:

Case Study of East Asia

Megumi Muto, Takuro Takeuchi, Norifumi Koike

NO. 24

October 2007

JBIC Institute (JBICI)

The JBICI Working Papers are based on the research done by staffs of Japan Bank for International Cooperation (JBIC) and published by the JBIC Institute. The views expressed in this paper are those of the author and do not necessarily represent the official position of JBIC.

Policy Coherence in Development: Case Study of East Asia

Megumi Muto∗ * Takuro Takeuchi∗ ** Norifumi Koike∗ ***

Contents

Chapter 1 Introduction P2 Chapter 2 Policy Coherence in Assisting the Development Process of

Industrial Agglomerations Centered on Foreign Direct Investment P4 Chapter 3 Case Study: Eastern Seaboard of Thailand P11 Chapter 4 Case Study: Dalian, China P24 Chapter 5 Case Study: Northern Vietnam P42 Chapter 6 Conclusion P58

Summary

This paper conducted case studies of the Eastern Seaboard of Thailand, Dalian in China, and Northern Vietnam in order to examine whether policy coherence in development was achieved as a result of the following: 1) Government-formulated policies addressing market failures emerging through the process of industrial agglomerations and 2) Japan’s support of such efforts with aid, trade, and overseas investment policies. For each case, this paper briefs the development of industrial agglomerations and reviews market failures occurring in the process, policy drivers pursued by the developing countries in response to the failures, and the corresponding Japanese assistance. Next, it makes several observations on how coherence in Japanese aid, trade, and overseas investment policies can be achieved. Firstly, strong ownership of developing countries is important not only for the purpose of recognizing market failures but also for identifying policy drivers suitable for each country’s market ∗＊ Senior Economist, Director, Development Policy Research Division, JBIC Institute ∗＊＊ Deputy Director, Development Policy Research Division, JBIC Institute (as of April 2007) ∗＊＊＊ Vice Deputy Director, Development Policy Research Division, JBIC Institute (as of April 2007)

1

development and state of government; it is also important for the development of corresponding policies. Secondly, it is important for Japan to be able to adequately mobilize an aid menu conducive to the policy drivers of developing country governments. In the future, we expect more consciously coherent policies similar to those seen in Vietnam. Finally, since industrial agglomerations are led by private sector initiatives, it is important to establish the policy environment with regard to infrastructure and institutions in full accord with the (potential) needs of private enterprises. Chapter 1 Introduction

1. Policy coherence in development

With the increasing emphasis on the outcomes of development assistance and with the globalization of the economy, the scope of policies the international community deems as influential for developing countries is expanding. Policymakers have come to realize that not only aid policies that focus mainly on the transfer of capital and technology from developed to developing countries but also policies in other areas such as trade and investment in industrialized countries are closely related to the development of countries. According to Kawai (2005, p. 239), “policy coherence in development” (hereafter policy coherence), in the broad sense of the term, refers to the policies and systems of developed countries, developing countries, and international development organizations that are mutually consistent in achieving developing countries’ policy objectives of development and poverty reduction. Policy coherence can be understood on 4 levels: 1) Coherence in a country’s overseas development administration (ODA) policies, 2) coherence between a country’s ODA policies and non-ODA policies, 3) coherence in the policies of developed countries, and 4) coherence between the policies of developed and developing countries.

A series of study sessions entitled “Policy Coherence Analysis Based on a Regional Economic Approach: The East Asian Experience and the Policies of Other Donors” was held at the Japan Bank for International Cooperation (JBIC) Institute from November 2003 to July 2004, and a report was completed based on the results. Based on a comprehensive overview of Japanese aid in East Asia, the report suggests the following three points regarding policy coherence. First, a review of the chronological history of the Japanese aid policy suggests that the aid policy was implemented in a

2

coherent manner, according to a certain pattern, depending on the stage of development of the developing countries (coherence of the Japanese aid policy according to the developing country). Second, in reviewing Japan’s trade, overseas investment, and aid policies from a cross-sectoral perspective, granted there were a number of unintended consequences, we found that these policies were coherent in accomplishing the following: infrastructure developments in the developing countries as a result of aid policy, increased foreign direct investment through shifts in manufacturing industries from Japan to Asian countries, an increase in manufactured exports—associated with the expansion of intrafirm divisions of labor and transactions—by developing countries, and an increase in household incomes in developing countries (coherence between multiple policies). Third, Japan’s aid policy, which focused on infrastructure development, was coherent with the policies of the East Asian developing countries, which aimed to achieve economic growth through industrialization and export orientation (coherence between the policy of the developing and developed countries). In this paper, we conducted case studies with regard to the second point, i.e., coherence among Japan’s multiple policies in assisting East Asian industrial agglomerations centered on foreign direct investment.

2. Approach of the study

Foreign direct investment is considered to have contributed to rapid growth in East Asia. A virtuous circle was created, where foreign direct investment brought economic growth through the expansion of domestic investment and exports; this economic growth attracted more foreign direct investment through the expansion of investment opportunities (Urata, 2005, p. 54). In particular, regions with sustained inflows of foreign direct investment enjoyed the effects of development in industrial agglomerations, such as the creation of employment and increase in income. In such a virtuous circle of industrial agglomerations centered on foreign direct investment, what were the roles played by Japanese aid, trade, and overseas investment policies? How can the coherence between these policies be explained, if such coherence did indeed exist? These are the main issues that will be discussed in this paper.

The World Bank’s World Development Report 1997, “The State in a Changing World,” suggested that governments can do the following things that would serve as “catalysts” in countries with markets in the early stages of development: provide special assistance for exporters, regional infrastructure (physical, human, and institutional), and ensure that there is cooperation between the public and private sectors. In this context,

3

we assume that Japan may have supported East Asia with multiple policies in response to the needs of the developing country governments. According to this assumption, the developing country governments themselves recognized the importance of regional infrastructure (the second role mentioned above) and then identified the policies most suitable for their respective countries. By reflecting such needs, the Japanese policies may have been implemented in a coherent manner. We also assume that there may have been recent cases in which Japan has consciously sought policy coherence.

The structure of Chapter 2 and the proceeding chapters are as follows. In Chapter 2, we will present the hypothesis for the case studies. In Chapter 3 and beyond, based on the hypothesis, we will analyze the cases of the Eastern Seaboard of Thailand, Dalian in China, and Northern Vietnam. In Chapter 6, we will analyze the common points observed across the three cases and present several suggestions for policy coherence. Chapter 2 Policy Coherence in Assisting the Development Process of

Industrial Agglomerations Centered on Direct Investment 1. Hypothesis for the case studies

This paper focuses on Eastern Seaboard of Thailand, Dalian in China, and Northern Vietnam as the cases for its case studies. [As will be discussed in detail below, these areas either had no notable industries or had deteriorating industries and falling economic standards. However, all of them had great latent potential due to comparable advantages, strategically strong locations, and governments that took strong initiatives toward development. Accordingly, the hypotheses of the case studies are that the increase of foreign direct investment, which contributed to the development of industrial agglomerations and an increase in income, was due to the following: 1) Government-formulated policies addressing market failures1 emerging through the process of industrial agglomerations centered on foreign direct investment and 2) Japan’s support of such efforts with aid, trade, and overseas investment policies. In terms of policy coherence, although Japan may not have necessarily coordinated its aid, trade, and investment policies in supporting Thailand and China from 1980 through the 1990s, it may have achieved policy coherence as a result of assisting the policy drivers 1 Markets are thought to achieve the optimal allocation of social resources; however, they do not necessarily achieve this optimality with regard to all aspects of the economy. “Market failures” can result from the supply of public goods, asymmetry of information, monopolistic behavior, and so forth. It is imperative for governments to act to remedy these market failures (Hayami, 2000, p. 229). Sonobe and Ohtsuka (2004, p. 6) suggest the importance of industrial agglomerations in creating an environment conducive to designing devices and mechanisms to effectively supplement the market for industrial development.

4

of the developing country governments. In contrast, we assume that since 2000, Japan has consciously coordinated its aid, trade, and investment policies in supporting Vietnam and that there has also been increased competition among ASEAN countries to attract investment.

In the content that follows, we will discuss a typical and simplified example of the development process of industrial agglomeration centered on foreign direct investment, and also outline the market failures that could take place at each stage of development. We will then discuss developing countries’ policy drivers designed to correct these market failures, and how Japanese aid, trade, and overseas investment policy tools can contribute to each policy driver. In terms of Japanese aid policy tools, we will mainly discuss ODA yen loans, technical cooperation, and grant aids. In terms of trade policy tools, we will mainly consider tariffs. In terms of overseas investment policies, among a wide range of tools that can be adopted, including financial assistance through other official flows (OOF), investment agreements, tax treaties, or information mediation by organizations such as the Japan External Trade Organization (JETRO), we will focus mainly on assistance provided to businesses expanding overseas for purposes such as reducing the risks surrounding foreign direct investment; we will also focus on assistance for improving the institutional and policy environments of recipient countries, the Ministry of Economy, Trade and Industry (METI) having directed its efforts toward both purposes since the mid-1990s.2

2. The development process of industrial agglomerations based on foreign direct investment and failures in markets (typical examples) (1) The dawn of direct investment inflows

In order to attract foreign direct investment, developing country governments determine massive infrastructure investments in regions with great latent potential. Governments usually consider infrastructure investments by private sectors in regions already experiencing economic development and where the use of infrastructure is expected. However, it is unrealistic to expect infrastructure investment from private sectors in regions where there are no notable industries or whose economic standards are falling, even if the regions have latent potentials. In such regions, the government will usually take the initiative for massive infrastructure development, the construction of industrial estates, or the development of laws and regulations related to investments.

2 The White Paper on International Trade published in 1996 suggested that as the activities of Japanese companies expand through direct investment, the risk involved with the institutional policy environment (tax system, regulations, etc.) issues of companies targeted for financing gradually elicits involuntary withdrawal, highlighting the need for an enhanced approach (METI, 1996, p. 5).

5

Typical examples of market failures during this period are failures to launch the infrastructures (that are high in risk and public in nature, namely, electric power, roads, railways, harbors, airports, water supply, communications, among others) to construct industrial estates, or to develop the investment-related laws and regulations. (2) The early stage of direct investment inflows

This is the period when the initial conditions are met and foreign direct investment begins to come in. It is the period when a company that has launched its business in the area experiences a number of problems related to investment-related laws and regulations or administrative operations. It is also a time when the need for subcontractors increases and small- and medium-sized firms start considering the launch of their businesses in the area.

Typical examples of market failures during this stage are mainly due to information asymmetry. The first type of information asymmetry arises when companies fail to convey to the developing country governments the problems they have identified in the minute details of investment-related laws and regulations or administrative operations. The second type of information asymmetry rises when the developing country governments fail to convey to the companies any remedial measures they have taken. This would lead to information asymmetry in the sense that these measures would not be transmitted to individual firms. These types of information asymmetry can create risks and deter investments and can leave a significant impact, especially on small- and medium-sized firms. However, information mediation between developing country governments and individual firms can alleviate these issues. (3) The main stage of direct investment inflows

Once the initial conditions critical to investments, including infrastructures, are in place; the environments surrounding regulations, policies, or administrations (particularly at the implementation level) are improved, and most issues pertaining to the investment climate are resolved, confidence starts to grow as many businesses shift to the region, and direct investment starts to concentrate and industrial agglomerations are formed. At this stage, there is an increased need for engineers and personnel with good management skills.

A typical example of a market failure during this stage is the shortage of personnel with a high level of knowledge and expertise. The gap between demand and supply becomes particularly apparent for engineers or personnel with management skills who can fill managerial positions. It is difficult to increase personnel supply only through the

6

private sector since a certain lead time is needed to develop human resources as well as due to the importance of initiatives at the basic education level. 3. Policy drivers for correcting market failures (1) Development of infrastructures

Infrastructures such as electric power, roads, and harbors are the basis for keeping down transaction costs and reducing the risk of production activities. In order to attract foreign direct investment, these infrastructures should be developed to a considerable threshold level. A major portion of these investments should be completed at an early stage. Many developing countries find it difficult to procure large amounts of capital in a short period of time for infrastructure development. As such, large-scale ODA yen loans with a long-term repayment period contribute significantly.

Furthermore, ongoing improvement of the quantity and quality of the infrastructure is necessary for continued foreign direct investment. As industrial agglomerations continue to advance, it becomes easier to forecast the profitability of these infrastructures. The governments may then consider the introduction of not only public funds but also private funds (so-called PPP funds). (2) Enhancement of the institutional/policy environment

In the early stages of direct investment inflows, countries actively attracting direct investment will formulate investment-related laws and institutions in the areas of business law (commercial and civil law) and taxation systems (income tax, corporate tax, and tariffs), and also provide a variety of incentives such as tax benefits. Technical cooperation for the establishment of laws and institutions contributes significantly when a country is in the early stages of improving its legislations.

The effectiveness of laws and institutions is tested at the operational stage. Indeed, there are many companies that encounter problems for the first time only after they have taken their businesses to a country. Examples of such problems are flaws in the legal system, or administrative defects that the company initially failed to detect. It is difficult for an individual company to convey these types of information to developing country governments and enable a reform in their systems and policies. Therefore, it would be ideal for several companies and developing country governments to share information as problems arise, and build a framework that addresses the reform of the investment system and policies. Industry associations such as the Japanese Chamber of Commerce can be a facilitator if a channel for dialogue between developing country governments

7

and companies in the region has already been established. Public organizations such as JETRO can serve as information mediators if this channel has not yet been established. (3) Eliminating the information gap and reducing risks

Gathering information on laws, the tax system, administration (business permits, customs, etc.), and the labor system is extremely critical when individual firms assess whether to shift to or continue operations in a developing country. It is also important for developing country governments promoting reforms in their systems and policies to accurately convey information on these reforms to individual companies.

While large firms can rely on their own information networks to obtain necessary information, it is difficult for small- and medium-sized firms to do the same. The local Japanese Chamber of Commerce, JETRO, and overseas branches of Japanese local authorities can play a significant role when small- and medium-sized companies attempt to bridge the information gap without depending on large companies. Meticulous services such as assisting business start-ups, helping the company to find reliable business partners and law firms or accountants, or informing the company of the change in the local regulations in a timely manner (these kinds of information are often circulated only in the local language and not conveyed to foreign companies) contribute to reducing a company’s risk stemming from information asymmetry. (4) Human resources

Some of the aspects of human resources that are most valued in the early stages of direct investment inflows are that they are inexpensive and that they have a conscientious approach to work. However, as companies shift into an area and the industrial agglomeration is formed, competition may intensify and companies may see an increased need to develop products more attuned to local needs. At the same time, a higher level of managerial skills may become necessary to deal with the increase in subcontractors and dispersed production among many countries. These will lead to a higher demand for highly trained personnel such as engineers or those with management skills. Japan can play an active role in fostering human resources with advanced knowledge and skills through ODA yen loans (for programs in vocational schools, higher education, etc.) and technical cooperation projects.

(5) Other related policies

We cannot ignore the importance of the trade and investment policies of developed countries or the relevant international framework as policy drivers that

8

contribute to foreign direct investment-based industrial agglomerations, although they differ in nature from the policy drivers (focused on in this paper) devised for correcting market failures. Tariff policies and OOF, which assist direct investment, are two examples of such policy tools. Japan benefited from the General Agreement on Tariffs and Trade (GATT) system established during the postwar period and was able to achieve economic growth through trading in the global market. The Kennedy and Tokyo Rounds from 1960 to 1970 enhanced preferential treatment for developing countries. The Uruguay Round negotiations, which concluded in 1994, established rules governing not only trade in commodities but also the international exchange of services, labor, intellectual property, and capital. Subsequently, the World Trade Organization (WTO) was founded in January 1995 as a driver for multilateral trade built on these rules. Amidst such developments, Japan, who consistently supported the GATT and WTO systems, achieved near complete trade liberalization in tariffs by 1970. By the mid-1970s, Japan had already lowered its tariff burden rate to around 2%–3%, the same level as that of the United States and the EU. Machinery was particularly notable since there were hardly any tariffs imposed in this area. Japan’s low tariffs need to be considered as a major premise in discussing the main issue of this paper, that is, whether Japanese aid and investment policies contribute to correcting market failures that arise during the development process of foreign direct investment-based industrial agglomerations. From the 1980s to the present, Japan’s tariff policy on machineries has had a significant impact on the establishment of international production and distribution networks in East Asia (Kimura, 2005, p. 93).

While trade continued to liberalize, political pressure increased for it to continue being liberalized. Industries within developed countries suffered as a result of globalization concomitant with trade and capital liberalization. This led to increasing calls for managing trade and bilateral trade frictions. In the latter half of the 1980s, Japan joined the United States and Europe as a tripartite member for direct investment within developed countries. In the run-up to the European community (EC) market integration, direct investment from European countries shifted from the United States to within Europe (Ishii, 2000, p. 201–203).

Japan prevented trade friction with developed countries by focusing much of its direct investment on the demand areas. On the other hand, Japan’s direct investment in East Asia was carried out mainly for the sake of eliminating rising costs after the yen became stronger with the Plaza Accord in September 1985. Subsequently, in 1993, the Common Effective Preferential Trade (CEPT) Scheme was initiated among the original member states (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand)

9

of the ASEAN Free Trade Area (AFTA). An intraregional tariff (0%–5%) was applied to products (over 40% of which were manufactured within ASEAN), highlighting the importance of building an intraregional production and manufacturing network in Southeast Asia. Furthermore, the lowering of national boundaries within ASEAN has been encouraging companies to concentrate their productive capacities in a single area as opposed to what the case was previously, i.e., their capacities were scattered in countries throughout the region. Along with the development of direct investment from Japan in the latter half of the 1980s, more and more overseas subsidiaries of Japanese companies started to raise their own funds overseas for reinvestment. This has enabled the JBIC to directly finance overseas affiliated companies through OOF and actively address the new needs.

As we outlined above, there are a variety of market failures in the development process of foreign direct investment-based industrial agglomerations and a variety of policy drivers—whose effectiveness change at each stage of the development process—to respond to these failures. We assume that Japan may have played an effective role in assisting these policy drivers through appropriately combining aid, trade, and investment policies, and consequently facilitating the process of developing countries to attract direct investment and promote industrial agglomerations.

10

Chapter 3 Case study: Eastern Seaboard of Thailand

1. Overview of the development of the eastern seaboard of Thailand

The eastern seaboard of Thailand is located 80–200 km southeast of Bangkok. It primarily consists of the three provinces of Chachoengsao, Chon Buri, and Rayong. The Eastern Seaboard Development Program aimed to build a new industrial zone in the region as an alternative to Bangkok, where 48% of factories were concentrated in the first half of the 1980s (The Japanese Chamber of Commerce in Bangkok (JCCB), 1989, p. 35). As a result of implementing this program, a region that once comprised quiet fishing villages has developed remarkably, growing to become the second largest industrial zone after the Bangkok metropolitan area.

Figure 1 Map of Thailand

11

In the beginning of the 1980s, the Thai government confronted problems associated with the import-substitution industrialization policy it had pursued since the 1960s; these problems were: (1) The export industry had not developed, (2) import dependency had risen, and (3) industrial over-concentration in Bangkok had intensified. Although the Thai government set out to foster export-oriented industries since the Third Five-Year Plan (1972–1976), the protection of import-substitution industries remained strong. As of 1980, exports accounted for only 24.1% of the GDP.3 Moreover, the economy was structured in such a way that the more the domestic production increased, the more the imports of intermediate goods, capital goods, and energy expanded. This was partly because petrochemical, fertilizer, steel, and other industries were still at an early stage of development. Furthermore, as industrialization moved forward, industrial locations became concentrated in Bangkok, which has both a port and the largest consumer market in the country, thereby making it one of the most congested cities in the world (Ohashi, 1983, p. 28, 29).

As a solution to these problems, the Thai government embarked on the development of the country’s second industrial zone along the Eastern Seaboard, and formulated the Eastern Seaboard Development Program, which aimed to foster export-oriented and heavy and chemical industries to enable the supply of intermediate and capital goods. In response to this, Japan provided large-scale assistance, through ODA loans, for the comprehensive development of infrastructure (e.g., two international container ports, highways, and railways connecting the Eastern Seaboard with Bangkok; water resources, electric power, and communications) and industrial estates (e.g., Laem Chabang and Map Ta Phut) in the area.

The development of the Eastern Seaboard brought a large amount of direct investment inflows into the area and facilitated rapid industrialization. After the launch of the Eastern Seaboard Development Program, the Eastern Seaboard received a cumulative inflow of direct investment, totaling to approximately US$40 billion (Shatkin, 2003, p. 23). Enhanced infrastructure was a major factor in the successful attraction of investment to the area. According to a 1998 interview survey conducted by the JBIC on the factories of 113 companies located on the Eastern Seaboard (JBIC, 2000, p. 35, 36), most companies emphasized the importance of infrastructural factors in their decision to locate factories in that region (evaluation on a 5-point scale: 0 = unrelated to investment decisions, 5 = very important). These infrastructural factors were “Transportation infrastructure (roads, railways, etc.) being well equipped (3.84),” “Public services such as electricity, waterworks, and communications being well

3 IMF, “International Financial Statistics”

12

equipped (3.71),” and “Proximity to port (2.98)” (Figure 2).

a) BOI's incentive measure for investmentsb) Investment incentive measure for export processing zonec) Proximity to the portd) Proximity to Bangkoke) Transportation infrastructure (roads, railways, etc.) being well equippedf) Public services such as electricity, waterworks, communications, etc. being well equippedg) Proximity to supplier-supporting industriesh) Proximity to consumers and customersi) Proximity to parent companies

Note:

Source: Reproduced from the JBIC (2000), p. 36

This interview survey asked the firms the reasons for their deciding to locate their factories on theeastern seaboard. This summarizes the responses of each company on what was important indetermining the location of their factories. Respondents were asked to rate each item on a 5-pointscale, where 0 = unrelated to investment decision, and 5 = extremely important. The responsescores of all the companies were then averaged.* BOI = Board of Investment

3.71

1.09

2.98 3.01

3.843.71

1.87

2.31

0.58

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

a b c d e f g h i

Figure 2 Factors governing interviewed factories' / firms' decisions to locatetheir factories in the Eastern Seaboard area

The impact of infrastructure on business location can also be seen in the

automotive industry. Watanabe (2003, p. 148–157) notes that the Eastern Seaboard attracted investments from the automotive industry due to its increased attractiveness as a business location, resulting from the development of harbors, industrial estates, and industrial water supply, along with improved highway access between Bangkok and the Eastern Seaboard. More specifically, the paper discusses how the automotive industry changed its location during the three periods of the Eastern Seaboard development: the planning stage from 1980 to 1989, the early stage from 1990 to 1995, and the stage

13

from 1996 to 1999, when the infrastructures in the Eastern Seaboard began to materialize. This paper describes how during these periods, the automobile companies gradually shifted their locations from Bangkok and Samut Prakan to Chon Buri and Rayong along the Eastern Seaboard (Figure 3).

(Units: # of companies)

Malaysia Indonesia

Bangkok Samut Prakan Chon Buri Rayong Total

Pre1979 9 11 1 0 22 4 12

1980-89 6 11 1 0 28 17 11

1990-95 3 3 11 2 29 11 1

1996-99 14 5 7 18

4

64 6 35

Total ‐ ‐ ‐ ‐ 143 38

Thailand

72

Source: Reproduced from Watanabe (2003), p. 157Original source: Data from the Japan Auto Parts Industries Association

Figure 3 Establishment of Japanese parts suppliers' subsidiaries

In addition, the development in the Map Ta Phut area (industrial complex, industrial port, natural gas separation plant, etc.) enabled the Eastern Seaboard to become the place that had the largest agglomeration of companies in the petrochemical industry. The national petrochemical complex shared by the upstream sector, which produces the basic materials for petrochemical products such as ethylene and propylene used for domestic natural gas, and the downstream sector, which produces the final material of synthetic resin, was developed for the first time in Thailand. As a result, most of the demand for Thai petrochemical basic and final materials is met through domestic production (JBIC, 2000, p. 33).

The rapid agglomeration of industries in recent years has contributed greatly to increased employment and income in the Eastern Seaboard. According to the National Economic and Social Development Board (NESDB), during the period from 1995 to 2000, direct investment inflows created about 460,000 jobs in the area (Shatkin, 2003, p. 22). Even in the midst of the Asian economic crisis (from the third quarter of 1997 to the third quarter of 1999), it was reported that while Bangkok lost 120,000 jobs, the areas in the vicinity of the Eastern Seaboard added 57,000 new jobs (Webster, 2002, p. 15). Moreover, the per capita gross provincial product (GPP) grew tremendously: in Chon Buri Province, between 1981 and 2004, it increased 3.5 times; in Rayong

14

Province, 15.5 times; and in Chachoengsao Province, 8.4 times (NESDB homepage, JBIC, 2000, p. 32). After around 2002, the total value-added of the manufacturing industry in the three provinces on the eastern seaboard came to exceed that of metropolitan Bangkok (NESDB homepage) (Figure 4).

150,000

170,000

190,000

210,000

230,000

250,000

270,000

290,000

310,000

330,000

350,000

1996 1997 1998 1999 2000 2001 2002 2003 2004(P)

(Millions of baht)

3 provinces on the ESB

Bangkok metropolitan area

Figure 4　Manufacturing value-added exceeding that in the Bangkokmetropolitan area

Source: Reproduced from the NESDB dataNote: Manufacturing value-added in the 1988 prices

Thus, we have briefly reviewed the background and recent status of the development of the Eastern Seaboard of Thailand. In the next section, from the perspective of the development of infrastructure, establishment of the market system, reduction of the information gap/risks, and the development of human resources, we will discuss the policy drivers of the Thai government and Japan’s contributions that led to this remarkable economic development.

2. Policy drivers (1) Infrastructure development

The Eastern Seaboard Development Program was a visionary idea to build a new industrial zone as an alternative to Bangkok in a region with hardly anything in terms of existing industrial or infrastructural facilities. As of 1981, it was estimated that the capital required to implement this program would be 99 billion baht (about US$4.5

15

billion or 13% of the GDP) (Shimomura, 2000, p. 61). However, in the 1980s, Thailand was met with a flurry of domestic and international criticism, which called on the government to adopt a cautious approach with regard to the large-scale investment plans at a time when the country faced a difficult macroeconomic situation. Thailand ran a serious current account and fiscal deficit (Figure 5), its debt service ratio exceeded 20%, and its foreign reserves fell so that it could only cover 2 months’ imports (Ariga and Ejima, 2000, p. 59). As a result, in November 1985, the Thai government froze the Eastern Seaboard Development Program.

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Actual GDP growth rate (%) 5.0 5.9 5.4 5.6 5.8 4.6 5.5 9.5 13.3 12.2 11.2

Finantial-deficit-to-GDP ratio (%)

-5.1 -3.5 -6.5 -4.0 -3.5 -5.3 -4.3 -2.3 0.7 3.1 4.7

Current-account-balance-to-GDP ratio (%)

-6.4 -7.4 -2.7 -7.2 -5.1 -4.0 0.6 -0.7 -2.7 -3.5 -8.5

Export growth ratio (%) 18.4 -4.0 -11.9 2.1 -3.7 -10.4 6.2 9.8 8.4 1.1 2.8

Import growth ratio (%) 4.4 9.9 -4.3 -4.9 -2.1 -2.8 -3.1 11.6 6.8 5.0 5.6

Debt service ratio (%) 14.4 19.4 20.3 23.7 25.3 29.5 27.7 21.6 18.3 15.3 14.3

Foreign currency reserves (months)

1.7 1.7 1.7 1.6 1.8 2.2 2.8 2.9 3.1 3.9 4.1

Direct investment (million dollars)

225 197 176 313 328 241 318 728 1,321 2,828 1,981

Source: Ariga and Ejima (2000), p. 60

Figure 5　Macroeconomic indicators of Thailand in the 1980s

However, the international investment climate in Thailand took a rapid turn for the better with the currency exchange adjustment and decline in oil prices, resulting from the Plaza Accord in 1985, and in 1986, direct investment showed signs of increasing. Meanwhile, the insufficient capacity of Bangkok Port, a river port, exposed infrastructural issues that needed to be addressed, which once again provided the momentum to proceed with the Eastern Seaboard Development Program. Although the program had been partially scaled down, it was still a large project. Unable to finance it alone, the Thai government requested assistance from the Japanese government, which evaluated the development program highly.

The Japanese government committed a total of 178.768 billion yen of ODA loans for 16 projects, to support the Eastern Seaboard Development Program. There had been no other examples of aid of this scale provided in such a short period of time for a specific region. Japan provided comprehensive aid to build an infrastructural foundation

16

in a variety of areas, including industrial estates, port construction, natural gas plants, waterways, railways, and road construction (Figures 6, 7). Figure 6 Locations of ODA loan projects in the Eastern Seaboard Development Program

Source: Ariga and Ejima (2000), P4

17

Figure 7 Eastern Seaboard development: ODA loan projects

Area／Sector Project name

Map Ta Phut Area development ①Map Ta Phut Industrial Complex Project

②Map Ta Phut Industrial Port Project

③Gas Separation Plant Project

Laem Chabang Area development ④Laem Chabang Commercial Port Project

⑤Laem Chabang Industrial Estate Project

⑥Nong Pla Lai Reservoir Project

⑦East Coast (Dok Krai - Map Ta Phut) Water Pipeline Project

⑧Map Ta Phut-Sattahip Water Pipeline Project

⑨Nong Kho-Laem Chabang Water Pipeline Project

⑩Nong Pla Lai-Nong Kho Water Pipeline Project

Railways ⑪Sri Racha-Laem Chabang Railway Project

⑫Sattahip-Map Ta Phut Railway Project

⑬Klong Sip Kao-Kaeng Khoi Railway Project

Roads ⑭Chon Buri-Pattaya New Highway Construction Project

⑮Bangkok-Chon Buri Highway Construction Project

⑯Outer Bangkok Ring Road (East Portion) Construction Project

Water resource development and water conveyance

Source: Ariga and Ejima (2000), p. 45

(2) Enhancement of the institutional/policy environment Thailand reformed its institutional and policy environment in a way that reflected

the investor demand, thereby becoming a successful case that fostered industrial agglomerations. For example, the efforts of the Thai government with the automotive industry, which developed rapidly into a flagship industry, have been received highly by investors since the government formulated an investor-friendly institutional and policy environment, involving preferential tax treatments and the elimination of business entry restrictions. (Watanabe, 2003, p. 157).

Another factor through which the Thai government successfully attracted direct investment was by forming a channel for close dialogue between the Joint Foreign Chambers of Commerce in Thailand (JFCCT), which is a federation of foreign chambers of commerce, Thai leaders, and other relevant authorities. Japanese firms, which began shifting production to Thailand in the second half of the 1960s, now accounting for 40% of the cumulative foreign investment in Thailand, have played a significant role in the process of building these relationships over the years.

The trade imbalance was the impetus that led to the emergence of a channel for dialogue between Japanese companies and the Thai government. Japanese firms first

18

began to conduct large-scale investment in Thailand in the second half of the 1960s. Thus, Japan pulled well ahead of the United States, the second largest investor in Thailand, and accounted for an overwhelming share of trade and investment between the two countries. Textiles, electricity, and automobiles produced by Japanese-affiliated companies in Thailand performed well in the Thai domestic market, which resulted in a surge in the trade deficit of Thailand to Japan. This led to an anti-Japanese sentiment toward the Japanese economic domination of Thailand, and after 1971, developed into an anti-Japanese student movement and a national boycott of Japanese products. (Kawabe, 2003).

In order to solve the issues related to the trade imbalance between Japan and Thailand, the two governments founded the “1st Joint Committee on the Trade of Japan-Thailand” in 1968, which was followed by the “Japan-Thailand Private Joint Trade Committee” in 1970, a private body designed to follow up on the governmental committee. In addition to the discussions that took place throughout the 1970s and 1980s on the elimination of Japanese import restrictions on agricultural products and the export promotion of Thai industrial goods, the JCCB, Thai Ministries of Commerce and Industry, and the Board of Investment (BOI) met every other month, beginning in the second half of the 1970s. This led to supports to foster Thai small- and medium-sized enterprises and the training of technicians. In the mid-1980s, the Thai government drafted the “White Paper on the Restructuring of Thai-Japan Economic Relations,” which incorporated recommendations for trade, investment, and economic cooperation that would eliminate the trade imbalance between the two countries. (Shimomura, 2004, p. 220–231). The JCCB was actively involved in improving the Thai investment climate through activities such as issuing a request for reforming the overall investment climate (1982) and making policy recommendations to enhance the Thai domestic production of automobiles (1983).

In recent years, the JCCB acted together with other foreign chambers of commerce to recommend the abolishment of the Alien Business Law (1997), and this led to its amendment in 1999. Particularly after the Asian economic crisis, the Thai government has made efforts to strengthen ties with the JFCCT, has held regular luncheons with the Thai prime minister, and established a joint committee between the Customs Bureau and Ministry of Labor. These efforts activated the exchange of opinions in times of legal reforms related to issues such as investment and business activities. Japanese companies, which originated from a country that is the largest investor country in Thailand, and which have had a long-term experience in Thailand, have assumed a leading role in the JFCCT—a federation of foreign chambers of commerce—and have continued to adopt a

19

proactive approach in improving the investment climate in Thailand (Kawabe, 2003). (3) Eliminating the information gap and reducing risks

Since Japanese small- and medium-sized enterprises shifted production to Thailand from the latter half of the 1980s, JETRO has been helping them to carry out smooth business operations by providing individual assistance or by striving to reduce the gap in information. The specific details of this are as follows.4 Start-up assistance: Because of shortages in human resources, many small- and medium-sized firms do not have the luxury of hiring staff skilled in the local language or with knowledge of local laws and institutions. Consultants that these firms hire locally often turn out to be deceitful. JETRO introduces affiliated lawyers and accountants to companies in need. Small- and medium-sized firms can benefit from such introductions since they enable the firms to gain access to trustworthy people.

Coping with the information gap: Approximately 70% of outbound companies are said to face issues related to personnel and labor. JETRO holds seminars, etc. for Thai employees, to explain the approach of Japanese managers. On the other hand, Japanese companies are often frustrated with the sudden legal changes made by the Thai government. While these changes in the law and others are actually made public by way of official reports, because there is a language barrier, Japanese firms often experience time lags before they are able to understand the changes. As such, JETRO’s offering of information in Japanese is very valuable to these companies.

Business partner matching: JETRO holds “reverse trade shows” that exhibit materials and parts that Japanese companies may want to purchase, thereby enabling them to find companies that can manufacture and provide these items. These shows contribute to Japanese companies, for whom finding local partners is an essential factor, and also contribute to local companies, which may expand their businesses and improve their technologies. (4) Human resources

Until the first half of the 1980s, Thailand experienced industrialization mainly in labor-intensive industries, while its industrial structure rapidly became highly sophisticated through foreign direct investment inflows, which began from the latter half of the 1980s. In the 1990s, the Thai employment structure changed considerably through increased foreign direct investment. This suddenly revealed a shortage in human resource with high-level expertise, especially engineers and managerial

4 The source of this information is an interview of JETRO by the JBIC research group.

20

personnel. According to a study by the Thai Ministry of Interior (1989, Figure 8), while the demand for undergraduate-level technicians as of 1989 was a little over 6,000, annually, there were only about 3,000 university graduates in the field of engineering. Other studies strongly confirmed this shortfall in the supply of engineers (Figure 9).

(People)

ElementaryEducation

SecondaryEducation

VocationalSchool

University No education Total

　Specialists and engineers 263 2,058 3 6,427 128 12,058

　Management level 2 0 91 325 7 425

　Clerical staff 738 1,748 6,447 1,892 405 11,230

　Sales staff 709 2,566 2,915 1,789 1,213 9,192

　Services 3,234 3,409 725 0 2,023 9,391

　Agriculture and forestry 694 12 3 3 12 724

　Manufacturing and transportation 12,579 6,873 6,660 86 13,364 39,742

Total 18,399 16,666 20,023 10,522 17,152 82,762

Source: Shimomura, Onoi, Kohsaka, Takahashi (1991), p. 76Original source: Thailand Ministry of Labor, Yearbook of Labor Statistics

Figure 8　Manpower demand by educational background (1989)

(People)

1988

Electrical and electronics sector -593

　Computers -78

　 Other electrical and electronic -515

Mechanical sector -1,262

　 Mechanical -1,285

　 Metal and mining 23

Related sectors -659

　 Other civil engineering and irrigation -88

　 Chemical -225

　 Industrial -346

Total -2,514

Figure 9　Shortage of technicians by field

Source: Shimomura, Onoi, Kohsaka, Takahashi (1991), p. 81Original source: TDRI (Thailand Development Research Institute) "Human Resource Contributions & Constraints Nov. 1989"

After undergoing such changes, the Thai government recognized the importance of

developing human resources. With the Seventh National Economic and Social Development Five-Year Plan (1992–1996), the development of human resources was

21

upheld as a national objective and serious efforts were made for improvement in this area. More specifically, this included (1) improving basic education (expanding the duration of compulsory education), (2) enhancing the vocational training system for unskilled laborers in the labor market, and (3) developing human resources at the middle and high school levels (skilled laborers, technicians, scientists, etc.) (Institute of Developing Economies, 1992, p. 73). These efforts are gradually yielding positive results, and the number of graduates from the engineering departments at public universities (2000) increased to as many as 15,000 (Ministry of Economy, Trade and Industry, 2005, chapter 3, p. 13).

The Japanese government has utilized a wide range of tools to support the efforts of the Thai government to develop human resources. In accordance with the Seventh National Economic and Social Development Five-Year Plan, Japanese ODA loans supported the Strengthening Vocational and Technical Manpower Production Project (1994), aimed at fostering mid-level technicians with the skills and adaptability that meet the technical standards of the industrial world. ODA loans also supported the Thailand-Japan Technology Transfer Project (1995), aimed at improving the level of science and technology, and developed human resources in the departments of science and engineering at Chulalongkorn University.

Other aid tools include programs that accept Thai trainees in Japan and also dispatch experts to Thailand, with the aim of transferring industrial technology and managerial expertise or developing local leaders (by The Association for Overseas Technical Scholarship (AOTS) and by the Japan Overseas Development Corporation (JODC)). JETRO conducts guidance programs that dispatch technical experts to small- and medium-sized companies in the automotive parts industry, with the aim of facilitating field guidance on industrial management and individual techniques. The Japan International Cooperation Agency (JICA) supports programs that assist the expansion and enhancement of higher learning engineering institutions.

Recent assistance includes the Thailand Automotive Human Resources Development Project (commonly called TAHRDP), which was initiated in December 2005. Based on a study by JETRO, this project aims to develop the skills of Thai technicians working for Japanese-affiliated companies and to expand the foundation for developing human resources. This is a program to develop Thai instructors by training them at Japanese human resource development organizations and having them attend workshops conducted by Japanese specialists; these Thai instructors then return to Thailand to train junior staff members and technicians at local Thai firms. More specifically, the program aims to develop human resources who can instruct others on a

22

variety of techniques related to manufacturing, metal mold casting, and engineering. Within 10 years, it also aims to develop several thousands of people with expertise in the automotive industry.

23

Chapter 4 Case study: Dalian, China

China, which had launched full-scale economic reform since the end of the 1970s, opened up 14 coastal port cities5 to foreign investors in 1984. When we look at the trends in overall foreign direct investment in China after the 1980s, we see that by the early 1990s, many companies shifted production to Liaoning Province (in the northeast region), mainly Dalian, as well as the South China region, mainly the Zhu Jiang Delta. However, after 1992, foreign direct investment to the East China region, including Shanghai and the bordering Jiangsu and Zhejiang Provinces, exceeded the investment made in the South China region. While foreign direct investment in South China was by companies that shifted there to create a production base for export processing, a majority of foreign direct investment in East China consisted mainly either of foreign companies that aimed to create products targeting the Chinese domestic market or companies that followed the precedent of other companies. This signaled a shift to a trend of direct investment aimed at meeting domestic demands (Inagaki, 2002, p. 31). According to Japanese firms, when deciding on a location for direct investment, it was deemed particularly important that the location’s infrastructure be developed, containing “seven connections and one leveling” (seven connections: roads, electricity, steam, communications, sewage, clean water, and waste drainage facilities; one leveling: buildings having been cleared and the land being in a suitable condition to begin construction projects).

Amidst such trends, since the mid-1990s, the northeast region of China was lagging behind as a location likely to be considered for foreign direct investment; however, Dalian was an exception. As we will discuss below, Dalian took advantage of elements such as its geographical proximity and deep historical linkages with Japan. Dalian made strategic use of these advantages, and from the mid-1980s, began to actively work to attract direct investment before any of the other regions could. Japan, which also considered this as a symbol of Sino-Japanese economic cooperation, provided assistance for the construction of Dalian Industrial Park, helping to develop the infrastructure and put in place a system finely tuned to the individual issues of companies interested in developing businesses there. This method became a model for export processing industrial estates and was emulated in other regions in China.

We will now discuss Dalian, China, as another case of Japan achieving policy

5 Fourteen coastal port cities： Tenjian, Shanghai, Dalian (Liaoning Province); Qinhuangdao (Liaoning Province); Yantai (Shandong Province); Tsingtao (Shandong Province); Lianyungan (Jiangsu Province); Nantong (Jiangsu Province); Ningbo (Zhejiang Province); Wenzhou (Zhejiang Province); Fuzhou (Fujian Province); Guangzhou (Guangdong Province); Zhanjiang (Guangdong Province); and Beihai (Guangxi Autonomous Region)

24

coherence with respect to the development process of industrial agglomerations. 1. Overview of development in Dalian, China

Located in northeastern China, Dalian is a coastal port city referred to as the gateway to the three provinces of Liaoning, Jilin, and Heilongjiang. Since the 1980s, Dalian has forged ahead with a strategy of attracting direct investment from foreign companies, especially Japanese firms, and has achieved significant economic development. Throughout the 1990s, Dalian’s growth rate exceeded 10%, averaging at 19.5% between 1992 and 2004 (Japan External Trade Organization Dalian Office, 2005, p. 7).

Figure 10 Map of China’s three northeastern provinces (details of Dalian)

Prior to China’s reform and opening up, the three northeastern provinces constituted a leading industrial area dependent on heavy industries. Ever since the country was founded, these northeastern provinces have been intensively developed as the hub of industries most essential to China’s development. As the largest domestic production base for heavy industries such as steel, oil, automobiles, munitions, and ships, this region provided large quantities of commodities and equipment nationwide, and supported the Chinese economy for a long period of time. However, since the implementation of China’s reform and opening-up policy, the three northeastern provinces faced inefficient management of state-owned companies and aging manufacturing facilities. In contrast to the exponential growth in the Chan Jiang and Zhu Jiang Deltas in the East and South China regions, the industrial manufacturing rate

25

of the region against China’s total national gross product fell from 16.1% (1981) to 13.7% (1990) in 10 years. In recent years, it fell to 8.2% (2003) (Sato, 2005, p. 49, 50) (Figure 11).

　（Units: 100 millions of yuan, %)

Rank Ministry/City Amount Share Rank Ministry/City Amount Share Rank Ministry/City Amount Share

National total 5,178 National total 18,689 National total 142,271

3 northeast provinces

835 16.13 northeast provinces

2,559 13.73 northeast provinces

11,685 8.2

1 Shanghai 609 11.8 1 Shanghai 2,061 11.0 1 Shanghai 21,513 15.1

2 Jiangsu Province 466 9.0 2 Jiangsu Province 1,517 8.1 2 Jiangsu Province 18,037 12.7

3 Liaoyang Province 451 8.7 3 Liaoyang Province 1,477 7.9 3 Liaoyang Province 15,380 10.8

4 Shandong Province 344 6.6 4 Shandong Province 1,380 7.4 4 Shandong Province 12,864 9.0

5 Sichuan Province 275 5.3 5 Sichuan Province 1,302 7.0 5 Sichuan Province 10,343 7.3

6 Guangdong Province 250 4.8 6 Guangdong Province 1,048 5.6 6 Guangdong Province 6,113 4.3

6 Heilongjiang Province 250 4.8 9 Heilongjiang Province 779 4.2 14 Heilongjiang Province 2,910 2.0

15 Jilin Province 134 2.6 15 Jilin Province 478 2.6 15 Jilin Province 2,662 1.9

1981 1990 2003

Figure 11　Change in the share of industrial output by province

Notes: 1. The year 1990 includes companies with sales at or above the township level; the year 2003 includes companies with sales of at least 5 million yuan; Sichuan Province in 1981 includes the city of Chongqing.　　　　 2. Reproduced from the China Statistical YearbookSource: Sato (2005)

While the economic status of the three northeastern provinces declined, Dalian maintained its status (Figure 12). As one of the 14 Chinese coastal port cities that were designated to open their doors to the world in 1984, Dalian established the sole “Economic and Technological Development Area” in the northeast region, making strategic use of its geographical proximity and deep historical linkages with Japan, and transformed its industrial structure mainly by attracting Japanese firms. As a result, Dalian changed from a city of heavy industry to an export production base for foreign companies. Amidst other northeastern cities whose economies have deteriorated drastically, Dalian continues to maintain its economic status even today.

26

（Units: millions of yuan）

Zone

　Harbin （Heilongjiang Province） 8,879 18,117 43,753 50,542 72,151

　Changchun （Jilin Province） 6,419 15,668 41,261 74,971 151,153

　Shenyang （Liaoyang Province） 15,444 35,515 100,550 71,428 106,436

　Dalian （Liaoyang Province） 10,646 30,021 107,032 109,916 154,686

1985 1990 1995 2000 2003

Figure 12 Change in industrial output by city in China

Source: Reproduced from Seki (2001) and the Urban Statistical Yearbook of China (2001, 2004)

From the perspective of Japanese companies that were considering an entry into China, compared to other regions, Dalian had the following three advantages: physical proximity to Japan, excellent port capacity, and an abundance of human resources that could communicate in the Japanese language. Most of the Japanese companies in the initial phase of shifting their businesses to China aimed at establishing an export production base for exports to Japan. Dalian’s physical proximity to Japan and excellent port capacity were essential conditions for such companies. In addition, the presence of personnel who could speak Japanese was a significant advantage to Japanese firms, many of which were shifting production to China for the first time in the 1980s. Dalian put all these advantages to practical use, and developed a direct investment strategy targeted at Japanese companies.

In the second half of the 1980s, Dalian strengthened its infrastructure development and actively pursued the development of a positive investment climate. For example, the local government maintained roads and constructed an elevated bridge to improve access between the Development Area and urban areas; this resulted in a significant reduction in the travel time. With regard to electric power, Dalian built the Huaneng Dalian Power Plant in 1988, securing the ability to provide 90% of the necessary electricity. In terms of the investment climate, Dalian initiated a succession of legal reforms crucial to attracting businesses and also set up law firms that would provide legal consulting services (Japan Overseas Enterprises Association, 1989, p. 146–148). At the strong request of Japanese companies, Dalian also actively negotiated with the central government and obtained an exceptional permit enabling entering companies to establish businesses based on “independent capital” without their having to create a joint venture with a Chinese company (Seki, 2001, p. 118–119).

However, despite Dalian’s efforts, a variety of risks dragged down Japan’s overall direct investment in China. During its reform and opening-up campaign, China enacted

27

a succession of fundamental laws necessary for a market economy, and it ran into many administrative problems. As such, in October 1988, the Japanese government sent a team of investigators, who pointed out the breadth of issues China faced in its investment climate, to examine the Chinese investment climate. In response to these observations, the Japanese and Chinese governments and the Japanese business sector came together to establish the Japan-China Investment Promotion Organization in 1990 in order to promote Japanese companies’ direct investment in China.

The first project of this organization and its Chinese counterpart, the China-Japan Investment Promotion Committee, was the Dalian Industrial Park Development Project. This project aimed to establish a joint venture between Japanese business groups and Chinese companies to create, subdivide, and manage the industrial estates within the Economic and Technological Development Area, and principally, to attract small- and medium-sized enterprises (Figure 13). In particular, for the purpose of reducing a variety of risks and establishing a model for industrial estates in China, the project aimed to provide services such as consulting services and employee training to companies considering entry into China. The JBIC provided equity and loan financing through the private sector investment finance window.

Figure 13 Dalian Industrial Park equity investors

・Chinese: Dalian Northern Science & Technology Investment Company 20%

・Japanese: Dalian Industrial Park Investment Corporation 80%

・Investors: JBIC, Itochu Corporation, Marubeni Corporation,

Bank of Tokyo-Mitsubishi UFJ, Mitsubishi Corporation,

Mizuho Corporate Bank, and 11 other companies

Source: Reproduced from materials from the Dalian Industrial Park Development and

Administration Company (DIPDAC)

Although the number of companies shifting production to China declined during the late 1990s due to recession in the Japanese economy and the Asian economic crisis, the efforts of Dalian are paying off. In recent years, the amount of investments in Dalian has once again been increasing (Figure 14). When we look at the amount of annual investments to Dalian by country of origin, we see that as of 2004, the largest investor nation was Japan (US$600 million), followed by Hong Kong (US$490 million), and Korea (US$320 million) (Figure 15).

28

0

5

10

15

20

25

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04(Year)

(US$ millions)

0

10

20

30

40

50

60

70

80

90

100（%）

Total Japan Japanese share (scale on right)

Figure 14　Change in direct investment in Dalian

Source: Reproduced from the Dalian Foreign Trade & Economic Cooperation Bureau (2003) and the Japan External Trade Organization Dalian Office (2005)

【Implementation basis: Ranking of top 10 countries in 2004】 （Units: US$ millions, %）

Amount Rank Share Amount Rank Share Amount Rank Share

Japan 7.02 1 43.5 7.44 1 33.7 6.00 1 27.2

Hong Kong 2.51 2 15.5 4.26 2 19.3 4.89 2 22.2

Korea 0.92 5 5.7 3.46 3 15.7 3.23 3 14.7

United States 1.98 3 12.3 2.05 4 9.3 2.73 4 12.4

Taiwan 0.40 8 2.5 0.54 5 2.4 1.11 5 5.0

Singapore 0.54 7 3.3 0.46 7 2.1 0.63 6 2.9

Canada 0.10 ― 0.6 0.18 ― 0.8 0.51 7 2.3

British Virgin Islands 0.61 6 3.8 0.30 10 1.4 0.45 8 2.0

Australia 0.13 10 0.8 0.53 6 2.4 0.39 9 1.8

Germany 0.97 4 6.0 0.35 9 1.6 0.25 10 1.1

2002 2003 2004

Source: Reproduced from the Japan External Trade Organization Dalian Office (2005)Original source: Dalian Statistical Yearbook and the Dalian Foreign Trade & Economic Cooperation Bureau

Figure 15　Annual direct investment received from major countries and regions

In the 1990s, Dalian’s industrial sector made great progress, increasing the value of industrial output 5.8 times between 1990 and 1997. The main feature of this was the increase in the share of foreign-affiliated companies contributing to industrial output. As Figure 16 shows, the “Other” category, a majority of which comprises foreign-affiliated firms, accounted for only 4.1% of the industrial output in 1990; by 1997, these firms’

29

share had increased to 50%. Another noticeable change was the transformation of the industrial structure. Compared to the past, when Dalian’s industrial structure was centered on heavy industries such as shipbuilding, locomotives, and large industrial machines, in recent years, electric and electronic industries, mainly setup by foreign-affiliated firms have grown the most (Seki, 2001, p. 102, 105).

Current prices 1990 constant prices State-owned Aggregate Other

1952 9.1 9.4 93.8 2.1 4.1

1957 17.7 19.1 97.1 1.2 1.7

1962 18.7 20.8 91.3 8.5 0.2

1970 ― 37.1 91.6 8.4 0.0

1975 ― 62.1 89.1 13.9 0.0

1980 74.2 107.5 79.4 20.0 0.6

1985 124.1 156.0 70.9 28.4 0.7

1990 300.2 246.4 69.3 26.6 4.1

1991 345.4 269.0 66.6 26.9 6.5

1992 459.1 315.5 61.6 28.4 9.6

1993 711.9 383.2 50.0 31.3 18.7

1994 987.1 598.5 48.5 25.7 25.8

1995 1,070.3 935.5 20.2 40.6 39.2

1996 1,443.3 1,161.5 18.7 40.0 41.3

1997 1,745.7 1,394.2 19.2 30.8 50.0

Industrial output(100 millions of yuan）

Ownership class (%)

Note: Composition ratios on a 1990 constant price basisSource: Reproduced from Seki (2001), p. 102Original sources: Xing Lian Ming, ed. (1996), Bohai Economic Ring, Dalian Volume , Dalian University of Technology Press,　　　　　Dalian Socioeconomic Statistics Yearbook (1997), Dalian Statistical Yearbook (1998)

Figure 16　Change in Dalian industrial output

Among Dalian’s trade partners, Japan accounts for an overwhelming share of trade with Dalian. The ratio of Japan’s share of exports as of 1994 was 58.5%. Maintaining its share of exports at above 40% as of 2003, Japan surpassed the United States, which had the second largest share of trade with Dalian (approximately 11%), by a large margin. Japan also accounted for 54% of Dalian’s imports in 1994 and 39% of Dalian’s imports in 2003, with a considerable margin between Japan and Korea, the second largest importer (13%) (Figure 17). From this data, one can infer that Japanese companies have contributed to Dalian’s becoming an export production base and to the growth of its economy at such a high rate (see Figure 18), resulting in an increase in per capita income from US$350.40 (1990) to US$1,253.90 (2004).6

6 The per capita income (yuan) listed in the Dalian Statistical Yearbook (1991 and 2005 eds.) is converted to US dollars using the

30

Customs statistics by major country (amount) （Units: US$ millions)

Country/region Export Import Export Import

　Total (10 countries/regions) 17.94 14.96 69.70 56.72

　Japan 11.71 9.22 36.96 28.12

　Korea 0.96 1.11 5.70 9.20

　United States 1.53 1.11 9.16 2.48

　Hong Kong 2.21 2.03 4.82 4.53

　Saudi Arabia - - 0.07 5.86

　Singapore 1.03 0.89 4.48 0.71

　Germany 0.34 0.59 2.34 2.78

　Iran - - 1.62 2.07

　Netherlands 0.15 0.00 2.99 0.36

　Indonesia - - 1.56 0.61

20.02 17.04

Customs statistics by major country (share) （Units: %）

Country/region Export Import Export Import

　Total 100.0 100.0 100.0 100.0

　10 countries/regions 89.6 87.8 84.0 78.3

　Japan 58.5 54.1 44.6 38.8

　Korea 4.8 6.5 6.9 12.7

　United States 7.6 6.5 11.0 3.4

　Hong Kong 11.1 11.9 5.8 6.2

　Saudi Arabia - - 0.1 8.1

　Singapore 5.2 5.2 5.4 1.0

　Germany 1.7 3.5 2.8 3.8

　Iran - - 2.0 2.9

　Netherlands 0.7 0.0 3.6 0.5

　Indonesia - - 1.9 0.9

1994 2003

1994 2003

Note: Aggregate imports and exports from the top 10 countries and regionsSource: Reproduced from Seki (2001) and the Japan External Trade Organization Dalian Office （2005）Original source: Dalian Socioeconomic Statistics Yearbook , 1995, Dalian Statistical Yearbook , 2004

Figure 17　Import-export activity by country and region

IFS exchange rate (period average).

31

0

500

1000

1500

2000

2500

1992199319941995199619971998199920002001200220032004

（100 millions of yuan）

0

10

20

30

40

50

60

70

（％）

GDP

GDP growth

Source: Reproduced from the Japan External Trade Organization Dalian Office (2005)Original source: Dalian Statistical Yearbook , Dalian Economic Dynamics

Figure 18　Change in the Dalian ＧＤＰ （nominal）

We have thus briefly reviewed the recent development pattern in Dalian. In the next section, from the perspectives of infrastructure development, enhancement of the institutional/policy environment, reduction of the information gap and risks, and the securing of human resources, we will discuss the policy drivers that led to the reform of the investment climate in Dalian and how Japan assisted these efforts. 2. Policy drivers (1) Infrastructure development

Prior to World War II, Dalian was under the control of Imperial Russia and Japan. A number of infrastructural elements built during these periods remained and standards were relatively high compared to those in other regions within the country when the People’s Republic of China was first founded (1949). However, in the mid-1980s, when foreign direct investment was well underway, the increase in demands gradually revealed an inadequate and aging infrastructure that needed to be reinforced.

Consequently, Dalian actively pursued measures to reinforce its infrastructure. With the implementation of the “fiscal contract system” in 1980, local governments were ensured a constant level of fiscal capacity and Dalian undertook efforts to improve

32

its roads and electric power, among other things. With regard to its roads, in 1994, Dalian announced an initiative for massive repairs of the major roads in the city, repairing 35 principal and connecting roads (Japan-China Economic Association, 1995, p. 27). Furthermore, Northeast Road and Zhenxing Road, the first highways in Dalian, were overhauled, which resulted in the distance between the city and the Development Area being reduced by two-thirds and the travel time between the two being halved from one hour to thirty minutes. In addition, improvements were made to the Shenyang-Dalian Highway (opened in 1990) and the entire network of highways that linked the provincial capitals of the northeastern region, comprising cities such as Changchun and Harbin, to facilitate the distribution of goods to the hinterlands (Sekine, 1997, p. 53).

Japan actively contributed to such efforts toward infrastructure development in

Dalian. Japan offered particular assistance to areas that could prevent the attraction of foreign direct investment, such as the ports, water supply, and industrial estates. Ports: As foreign companies shifted export processing production to China, Dalian’s port cargo volume rose dramatically and pushed the capacity of the old port in Dalian Bay to its limit. While the Dalian Port Authority launched the construction of Dayao Bay in 1987, the average number of days a ship remained in the harbor was still 6.8 days as of 1994, and there were concerns that the port’s processing capacity would prevent the attraction of investments. In 1995, Japan extended an ODA loan to assist the capacity expansion of Dayao Bay Port. Consequently, the total cargo volume handled by Dalian Port expanded significantly from 4,576 tons as of 1993 to 12,600 tons as of 2003 (Figure 19). Water supply: Dalian’s water supply facilities, which mainly comprised a water treatment plant constructed in 1932, a pumping station constructed in 1943, and an aqueduct, were aging. Japan extended an ODA yen loan to Dalian in 1997 to assist with a water supply project, which included expanding the pumping station, rehabilitating the aqueduct, and newly constructing and increasing the capacity of the water treatment facility. As a result, a stable water supply system, fully equipped to meet the current as well as future demands was secured. Industrial estates: In 1984, Dalian made improvements to the industrial development estate of the Economic and Technological Development Area. When initiating the

33

second phase of construction, Dalian planned the use of foreign capital to develop the industrial estate and asked Japanese business groups to consider participating. As a result, Japanese business groups formed a joint business venture with Chinese companies with the aim of attracting small- and medium-sized companies through the creation, subdivision, and management of the industrial estate within the Economic and Technological Development Area. The total development area of Dalian Industrial Park was 217 ha, and an area of 184 ha, excluding management roads, was subdivided into 77 lots. Fourteen leases were signed in 1993, when the industrial estate was first subdivided. Although lot leases in the industrial estate stagnated from 1997 to 1999 during the Asian economic crisis—an economic slowdown in China and the Japanese recession—the leases once again picked up in 2000, and by 2002, nearly 100% of the lots were leased. Referred to as the Dalian method, this method in which an industrial estate was developed utilizing Japanese capital and managerial know-how, served as a reference and model case for industrial estate developments in various other regions in China (Suzhou-Singapore Industrial Park, etc.).

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

95 96 97 98 99 00 01 02 03

0

20

40

60

80

100

120

140

160

180

Container volume(10,000 TEU,scale on right)

Cargo volume（10,000 tons,scale on left）

Figure 19　Change in cargo and container volume in Dalian

Source: Reproduced from Masudome (2005)

(2) Enhancement of the institutional/policy environment Similar to other regions in China, building confidence in the institutional policy

environment has been the most important challenge for Dalian in attracting foreign direct investment. Since its foundation, China has pursued a policy of planned economic management and laid the foundation for distinctive legislations, policies, and business

34

practices. Therefore, switching to an institutional/policy environment that allowed foreign direct investment was not an easy task.

Under its reform and opening-up policy, China instituted a succession of fundamental laws necessary for the market economy. However, while these laws were enacted, there were many administrative issues, which imposed substantial costs on the companies. The issues were as follows. Overflow of arbitrary laws and regulations: When Chinese authorities implemented new laws and regulations, they often first implemented a certain system in some regions on an experimental basis and then used the lessons learned from these regions to examine whether to implement them on a national level (Kobayashi, 2000, p. 49). In such regions, where experimental institutions were implemented, both the experimental and traditional institutions often became mutually contradictory. Rule by men: In China, there are many cases where the operation of law, based on unwritten or empirical laws, is interpreted differently, depending on the person, place, or time. With laws experimentally implemented in various regions under the reform and opening-up policy, there were many cases in which only the basic principles were stipulated, leaving operational bylaws undefined and the operation of laws in each place dependant on administrative judgment and judicial interpretation.

Furthermore, business activities incurred significant costs due to non-refundable taxes and a wide array of fees levied on foreign companies by administrative institutions, namely, the government (both central and local).

Arbitrary fees: This refers to arbitrary fees collected by the administrative bodies in each region (see Figure 20 for the general coverage). For example, in some regions, foreign companies aiming to shift businesses to those regions faced issues that could not be overlooked, such as restrictions by administrative authorities in hiring workers so that they could collect “introduction” fees in return for assisting with human resources (Sugita, 1996, p. 248). According to a study on “arbitrary fees” by the Guangdong Price Bureau (1995), among the various fees that local governments and relevant authorities collect from firms, only one-third were in accordance with the regulations of national or provincial governments, while the remaining two-thirds were gathered through the excess authority of local governments and relevant authorities (Sugita, 1996, p. 10–11).

35

Non-refundable export value-added tax: The export value-added tax introduced in January 1994 stipulated that when imported raw materials were used for the production of exported goods, the entire amount of the export value-added tax be refundable after export. However, in May 1995, the central government indicated a policy to withdraw part of the refund of the export value-added tax. According to an estimate by the Japanese Ministry of Economy, Trade and Industry, Japanese-affiliated companies were projected to have incurred a total loss of ¥10 billion, imposing severe damages to business activities. With the subsequent backlash from foreign-affiliated companies, the central government revised its policy, once again allowing for a conditional refund of the export value-added tax. However, several policy revisions within a short period of time made planning difficult.

Figure 20 Principal non-recoverable fees (arbitrary fees) levied on foreign-affiliated

companies by local governments in China

Arbitrary fees Fees City

Fees for rescuing unprofitable state-owned businesses

under the jurisdiction of the relevant authorities 10,000 yuan Shanghai

Issuance of employment certificate 2,000‒3,000 yuan

Anti-poverty program fee 60,000 yuan

Highway construction fund 90,000 and 200,000 yuan Hangzhou, Kunshan

Factory construction comptroller fee 550,000 yuan Dalian

China Commodities Inspection Bureau inspection fee 240,000 yuan Dalian

Education fund and additional education program fee 530,000 yuan Fujian Province

Source: Nakashima, Nakatani (1997), p. 34

At the strong request of the Chinese government, from the second half of the 1980s, the Japanese government tackled issues of investment risks in China. During his visit to China in October 1988, Prime Minister Takeshita received a request from Premier Li Peng to assist Japanese companies to enter China. Just 2 months later, a team of 80 investigators from the public and private sectors were sent to examine the Chinese investment climate. They visited the four cities of Shanghai, Beijing, Tianjin, and Dalian, to meet with political leaders such as Premier Li Peng, General Secretary Zhao Ziyang, and Shanghai Mayor Zhu Rongji, establish a dialogue with government policymakers, and visit foreign companies in China. The team brought to light elements

36

deemed as risk factors related to investments in China, such as the administration of China’s legal system and business practices.

The team of investigators suggested that “the difference in business practices and shortcomings of investment climates, mainly with respect to the institutional and policy environment such as the legislative system and investment policies, will become central issues in the future.” To work on these improvements, the public and private sectors cooperated in 1990 to establish the Japan-China Investment Promotion Organization. With Prime Minister Takeshita serving as honorary adviser, this organization brought together top-level personnel from the public and private sectors to assist with improving the Chinese investment climate and provide assistance to companies shifting production to China (Box 1).

Box 1 Principal business activities of the Japan-China Investment Promotion Organization

1． Investment aid to individual firms: Credit investigations of Chinese companies, introductions of

merger partners, recommendations of policy solutions to Chinese government agencies, etc.

2． Assisting maintenance of the investment climate: development of designated areas and

assistance in attracting enterprises, seminars on the Sino-Japanese economy attended by

prominent figures in the economic field, support with regard to the development of Chinese

managers, etc.

3． Research and publicity

4． Promoting negotiations with China

Source: Japan-China Investment Promotion Organization website: （http://www.jcipo.org/main.html）

(3) Eliminating the information gap and reducing risks One of the major risk factors related to investment in China was inadequate

information (Imai, 1990, p. 106; Japan Overseas Enterprises Association, 1989, p. 12). Firstly, it was difficult for investors to understand what was happening in the market because industry statistics on areas such as domestic production, supply and demand, distribution, and trade were underdeveloped. Secondly, as discussed above, it was difficult to grasp the current conditions of institutions and policies due to the lack of uniformity in their operations.

While Dalian’s investment climate was highly evaluated compared with other cities in China, the risk involved in shifting businesses to Dalian was not low (Japan Overseas Enterprises Association, 1989, p. 116–118). Therefore, along with providing hard infrastructure at the Industrial Park, the Dalian Industrial Park Management Company emphasized support mechanisms such as responding meticulously to the

37

individual issues surrounding business, gathering and providing information, and mitigating the risk of entering China (Box 2).

Box 2 Risk response in Dalian

・ There have been an array of public organizations in Dalian collecting high fees under the

name of workshops and penalties. In particular, there have been many cases where small-

and medium-sized companies with limited information-gathering and negotiation abilities

were forced to bear a number of costs. In such cases, the Industrial Park Management

Company negotiated with the relevant organizations to stop these fees from being

collected. As a result, the collection of arbitrary fees decreased.

・ Although there have been many instances in which a sudden change in laws has exerted a

significant impact on business operations, the Industrial Park Management Company

promptly gathered information and notified relevant businesses of the precise matters

pertaining to the issues.

・ Investment in China has experienced perpetual land-related problems, resulting from

discrepancies in the land ownership system. Dalian Industrial Park has at times been seen

as a symbolic representation of Sino-Japanese economic cooperation, and has eliminated

an exceptional number of regulations placed on real estate projects, which foreign-affiliated

businesses were prohibited to undertake at that time. Land subdivisions also became

possible through the Industrial Park Management Committee. As a result, foreign direct

investment companies have been liberated from the risk involved in land use.

Source: Kotani (1999), (2000)

There were a number of notable actions taken with the objective of eliminating the information gap. One of these was the reverse trade show held by JETRO. There was great demand for an information distribution network through which companies who had entered China could find reliable business partners able to supply parts and raw materials. As such, every year since 1994, JETRO has held reverse trade shows, which have been successful in Southeast Asian countries (Figure 21). This had led to a large number of business negotiations between Japanese-affiliated companies and local companies (Ishizaki, 1999, p. 8). In addition, JETRO has provided support for reducing risks through offering information about and examples of a wide variety of issues related to production, market entry, distribution, trade, management, or intellectual property protection, as well as through introducing reliable lawyers, tax practitioners, and accountants.

38

1994 1995 1996 1997 1998 1999

1st 2nd 3rd 4th 5th 6th

Number of Japanese andJapanese-affiliatedexhibitor firms andorganizations

20 59 91 78 82 72

Number of businessmeetings

Approx. 400 1,031 Approx. 1,500 1,841 2,019 Approx. 1,500

Note: The number of business negotiations does not reveal the success or failure of the meetings. The figures are based on the number of business negotiations included in the questionnaire survey.Source: Reproduced from Ishizaki (1999), p. 9

Figure 21　Trends in Dalian Global Parts and Materials Fair

Through such efforts, Dalian is beginning to receive high marks for its favorable investment climate. For instance, according to a questionnaire survey conducted by JETRO in March 2003 on Japanese-affiliated firms in China, Dalian received a “3.0 (average)” or higher rating in 8 out of 10 evaluation items. Dalian is highly appraised as exceeding the national average, particularly with regard to both hard and soft infrastructure development (Figure 22).

Note:

Source: Reproduced from the Japan External Trade Organization (2004), p. 166

JETRO conducted this survey from March to April 2003, targeting Japanese-affiliated companiesin China. The survey was a comprehensive evaluation (5-stage evaluation; higher values indicatehigher evaluations) of 72 items in 10 different areas, including infrastructure (hard),infrastructure (soft), living environment, legal system, favorable policies, administrativeresponsiveness, labor force, business practices, cost of land, and supporting industries.

2.0

3.0

4.0Hard

Soft

Lifestyle

Legal system

Preferential treatment

Administration

Businesspractices

Labor

Land

Support

Dalian (Economic andTechnological DevelopmentArea)National average

Figure 22　Evaluation of Dalian (Economic and Technological Development Area)by investment climate category

39

(4) Human resources Dalian has a considerable advantage when it comes to low-wage, diligent, and

high-quality laborers. For example, in 1988, the average wage of the working class in Dalian was around 160 yuan per month. This was even lower than the average wage in Guangzhou (about 230 yuan), which had experienced an influx of foreign-affiliated firms. Although the level of wages in Dalian rose after the subsequent surge in the number of foreign direct investment companies in the 1990s, in 1998, the average wage for the working class was about 690 yuan per month, which was still low compared to the wages in Guangzhou, which were around 1,200 yuan in the same year.7

Dalian has also benefited from enhanced institutions of higher learning, namely, its University of Technology. This has provided a solid foundation of support for a more sophisticated industrial structure. As of 1997, Dalian had 13 universities. Above all, Dalian University of Technology, a university oriented toward science and technology, ranks as one of the nation’s key universities. Home to approximately 8,000 undergraduate students and 1,900 graduate students, its graduates enjoy a favorable reputation among businesses (Seki, 2001, p. 37, 99). Dalian Maritime University is yet another key national university. Two of the three national key universities in Liaoning Province are situated in Dalian.

An abundance of Japanese-speaking human resources is one very appealing resource in terms of Dalian attracting Japanese companies. In Dalian, Dalian University of Foreign Languages is said to have the highest level of Japanese language education in China, while Liaoning Normal University is also notable for its high-quality Japanese language education. As of 2002, 6 of the total 18 universities in Dalian had a Japanese language department (Dalian Foreign Trade & Economic Cooperation Bureau, 2003, p. 26–27). An abundance of Japanese-speaking human resources is conducive to smooth communication at the manufacturing site and to increased productivity. Many of the companies that have shifted production to Dalian list the wealth of Japanese-speaking human resources as a major factor in shifting to Dalian.

Dalian continues to work toward deepening its links to Japan and further enhancing its high value-added industries. In order to assist Dalian in its efforts, grant aid from Japan has facilitated the construction of the China-Japan Friendship Dalian Center for Human Resources Development. This project, the construction for which is due to be completed in 2006, was conceived of with the cooperation of the Dalian Municipal Government, Chinese Ministry of Commerce, and the Japan Commerce Association of Dalian. Focused on university and high school graduates as well as

7 China Economic Yearbook, 1989 and 1999 eds.

40

Chinese who already actively contribute within Japanese companies, this center aims to foster complex business personnel equipped with practical skills in the Japanese language and culture, along with specialist expertise in IT, engineering, business administration, and industrial management (Fuji Sankei Business Eye, 4/14/2006, morning edition, p. 11).

41

Chapter 5 Case study: Northern Vietnam

1. Overview of the development in the Northern Vietnam

Located south of the South China region,8 Northern Vietnam comprises three regions: the Red River Delta, the Northeast, and the Northwest. The capital of Hanoi and the port city of Hai Phong are the two representative cities of Northern Vietnam. During the 1990s, direct investment was concentrated in southern Vietnam, particularly in Ho Chi Minh (the southeast and Mekong Delta region). Northern Vietnam lagged behind southern Vietnam. However, driven by an increase in foreign direct investment, resulting from the initiative of the Vietnamese government and international community, the total industrial output of Northern Vietnam surged after 2000, rising from 73.7 trillion dong (US$5.2 billion) in 2000 to 146.2 trillion dong (US$9.4 billion) in 20039 (data from the General Statistics Office of Vietnam).

Figure 23 Location of Northern Vietnam

8 Hanoi is located about 800 km from Guangdong Province, China. 9 Industrial output (millions of dong) listed in the General Statistics Office statistical data has been converted to US dollars using the IFS exchange rate.

42

Vietnam adopted the Doi Moi policy in 1987, pursuing an industrialization strategy built on introducing foreign capital. Subsequently, in the first half of the 1990s, the external environment around Vietnam took a turn for the better,10 and foreign direct investment into the country began to pick up. From 1990 to 1993, foreign direct investment on an approved basis grew 4.8 times (US$600 million to US$2.87 billion) and the number of investments grew 2.6 times (108 to 280). Investments during this period grew by an annual average rate of 56% (Vietnam Economic Research Institute, 1994, p. 57) (Figure 24).

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1988 1989 1990 1991 1992 1993

(US$ millions)

0

50

100

150

200

250

300

(Number ofinvestments)

Investment amount(US $ millions,approval basis, scaleon left)

Number ofinvestments(approval basis, scaleon right)

Source: Reproduced from the Vietnam Economic Research Institute (1994), p. 57

Figure 24　Direct investment inflows into Vietnam: A surge in the 1990s

However, in the early 1990s, much of the foreign direct investment flowed to the South, which had great market potential due to its income level, and also where the infrastructure built by the United States during the Vietnam War still remained. After the enactment of the Law on Foreign Investment in 1987, by 1994, the cumulative investment reached a total of 1,144 investments worth US$10.5 billion (data from the General Statistical Office of Vietnam). Of this, foreign direct investment in the south totaled to 710 investments worth US$5.98 billion, while foreign direct investment in the North considerably lagged behind the South, totaling to 311 investments worth US$3.72 billion (Figure 25).

10 For example, a solution to the Cambodia problem was widely expected after the end of the Cold War in 1989 and the Vietnamese military’s withdrawal from Cambodia in the same year. Once the Paris Peace Agreement was signed in 1991 to address the Cambodia issue, peace and reconstruction efforts progressed under the auspices of the United Nations Transitional Authority in Cambodia (UNTAC). Subsequently, the United States lifted economic sanctions in 1994, thereby permitting international financial institutions to provide aid.

43

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

North Central South

(US$ millions)

0

100

200

300

400

500

600

700

800

(Number ofinvestments)

Cumulative investment(US$ millions, scale onleft)

Cumulative investments(scale on right)

Source: Reproduced from the General Statistical Office of Vietnam, "Statistical Yearbook 1995"

Figure 25　Cumulative investment by region (1994)

The Vietnamese government acknowledged the gap between the North and the South, which widened in the 1990s, and made efforts to eliminate it. In the Sixth Five-Year Plan (1996–2000), the Vietnamese government identified “regional development” as an important issue and indicated policies to redress the North-South gap. Under these policies, the Vietnamese government put most of its efforts into infrastructure development in the North. With improved infrastructure, the North had potentially easy access to China for procuring parts and also to the Chinese market itself. The North had other advantages as well as a location for industries. Its land prices and wages were low, its workers were honest, there were more universities than there were in the South, and it had an abundance of highly educated people. The government also worked to attract large-scale foreign direct investment in the North, reform the investment climate, and construct industrial estates. With regard to the institutional and policy environment, under the Japan-Vietnam Joint Initiative, the government formulated a practical plan of action and ensured its effective implementation through a platform for talks between private companies and the Vietnamese government; we will discuss this plan below.

As a result of these efforts on the part of the Vietnamese government and the international community, the investment climate in Northern Vietnam improved considerably and foreign direct investment in the region increased remarkably in recent years. From 2000 to 2004, foreign direct investment on a registered basis grew

44

approximately 19 times (from US$62.3 million in 2000 to US$1.19 billion in 2004), with the total number of investments growing approximately 3 times (from 61 in 2000 to 197 in 2004). Investment growth in the North came to exceed that in the South, where investment grew 3.7 times (Figure 26).

(higher: US$ millions; lower: number of investments)

2000 2001 2002 2003 2004 2004/2000

62.3 272.9 375.4 604.5 1195.9 19.2

(61) (89) (176) (204) (197) 3.2

58.7 128 145.1 218.4 405.2 6.9

(18) (35) (39) (59) (39) 2.2

707.1 2102.2 992.1 1061.1 2609.6 3.7

(284) (378) (536) (484) (486) 1.7

　North

　Central

　South

Source: Reproduced from the General Statistical Office of Vietnam, "Statistical Yearbook 2000-2004"

Figure 26　Change in direct investment (registered amount) and number of investments by region

In 2001, a number of major Japanese corporations, including Canon and Denso, invested directly in Northern Vietnam. The amount per Japanese investment in the North was nearly 3 times the national average in that year (Seki and Nagasaki, 2004, p. 77) (Figure 27). A notable trend after 2002 was the entry of small- and medium-sized enterprises of supporting industries, which followed these large corporations, in Japan. This created a solid foundation for further development (Tran, Kuchiki, Idei, Sakata, 2003, p. 9). The industrial agglomeration referred to as the so-called “canon effect” is a prime example of this kind of industrial agglomeration (JBIC-IDCJ, 2003, p. 98). Canon established its production base for printers in Northern Vietnam and began production in April 2001. As a result, Japanese, Singaporean, and Malaysian-affiliated companies entered the region one after the other to produce associated parts, prompting the formation of industrial agglomerations (Figure 28).

45

0

2

4

6

8

10

12

14

2000 2001 2002

(US$ millions)

National average

North

South

Source: Reproduced from Seki and Nagasaki (2004), p. 77

Figure 27　Amount per Japanese investment in Vietnam

Figure 28 Industrial agglomerations centering on Canon

Source: JBIC-IDCJ (2003), p. 98

The Nomura-Hai Phong Industrial Zone, which is a typical example of the industrial estates in the North, has also witnessed the development of these supporting industries. While the number of leases in this industrial estate between 1996 and 1999 was 5, between 2001 and 2005, this number surged to 30 companies leasing 36 lots. Since 2001, there has been a particularly high number of entering companies in the supporting industries, in the areas of automotive parts (air bags and wire harnesses), electronic components, precision sheet metal processing, plastic injection molding and metal dies, and metal press working components (Nomura-Hai Phong Industrial Zone materials).

46

These foreign direct investment inflows have made a significant contribution to the development of the local economy. Industrial output in Northern Vietnam increased sharply after 2000. According to Mitsui (2004, p. 9), it is estimated that in 2003, the 4 industrial estates constructed in regions adjacent to the Hanoi-Hai Phong corridor employed 14,000 workers, while new investment along this main highway created 40,000 additional new jobs.

We have thus briefly reviewed the developments in Northern Vietnam. In the next section, from the perspectives of infrastructure development, the institutional/policy environment, and the securing of human resources, we will discuss the Vietnamese government’s policy drivers that led to the reform of the investment climate in the North, and how Japanese aid contributed to these efforts.

2. Policy drivers

(1) Infrastructure development In the early 1990s, Vietnamese infrastructure was in an extremely poor state. In

particular, there was a serious lack of infrastructure in Northern Vietnam, which was a major obstacle in realizing the region’s latent appeal. The region had potential to develop as a production base for the international division of labor in Asia because it was located next to China (South China), an area that had experienced rapid growth both in its market and as a production base; besides, it was located in a central area of East Asia. However, its undeveloped port and road infrastructure hindered access to it, thereby making timely delivery difficult and increasing production costs (Tsūsan shiryō chōsakai, 1993, p. 226). If the minimum infrastructure, for example, electric power, was not in place, a location would not even be considered as an industrial site; nevertheless, on all levels, Northern Vietnam’s infrastructure was considerably backward. To deal with this issue, the Vietnamese government prioritized the infrastructure development of the North as part of its policy to redress the North-South gap.

Japan, one of the major donors to Vietnam, actively assisted infrastructure development in accordance with the Vietnamese government’s policy to develop the North. Figure 29 shows the infrastructure projects that Japan has so far assisted Vietnam with through ODA yen loans and grants. As shown in the figure, Japan has provided intensive support to Northern Vietnam in the areas of transportation (roads, bridges, and ports), electric power, and water supply and sewerage.

47

Figure 29 Japanese infrastructure development assistance to Vietnam

●Hanoi Drainage Project 94.97.05 ●Hanoi Urban Infrastructure 96 ●Transport Infrastructure in Hanoi 98 ●Red River Bridge 99.01.03.05 ●Nhat Tan Bridge 05 ●New National Highway No. 3 and Regional Road Network Project 04

●National Highway No. 10 Improvement 97.99

●Bridges in Northern Vietnam 95–98 ●Gia lam Water Supply 93–95 ●Hai Duong Water Supply 98–02 ●Ground water Development in Northern Vietnam 02–04

●National Highway No. 18 Improvement 97.99

●Pha Lai Thermal Power Plant 93–96.98 ●Cai Lan Port Expansion 95 ●Bai Chay Bridge 01 ●Hai Phong PortⅠ.Ⅱ. 93.99 ●Binh Bridge 99 ●Hai Phong City Environment Improvement Project 04

●National Highway No. 5 Improvement 93–95

●Ninh Binh II Thermal Power Plant 04.05

●National Highway No.1 Bridges Rehabilitation 93–96.98.02 ⅠHanoi - Vinh. HCMC-Can Tho ⅡHanoi - Lang Son. Dong Ha - Nha Trang

●Hai Van Tunnel 96.98.01 ●Da Nang Port Improvement 98 ●North-South Submarine Fiber Optic Cable Link Project 01.02 ●Ha Noi – HCMC Railway Bridges Rehabilitation 93–95.03 ●Central Vietnam Rural Telecommunication Network 97

●Phu My - HCMC 500kv Transmission Line 00 ●Phu My Thermal Power 93.94.96.98 ●Dong Nai and Ba Ria - Vung Tau Water Supply97.03 ●Saigon East-West Highway 99.01.02.04 ●HCMC Water Environment 00.02.05 ●Tan Son Nhat Inter. Airport 01 ●Cai Mep Thi Vai International Port 04

●Thac Mo Hydropower Station Extension Project 04

Loan Aid Projects

Grant Aid Projects

●Da Nhim Power System 96 ●Dai Nihn Hydropower 98.00.03 ●Ham Thuan - Da Mi Hydropower 93–97 ●Phan Ri - Phan Thiet Irrigation Project 00(E/S).05

●Bridges in Central Vietnam 01–05

●Bridges in Mekong Delta 01–03

●Can Tho Bridge 00 ●National Highway No. 1 Bypass Road 00 ●O Mon Thermal Power Plant 97(E/S) 00.01.02.03 (Unit No.2)

Source: Produced by the research group

48

This large-scale assistance with regard to infrastructure development in the North unleashed the region’s potential and is likely to have made a significant contribution to attracting foreign direct investment. For instance, upgrading National Highway No. 5 and expanding Hai Phong Port not only enhanced other infrastructure development but also expanded the functionality of the Hanoi-Hai Phong corridor (Figures 30, 31). This simplified access from Hanoi (the country’s capital and largest city in the northern region) to international markets. As a result, foreign direct investment in industrial estates situated along the corridor (Thang Long, Noi Bai, Saidong B, and Nomura-Hai Phong Industrial Zone) increased considerably after 2003 and played a leading role in the industrial output in the North. As of mid-2003, these four industrial estates accounted for approximately 85% of the North’s total industrial estates both in terms of the number of approved projects and registered capital (GRIPS, 2003, p. 7). According to interview surveys administered to more than 70 companies that have shifted businesses to Northern Vietnam, over 90% responded that they “would not have invested in the region had there been no improvements in National Highway No. 5 and Hai Phong Port” (ADB-World Bank-JBIC, 2005, p. 70).

0

2,000

4,000

6,000

8,000

10,000

12,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Total volume (1,000 tons)

Container (100 TEU)

Source: JBIC-IDCJ (2003), p. 24

Figure 30　Cargo throughput statistics in Hai Phong Port (1993-2002)

49

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

(US$ millions)

0

20

40

60

80

100

120

140

(Number ofprojects)

Registered capital (US$ millions, scale on left)

Number of FDI (scale on right)

Source: JBIC-IDCJ (2003), p. 85

Figure 31　Trend of FDI inflow to the four provinces along Highway No. 5

(2) Enhancement of the institutional/policy environment In the period from the late 1980s to the early 1990s after the adoption of the Doi

Moi Policy, the Vietnamese government worked to enact the legislations necessary for promoting market-oriented economic reform, and instituted a wide variety of laws and ordinances. The government was particularly active in pursuing institutional reform for attracting foreign direct investment. For example, the Law on Foreign Investment enacted in 1987 focused on repealing restrictions on the foreign investment ratio and allowed entities to be financed 100% by foreign capital. At the time it was enacted, the law attracted attention for being the “most liberal policy not only in Asia but in the Pacific Rim.” In addition, companies that met certain conditions became eligible for preferential treatment with regard to corporate tax and the exemption or reduction from an import tax on plant equipment (Seki, Nagasaki, 2004, p. 283–285). However, despite the many laws and institutions that were improved, much remained to be done from the perspective of foreign businesses: There still remained laws that needed to be instituted, discordance between existing laws, and a lack of coherence in the way the laws were implemented.

From the beginning to the mid-1990s, the international community initiated support for reforming Vietnam’s legal system in order to assist the Vietnamese government’s efforts to remedy these problems. From 1996, Japan provided assistance for the improvement of broad-based legislative support for a market economy, including laws pertaining to civil affairs, commerce, and economics. Although this legislative

50

support mainly assisted with the civil law, it also extended to corporate law, a law for bills of exchange and promissory notes, maritime law, a civil procedure code, civil execution law, bankruptcy law, antitrust law, unfair competition law, and securities exchange law. Even after instituting the civil law, Japan closely examined the enforcement of these laws and continued to assist with legal revisions, the arrangement of relevant bylaws, and improved implementation.

While a variety of legal institutions had been established, foreign companies paid attention to whether the above legal institutions would take root and be smoothly implemented. In fact, a number of operational problems came to light as companies that had entered Vietnam expanded and business activities continued to develop (see Box 3 for an example pertaining to land laws). Positive results were achieved to improve the investment climate including the legal system, through efforts by various forums formed by international organizations, bilateral assistance, and private-sector economic exchange.11 However, there were still deep-seated concerns in the international business community—including Japan—that no major progress had been made in the “hardcore” aspects of the abovementioned laws such as land laws (complicated and unclear regulations and the legal enforcement system, limits on foreign direct investment, etc.) (Ministry of Foreign Affairs, 2003, p. 42–43). Figure 32 also shows that the legal system was a major constraint for Japanese companies investing in Vietnam.

Box 3 Land risk in Vietnam

In Vietnam, the new constitution enacted in 1992 and the new Land Law enacted in 1993 specifies

that all the land is owned by the state. Although this legislation recognizes land use rights, it does not

allow the transfer of the land itself. Land is divided into six categories, each stipulating use rights and

rates for property tax and so forth. Before the mid-1990s, city residents paid property tax on land,

but did not pay compensation for use rights. On the other hand, the Vietnamese government

collected a 20% commission whenever use rights changed hands. In accordance with Finance Ministry

Circular No. 2, the rate subsequently changed to 100%.

Decree No. 18, issued in February 1992, prohibited land use rights for commercial purposes and

stipulated that all such rights be converted to lease agreements. In other words, this meant that land

use rights would be forfeited, regardless of whether companies had previously paid a 100%

commission upon obtaining these land use rights.

Source: Pham van Thuyet (1995), p. 6‒9

11 For example, a number of organizations and initiatives were working toward reforming the investment climate, including the conditionality of the World Bank and IMF programs, the Vietnam Business Forum, and the action plan and Investment and Trade Working Group, which were part of Japan’s New Miyazawa Plan (Ministry of Foreign Affairs, 2003, p. 42).

51

a) Legal instability g) Expensive transportation and port feesb) Socialism h) Insufficient preferential investment treatmentc) Uncertainty about the future i) Poor national imaged) Many imitation products j) Difficulties involved in liveing (residing) in the country

e) Difficulty of technology transfer k) High electricity costsf) Dual-pricing system

0

1

2

3

4

5

6

7

8

9

a b c d e f g h i j k

Source: ＪＥＴＲＯ (2003), p. 25

Figure 32　Reasons for companies' hesitation to invest in Vietnam

(Results of a survey of Japanese-affiliated firms that have not shifted production to Vietnam:45 multiple-response answers)

Meanwhile, with the turn of the century, the Vietnamese government began pursuing efforts to act externally to enter the global economy. The Vietnam-US Trade Agreement came into effect in 2001 and the Japan-Vietnam Investment Agreement was signed in November 2003. Serious negotiations to join the WTO began in 2002 and full-scale participation in AFTA was planned for 2006. There were some within the Vietnamese government at the time who felt that if Vietnam were to fully enter the global market, they would have to face intense competition from both China and other ASEAN countries and be forced into a structure of vertical division of labor, whereby Vietnam would become a mere supply base for labor and raw materials (Ministry of Foreign Affairs, 2003, p. 41). Figure 33 shows the recent trend of foreign direct investment in Vietnam and its Asian neighbors.

52

(US$ millions)

2000 2001 2002 2003

　China 38,399 44,241 49,307 53,505

　Singapore 17,219 15,003 5,652 11,430

　Malaysia 3,787 553 3,203 2,473

　Thailand 3,365 3,892 953 1,949

　Vietnam 1,298 1,300 1,400 1,450

Source: World Development Indicators, net inflows basis

Figure 33　Change in direct investment to Vietnam and neighboringcountries

Consequently, there was an urgent need to solve the abovementioned “hardcore” problems and reform the investment climate. The Japanese government, which aimed for a significant reform of Vietnam’s investment climate, collaborated with the Vietnamese government on the “Japan-Vietnam Joint Initiative,” which was launched in 2003. This initiative aimed to achieve effective reforms and go beyond merely setting policy recommendations and targets.

The action plan, which comprised 44 items, was approved after intensive debates held over an 8-month period since the agreement to launch the initiative had been reached at the Japan-Vietnam Summit in April 2003. It contained a comprehensive list of items for reform in Vietnam’s investment climate, including the structuring and implementation of a strategy to promote foreign investments, the revision of investment-related regulations, enhancement of the abilities of implementing agencies, development of infrastructure, and the solving of individual cases. It included items the Vietnamese government needed to address, issues that required Japan’s assistance, and the deadlines for each of the agendas (Box 4).

From the perspective of policy coherence, it is worth mentioning that the ODA’s policies with its ODA yen loans and technical cooperation are being implemented in a consciously uniform manner with the investment policies of JETRO and other organizations. Thus, Japanese policies pertaining to this initiative are consciously coherent with one another. More specifically, ODA yen loans for supporting policies (loans that support poverty reduction) promote agendas with regard to this initiative, while the initiative itself counts on investment promotions by JETRO and technical cooperation in various areas, such as the improvement of legislation and legal human resources, to be implemented by the JICA.

53

Box 4 Japan-Vietnam Joint Initiative: Principal items of reform

for the market system (excerpt)

(1) Regulations related to investment

・ Schedule of establishment of commercial presence and deregulation for foreign trading

companies

・ Removal of the restrictive investment rule (80% of export requirement, etc.)

・ Clarification of sectors where 100% foreign direct investment companies are approved

・ Reform of Labor Code restrictions (enforcement of indefinite term labor contracts), etc.

(2) Capacity-building of implementing authorities

・ Ensuring transparency, reliability, harmonization and speed-up, and the simplification of

customs procedures

・ Tax administration system (VAT refund systems, etc.)

・ Improvement of the administration of intellectual property rights, etc.

(3) Improvement of investment-related institutions

・ Improvement in the promulgation process of legal normative documents (holding opinion

hearings for foreign companies, etc.)

・ Improvement of the implementation of judgments (ensuring the effective and sufficient

implementation of civil judgment, etc.)

・ Promulgation of the competition law

・ Introduction of International Accounting Standards

・ Introduction of the system of bills and checks

・ Industrial standardization and metrology improvement, etc.

Source: Ministry of Foreign Affairs, (2003), p. 71‒109

Japan and Vietnam held a final evaluation conference on November 29, 2005 to sum up the 2 years of effort with regard to this initiative. At this meeting, the two countries determined that 85% of the 44 items (including the 125 subitems) on the initiative’s action plan “had been solved” or “were progressing on schedule.” The actual achievements were, for instance, the abolishment of 80% of the export obligations, unanimous ruling by the board of directors, dual pricing on electricity rates (foreigner rates), and rules to procure products locally. Short-term visas from Japan were also abolished (from January 1, 2004), the maximum tax rate on individual income tax was reduced (from 50% to 40%), and the transfers, leases, and collateral setting with regard to land use rights acquired by foreign capital were eased.

Thus, the Japan-Vietnam Joint Initiative Action Plan addresses many of the issues

54

acknowledged in international business circles. For this reason, foreign business leaders have shown a great deal of interest in this initiative. It is being seen more and more that the initiative benefits foreign direct investment not only from Japan but from all the countries, and has a positive effect on the development of the private sector as a whole (Shimamura, 2005, p. 39).

(3) Human resources

In Vietnam, a country where the infrastructure and institutional policy environment has been relatively slow to develop, human resources were what fascinated investors most. In the beginning of the 1990s, the population of Vietnam was over 70 million, and approximately 70% of the working population was engaged in agriculture, resulting in an abundance of labor force in proportion to land. The per capita GNP was low, around US$220 (1988), but basic education was widely prevalent. For example, the literacy rate in the early 1990s was 84%, which well exceeded the average rate in the poorest countries (36%), approaching that of Thailand (91%) (Tsūsan shiryō chōsakai, 1993, p. 3).

The current Vietnamese constitution, which was enacted in 1992, specifies that the state is responsible for providing education. Decree No. 90/CP, issued by the government in 1993, confirmed the right of all citizens to receive an education and to seek higher education. In addition, the Fifth Five-Year Plan (1991–1995) called for the qualitative enhancement of human resources to meet the demands of industrialization and modernization as one of its goals. As a result of these policies, the number of both public and private universities increased and enrollment in higher education institutions including universities and junior colleges also rose from 48,433 in 1990–91 to 256,935 in 2002–03 (JBIC, 2004, p. 127).

A number of students evidenced the wide-scale expansion of higher education in Vietnam; however, there was still room for improvement in terms of quality. Education presented a sizable challenge, particularly from the standpoint of fostering human resources who could play an active role in an industry-oriented market economy. It was still an issue that the curriculum at Vietnam’s higher education institutions did not cater to market-oriented economic reforms because many teachers had been educated in the former communist bloc.

Meanwhile, the composition of the industrial labor force is changing dramatically with the rapid economic growth. What is particularly remarkable is the rapid increase in the number of people employed by private and foreign-affiliated firms (Figure 34). Amidst such a trend, competition among foreign-affiliated firms to acquire skilled

55

laborers is becoming increasingly intense. A recent study conducted by the Central Institute for Economic Management (CIEM) shows that the turnover rate of employees in foreign-affiliated companies between 2001 and 2003 reached 43.4%, 42% of which were skilled laborers. In addition to this, among companies that experienced the turnover of workers, 32% of these workers moved to other foreign companies, 23% became independent, while 18% moved to domestic companies (World Bank, 2005, p. 94–95).

Figure 34 Composition of industrial labor force (%)

1993 1998 2002 2004

Inactive 19.42 15.32 16.69 17.17

Active 80.58 84.68 83.31 82.83

Employed

Government 3.08 3.55 4.44 5.25

State-owned enterprises

(SOEs)

2.50 2.57 3.30 3.14

Private 10.78 10.14 15.71 16.99

FDI companies 0.10 1.12 0.8 1.33

Non-farm self-employment 14.67 16.52 19.05 16.52

Farmers 49.46 50.15 38.2 38.77

Unemployed - 0.63 1.8 0.83

Source: World Bank (2005), p. 85

Despite the increasing need, it has become clear that Vietnam still has very few human resources with advanced expertise or managerial abilities, who have acquired such technical skills from vocational training schools, or who have studied management or other areas of technical expertise at institutions of higher education. For instance, as shown in Figure 35, the number of people considered to be skilled in Vietnam is less than 20%, while even fewer people are either qualified or graduates from vocational schools. Moreover, while the enrollment rate in higher education increased dramatically between the beginning of the 1990s to 2000, it was still only 20% as of 2001–2002 (Figure 36). Furthermore, as discussed above, the quality of education needs to be improved.

56

Unskilled 80.4% Skilled　 19.6%

Completed elementary education　3.3%

Skilled, no elementaryeducation 3.9%

Skilled, elementaryeducation 4.4%

Vocational school 3.9%

Junior college andabove　4.2%

Source: Reproduced from Seki, Nagasaki (2004), p. 50Original source: Central Institute for Economic Management, Vietnam's Economy in 2002, 2003

Figure 35　Education and technical level of Vietnam's labor force (2002-2003)

Figure 36 Higher education enrollment rate in Vietnam

Year 1992‒1993 1997‒1998 2001‒2002

Enrollment rate 1.4% 13.0% 20.1%

Source: JBIC (2004), p. 138

In recent years, Japan has been actively involved in providing support to enhance the level of Vietnam’s vocational and university education. Of primary concern is the shortage of mechanical technicians that has accompanied Vietnam’s pursuit of market-oriented economic reform. To this end, Japan provides technical cooperation to Hanoi Industrial College, an institution oriented toward serving as a center in the north for training technicians, and also assists with curriculum development, the installation of machinery and equipment, and training guidance (JBIC, 2004, p. 280). Furthermore, Japan committed an ODA loan in March 2006 to finance the Higher Education Development Support Project in the information and communication technology (ICT) sector with the objective of enhancing education standards in Vietnam’s IT sector and strengthening Vietnam’s industrial competitiveness. A model IT education program will soon commence at Hanoi Industrial College.

57

Chapter 6 Conclusion

The hypothesis of the case studies in this paper is that the increase in foreign direct investment in the relevant countries will contribute to the development of industrial agglomerations and an increase in income as a result of the following: 1) Government-formulated policies addressing market failures emerging through the process of industrial agglomerations centered on foreign direct investment and 2) Japan’s support of such efforts with aid, trade, and overseas investment policies. Based on this hypothesis, in chapters 3 through 5, we examined case studies of the Eastern Seaboard of Thailand, Dalian in China, and Northern Vietnam. For each region, we first provided a brief description on how the region was developed as an industrial agglomeration and then reviewed the policy drivers—designed to address the market failures that emerged during the development process—pursued by the developing country’s government. We also dealt with the corresponding Japanese assistance. The case studies in this paper are limited in the sense that they do not cover all Japanese assistance in these areas and they do not contrast these cases with other areas in the same countries or other countries. Further, this paper neither covers all the perceptions of market failures nor the policymaking processes within the developing country governments. However, despite these limits, this paper confirms the following commonalities (across the three regions) that successfully attracted foreign direct investment and developed industrial agglomerations.

The first commonality was the strong and sustained ownership on the part of the developing country governments. All the three regions in the case studies either had no notable industries (the Eastern Seaboard of Thailand and Northern Vietnam) or were experiencing industrial decline and a decline in economic activity (Dalian, China). Therefore, it would have been difficult for each of these regions to attract foreign direct investment without government policy interventions. After many years of debate, the Thai government invested a massive amount of funds in infrastructure development and developed a second industrial zone in addition to Bangkok. With a policy oriented toward redressing the sizable gap between the North and the South, the Vietnamese government carried out large-scale infrastructure development and tapped into the inherent potential of the North. In the midst of a stagnating economy in the northeast region in China, Dalian successfully attracted foreign direct investment by taking strategic advantage of its close physical proximity to Japan and actively pursuing infrastructure development and institutional policy reform.

The second commonality was that typical examples of market failures (discussed

58

in Chapter 2) were identified more or less as challenging issues in the development process of industrial agglomerations. These issues were: 1) The need for developing infrastructure and industrial estates, 2) the need for developing investment-related laws and institutions, 3) information asymmetry (information on various issues not being conveyed from individual companies to developing country governments and information of developing country governments not being conveyed to individual companies), and 4) a shortage in the supply of human resources with advanced knowledge and expertise. 12 The developing country governments in the regions analyzed in this paper understood the necessity of overcoming these challenges and formulated appropriate policy drivers in accordance with the level of development in the markets and the state of the government in their respective countries.13

The third commonality was that Japan supported developing countries’ policy drivers addressing the market failures discussed above, through a combination of aid, trade, and investment policies. Whether a specific combination of assistance was optimal for a specific area on the basis of the results regarding the development is a question that needs to be examined and answered by another study. However, the aid menu of the Japanese ODA yen loans and technical cooperation, along with the information mediation by JETRO, did not contradict one another and were mutually coherent for the sake of correcting market failures that arose in the development process of industrial agglomerations. While Japanese aid, trade, and investment policies to assist Thailand and China from 1980 through the 1990s were not necessarily consciously coordinated, Japan achieved policy coherence as a result of assisting the policy drivers of developing country governments. On the other hand, Japan has consciously aimed for coordinated aid, trade, and investment policies in assisting Vietnam since 2000, and has thus achieved policy coherence.

These three commonalities found in the case studies lead to a number of important observations with regard to coherence in Japan’s aid, trade, and investment policies. First, it is essential for developing country governments with strong ownership not only to understand market failures but also to recognize and be able to formulate policy drivers depending on the level of market development in their respective countries and the state of their governments. In terms of infrastructure development, there is a particular need for massive early-stage development and for putting in place a minimum environment that supports business activities. Policy decisions for these investments

12 For example, Vietnam is expected to become actively involved with infomediation, through which developing country governments convey information to individual firms. 13 For instance, comparing Thailand with less developed Vietnam, in the latter market failures 1) through 4) occur considerably rapidly as conditions of external competition with AFTA, etc., change.

59

must be made at an extremely risky stage of development; therefore, it is essential for the developing country governments to have a thorough understanding of the strengths and weaknesses of the market within their economy and to be able to determine the necessary policy drivers.

The second observation is that it is essential for Japan to be able to accurately mobilize an appropriate aid menu in response to the policy drivers of the developing country governments. From now on, it is especially important that coherence in policies is consciously achieved. Although critical paths attributable to market failures will change in each stage of the industrial agglomeration process, it is important for Japan to mobilize an aid menu that is appropriate at the time. As discussed above, there is a need for massive infrastructure development in the planning stages of foreign direct investment; however, most developing countries do not have the fiscal capacity for this and will be in desperate need of financial assistance from donor countries. In the early stages of foreign direct investment, the absence of a channel for information exchange between developing country governments and companies considering entry can become an obstacle, and thus, public organizations such as JETRO and chambers of commerce of donor countries can act as catalysts to overcome these information asymmetries. Furthermore, in the main stages of foreign direct investment, human resources with a high level of engineering and managerial expertise may become scarce; thus, technical cooperation and financial aid from donors can play a significant role.

The final observation, which may overlap with the above discussion, is that it is important to put in place infrastructure and an institutional/policy environment based on the (potential) needs of private enterprises since industrial agglomeration is a process led by private initiatives. Though perhaps a hindsight analysis, from the standpoint of infrastructure, the Eastern Seaboard of Thailand was conducive as an industrial site because the project was set up in an area situated just over an hour by road from Bangkok. It had also developed a port capable of processing volumes of goods that were high even by international standards, and this encouraged business entry. Infrastructure that catered to the needs of private enterprises was also a major key to foreign direct investment inflows to the Northern Vietnam. In terms of the institutional/policy environment, a sequence of events in Thailand, including trade friction and anti-Japanese sentiment, led to the emergence of a close dialogue between the government and Japanese companies (and companies from other countries) facilitated by the chamber of commerce. Additionally, in Vietnam, initiatives between both the Japanese and Vietnamese governments allowed the Vietnamese government and foreign direct investment companies to create a framework for comprehensive discussions on

60

issues relating to the investment climate. Each of these played a significant role in the overall outcome. The cases discussed above can be viewed as instances of investment climate reform, a topic debated extensively in the international community.

Through case studies of industrial agglomerations in East Asia, policy drivers to promote them, and Japan’s roles, this paper aims to contribute to the discussion of policy coherence in development. These three successful cases suggest that (1) the developing country governments were able to determine the necessary policy drivers, based on the strengths and weaknesses of the markets in their respective countries’ economies; (2) Japan successfully mobilized an aid menu to support the policy drivers of developing country governments; and (3) the (potential) needs of private companies were fully considered. These were all contributing factors that led to policy coherence. This study also confirmed that Japan consciously coordinated multiple policies while giving recent aid to Vietnam. From now on, competition for attracting investment with neighboring countries will intensify due to further liberalization in trade and investment and developments in information communication, and the pace required for reforms will quicken. The timing and aspects of market failures that developing country governments face will most likely change. We hope that future studies will intensify the debate on policy coherence based on such rapidly changing conditions.

Bibliography

[Japanese References] Ariga, Kenichi. and Ejima, Shinya. (2000). “POST-EVALUATION FOR ODA LOAN

PROJECT―KINGDOM OF THAILAND ‘Overall Impact of Eastern Seaboard Development Program’”, JBICI Review (2000.4), Japan Bank for International Cooperation

Institute of Developing Economies (1992). “Kunibetsu keizai kyōryoku kenkyū

hōkokusho tai (Country-Specific Economic Cooperation: Thailand)” (in Japanese)

Ishii, Kazuo. (2000). “Nihon no bōeki 55-nen (55 Years of Japanese Trade)”, Japan

External Trade Organization (in Japanese)

61

Ishizaki, Tomoo. (1999). “Jōhō sute-shon toshite no dairen buhin zairyōten (Dalian Global Parts and Materials Fair as an Information Station)”, Chūgoku keizai (December, 1992), Japan External Trade Organization (in Japanese)

Inagaki, Kiyoshi. (2002). “Chūgoku shinshutsu kigyō chizu: Meido in chaina no tenkai

(Map of Inbound Companies in China: Made in China)”, Sososha (in Japanese) Imai, Satoshi. (1990). “Taichū tōshi: Tōshi kankyō to gōben kigyō ke-su sutadi

(Investment in China: Investment Climate and Case Study of Joint Ventures)”, Japan External Trade Organization (in Japanese)

____ (1994). “Taigai kaihō no kasoku to chokusetsu tōshi no dōnyū (The Acceleration

of Open Door Policy and the Introduction of Direct Investment)” in Fujimoto, Akira. (ed.), “Chūgoku shijō keizai he no tenkan (Shifting to a Market Economy in China)”, Japan External Trade Organization (in Japanese)

Urata, Shujiro. (2005). “Higashi ajia ni okeru jūsōteki kaihatsu purosesu—bōeki to

chokusetsu tōshi no sōgo izon kankei no kakudai to shinka (East Asia’s Multi-Layered Development Process: The Trade-FDI Nexus)” in “Chiiki keizai apro-chi wo fumaeta seisaku no ikkansei bunseki: higashi ajia no keiken to tadona- no seisaku kenkyūkai hōkoku (Regional Approach on Policy Coherence: Past Experience in East Asia and Current Donor Practices)”, Japan Bank for International Cooperation

Ohashi, Yutaka. (1983). “Tai tōbu rinkai kōgyō kaihatsu keikaku no genjō to mondaiten

(The Eastern Seaboard Development Program and its Challenges)”, The OECF Research Quarterly (July, 1983), Overseas Economic Cooperation Fund (in Japanese)

Ministry of Foreign Affairs (2003). “Vietnam-Japan Joint Initiative to Improve Business

Environment with a view to strengthen Vietnam’s Competitiveness” Kawai, Masahiro. (2005). “Nihon ni okeru kaihatsu no tame no seisaku no ikkansei

(Japanese Policy Coherence for Development)” in “Chiiki keizai apro-chi wo fumaeta seisaku no ikkansei bunseki: higashi ajia no keiken to tadona- no seisaku kenkyūkai hōkoku (Regional Approach om Policy Coherence: Past Experience in

62

East Asia and Current Donor Practices)”, Japan Bank for International Cooperation (in Japanese)

Kawabe, Sumiko. (2003). “Chao puraya gawa no nagare to tomo ni—bankokku

nihonjin shoukou kaigisho no 50-nen (Flowing with the Chao Phraya River—50 Years at the Japanese Chamber of Commerce in Bangkok)”, Shoho (April 2003 report, May 2003 report, November 2003 report)”, Japanese Chamber of Commerce in Bangkok (in Japanese)

Kimura, Fukunari. (2005). “Nihon no bōeki jiyūka/shijō kaihō: higashi ajia keizei he no

gan’i (Japan’s Trade Liberalization and Market Opening: Implications for the East Asian Economy)” in “Chiiki keizai apro-chi wo fumaeta seisaku no ikkansei bunseki: higashi ajia no keiken to tadona-no seisaku kenkyūkai hōkoku (Regional Approach om Policy Coherence: Past Experience in East Asia and Current Donor Practices)”, Japan Bank for International Cooperation (in Japanese)

Ministry of Economy, Trade and Industry (1996). “Tsūshō hakusho (White Paper on

International Economy and Trade)” (in Japanese) _____(2005). “Heisei 16 nendo chikyū kankyō/puranto kasseika jigyōtō chōsa, taikoku

jidōsha sangyō ni okeru jinzai ikusei purojekuto ni kakaru F/S chōsa hōkokusho (2004 Study of Projects for the Global Environment and Plant Activation, Feasibility Study of the Thai Automotive Human Resources Development Project report)” (in Japanese)

Japan Bank for International Cooperation (2000). “Eastern Seaboard Development

Program Impact Evaluation: Ex-Post Evaluation Report for ODA Loan Projects 2000” http://www.jbic.go.jp/english/oec/post/2000/pdf/01-01.pdf (August 19, 2005)

_____(2004). “Betonamu kyōiku sekuta-chōsa (Study on the Vietnamese Education Sector)” (in Japanese)

_____(2005). “Betonamu no tōshi kankyō (Vietnam’s Investment Climate)” (in Japanese)

63

Kotani, Jun. (1999). “Afuta-sa-bisu de banzen wo kisuru—nicchū gōben dairen kōgyō danchi no kotani sōkeiri ni kiku (Providing Assurance with Afterservice: An interview with Mr. Kotani, General Accountant for the China-Japan joint Dalian Industrial Park)”, Asia Market Review (November 1, 1999), Aizawa Securities Investment Research Center

_____(2000). “Henbō suru dairen no tōshi kankyō—nihon kigyō no chūgoku shijō

shinshutsu wo sekkyoku shien suru dairen kōgyō danchi (The Transforming Dalian Investment Climate: The Dalian Industrial Park as a way to actively assist Japanese companies to penetrate the Chinese market)”, Japan-China Economic Journal (May 2000), Japan-China Economic Association (in Japanese)

Kobayashi, Masayuki. (2000). “Chūgoku no shakaishugi shijō keizaika to kigyōhō no

taiō (China’s Socialist Market Reform and Corporate Laws)” in Kobayashi, Masayuki (ed.), “Ajia syokoku no sijyō keizaika to kigyōhō (Market Economy and Corporate Laws in Asia)”, Institute of Developing Economies (in Japanese)

Japan Overseas Development Corporation (2002). “Tai ōkoku jidōsha sangyō ginō

kentei shien hōsaku sakutei chōsa hōkokusho (Study on Technical Assistance for the Skill Certification of the Thai Automobile Industry)” (in Japanese)

Sato, Katsumi. (2005). “Chūgoku tōhoku chiiki no tōshi kankyō—tōhoku 3-shō no

genjō (Investment Climate in Northeast China: 3 northeast provinces)”, Shinkin Central Bank Monthly Review (2005.7), Shinkin Central Bank (in Japanese)

Shimamura, Masumi. (2005). “Betonamu ni okeru nihon no seido/seisaku he no nōdō

kanyo—genchi ODA tasuku fo-su ga hatashita yakuwari, enjo kyōcyō no imi to ha (Active Contributions to Japan’s Institutions and Policies in Vietnam: significance of aid coordination and the role of the local ODA task force)”, GRIPS Development Forum Discussion Paper, National Graduate Institute for Policy studies (in Japanese)

Shimomura, Yasutami. (2000). “The Vicissitudes of Eastern Seaboard Development

Program and Their Significance—the ownership and effective use of aid in developing countries” in Ex-Post Evaluation of ODA Loan Projects 2000, Japan Bank for International Cooperation

64

_____(2004), “Sangyō ikusei shudan no tayōka wo motomete—tai no keiken ga shisa suru mono (Diversifying the Industrial Development Process: Suggestions from the Thai Experience)”in Kuroiwa, Ikuo. (ed.), “Institutional Capability of the State and Industrial Policy”, Institute of Developing Economies (in Japanese)

Shimomura, Yasutami., Onoi, Yoshiki., Kohsaka, Akira., Takahashi, Yoshiharu. (1991).

“Tai makuro keizai chōsa (Thailand Macroeconomic Survey Report)”, The OECF Research Quarterly (April, 1991), Overseas Economic Cooperation Fund (in Japanese)

Sugita, Toshiaki. (1996). “Chūgoku bijinesu no risuku manejimento: Shippai kara

manabu chokusetsu tōshi senryaku (Direct Investment Strategies Learned from Risk Management Mistakes by Businesses in China)”, Diamond (in Japanese)

Seki, Mitsuhiro. and Nagasaki, Toshiyuki. (2004). “Betonamu: Shijō keizaika

to nihon kigyō (Vietnam’s Transition to the Market Economy and Japanese Enterprises)”, Shinhyoron (in Japanese)

Seki, Mitsuhiro. (2001). “Nihon kigyō/chūgoku shinshutsu no shinjidai: Dairen no

10-nen no keiken to shōrai (The New Age of Japanese Enterprises in China: 10 years in Dalian and the Future)”, Shinhyoron (in Japanese)

Sekine, Masaaki. (1997). “Dairen shinshutsu nikkei kigyō no nayami—tōshi kankyō

kaizen no tegakari wo saguru (The Discontents of Japanese Enterprises in Dalian: Searching for Hints of Investment Climate Reform)”, Japan-China Economic Journal (September–October 1997), Japan-China Economic Association (in Japanese)

Sonobe, Tetsushi. and Otsuka, Keijiro. (2004). “Sangyō hatten no ru-tsu to

senryaku—nicchūtai no keiken wo manabu (Roots and Strategies of Industrial Development: Lessons from the East Asian Experience)”, Chisen Shokan (in Japanese)

Dalian Foreign Trade & Economic Cooperation Bureau (2003). “Dalian Investment

Guide” (in Japanese)

65

Tsūsan shiryō chōsakai. (1993). “Yakushin suru betonamu: Kōgyō shinkō to tōshi sokushin no kyōryoku ni mukete (A Rapidly Advancing Vietnam: Toward Cooperation for Industrial Advancement and Investment Promotion)” (in Japanese)

Tran, Van Tho., Kuchiki, Akifumi., Idei, Fumi., Sakata, Shozo. (2003). “Impact

Assessment of Transport Infrastructure Projects in Northern Vietnam”, Japan Bank for International Cooperation

Nakashima, Hiroyuki. and Nakatani, Keiji. (1997). “The Recent Trends and Problems of

Direct Investment in China”, Journal of Research Institute for International Investment and Development (Vol.23 No.11 November 1997), The Export-Import Bank of Japan

Japan-China Economic Association (1995). “Chūgoku no seiji keizai dōkō: Higashi ajia

kokusai bungyō kouchiku he no chōsen—‘Kankoukai keizaiken’ kōsatsu chōsadan hōkoku (Trends in Chinese Political Economy: Challenges to an East Asian Division of Labor—‘Pan Yellow Sea Economic Area’ Prospective Investigative Study Report)” (in Japanese)

Japan Overseas Enterprises Association (1989). “Chūka jinmin kyōwakoku: Tōshi

kankyō chōsadan hōkokusho (People’s Republic of China: Investment Climate Study Report)” (in Japanese)

Japan External Trade Organization (2003). “Betonamu ni okeru tōshi/bōeki kankyō ni

kansuru anke-to chōsa kekka (Survey Results of Vietnam’s Trade and Investment Environment)” (in Japanese)

Japan External Trade Organization (2004). “Chūgoku no chiikibetsu tōshi kankyō chōsa

hōkoku (Regional Investment Climate Report on China)”, Chūgoku keizai (2004.2) (in Japanese)

Japan External Trade Organization Dalian Office (2005). “Dairenshi gaikyō (Outlook

for Dalian)” (in Japanese) Hayami, Yujiro. (2000). “Development Economics: From the poverty to the wealth of

66

nations”, Sobunsha Japanese Chamber of Commerce in Bangkok (1989). “Taikoku no chūshō

kōgyō (Small and Medium Industries in Thailand)” (in Japanese) Vietnam Economic Research Institute (1994). “Betonamu tōshi gaido: Hōteki tetsuzuki

kara kaisha setsuritsu, jigyō un’ei made (Vietnam Investment Guide: From Legal Procedures to Company Start-up and Operations)”, Nihon Keizai Shimbun (in Japanese)

Masudome, Tokuro. (2005). “Chūgoku dairen-kō no genjō (China’s Dalian Port)”,

Quarterly (Vol.1,2 No.71 2005), The Overseas Coastal Area Development Institute of Japan (in Japanese)

[English References] General Statistics Office of Vietnam, “Statistical Yearbook” GRIPS Development Forum (2003). “Linking Economic Growth and Poverty

Reduction” Japan Bank for International Cooperation, Asian Development Bank, World

Bank (JBIC-ADB-World Bank) (2005). “Connecting East Asia: A New Framework for Infrastructure”

Japan Bank for International Cooperation and International Development

Center of Japan (JBIC-IDCJ) (2003). “Impact Assessment of Transport Infrastructure Projects in Northern Vietnam”

Mitsui, Hisaaki (2004). “Impact Assessment of Large Scale Transport

Infrastructure in Northern Vietnam,” A Case Study from Scaling Up Poverty Reduction: A Global learning Process and Conference Shanghai, May 25–27, 2004

National Economic and Social Development Board, “Gross Regional and

Provincial Product”

67

http://www.nesdb.go.th/econSocial/macro/macro_eng.php (March 31, 2006)

Shatkin, Gavin (2003). “Globalization and Local Leadership: Growth, Power and

Politics in Thailand’s Eastern Seaboard,” Conference Report Series, University of Michigan, http://sitemaker.umich.edu/urrcworkingpapers/urrc_working_papers_home/da.data/308460/Paper/urrc_2003-05.pdf (February 9, 2006)

Thuyet, Pham van (1995). “The Emerging Legal Framework for Private Sector

Development in Vietnam’s Transitional Economy”, World Bank Policy Research Conference report 1486, Washington, DC: World Bank

Watanabe, Matsuo (2003). “Official Development Assistance as a Catalyst for Foreign

Direct Investment and Industrial Agglomeration”, Asian Development Experience Vol1: External Factors for Asian Development, Institute of Southeast Asian Studies

Webster, Douglas (2002). “On the Edge: Shaping the Future of Peri-urban East Asia”,

Shorenstein Asia-Pacific Research Center, Discussion Paper, http://iis-db.stanford.edu/pubs/20031/Webster2002.pdf (August 7, 2005)

World Bank (2005), “Business”, Vietnam Development Report 2006

68