Asian Business & Management, 2002, 1, (291–312) r 2002 Palgrave Macmillan Ltd 1472-4782/02 $15.00 www.palgrave-journals.com/abm

Industry Policy in East Asia Fred Robins Graduate School of Management, Adelaide University, Level 3, Security House, 233 North Terrace, Adelaide SA 5000, Australia. E-mail: [email protected]

This commentary examines the future of industry policy in those countries of East Asia where it has a track record of apparent success. Particular attention is given to the attitudes of the policy-making elite in the aftermath of the Asian Crisis. The author judges that the priority given by regional governments to industrial development and their confidence in state-assisted industrialization is undiminished. At the same time, there is broad recognition of the need to take the WTO and greater global business integration fully into account. The consequence is likely to be changes in the mechanisms of industry policy, but not to the important place given to industry policy in ‘developmental’ states. Asian Business & Management (2002) 1, 291–312. doi:10.1057/palgrave.abm.9200021 Keywords: industry policy; Asian crisis; state-assisted industrialization; WTO; cronyism

Introduction Since the 1950s or 1960s, most governments in East Asia have accepted responsibility for the industrialization and accelerated development of their national economies; they have also taken this responsibility seriously. The promotion of economic growth in general, and the establishment of new industries in particular, have been regarded as core responsibilities of governments and public service bureaucracies alike and have typically been accorded the highest possible priority after provision of national security. Put simply, East Asian governments have accepted a more direct responsibility for growth and given it higher priority than their Western counterparts. They have also shown themselves perfectly willing to ‘intervene’ in the economy in pursuit of these objectives. These policies and actions have given rise to business– government relationships that differ from those in the West. The questions now, in the aftermath of the ‘Asian Crisis’, are whether there will be any fundamental change in industry policy thinking by development-oriented East Asian governments and to the business–government relationships they have developed. ‘Intervention’, of course, is economists’ code for any government action that influences prices. Such actions range from the imposition of bans, quotas and

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tariffs on trade, through domestic preference mechanisms in public procurement, local content requirements and offset agreements, to the provision of subsidized land and other financial inducements to lure desired foreign investment. It may also embrace such features as export processing zones and concessionary tax provisions. Where designed to achieve specific industry outcomes, rather than simply to raise revenue or for some other nondevelopmental purpose, such actions are normally coordinated and constitute what is commonly referred to as ‘industry policy’. All of these actions, and more of the kind, have been taken over recent decades by the governments of the high-growth economies in East Asia. Indeed, ‘interventionist’ economic development policies have long been the norm, albeit not quite universal, across the region. It follows that East Asia is the most appropriate region for an examination of industry policy and the particular business–government relationships it has fostered. Despite ample evidence of purposeful government industry policy in the region (eg Amsden, 1989), economists remain divided in their interpretation of the developmental role of East Asian governments. Their disagreement focuses on whether it is government initiatives or market forces which have constituted the primary causal factor in stimulating modern economic development and industrial productivity growth. Astonishingly, given the significance of the issue, this debate is a good deal less than rigorous. However, its nature and content are excellently summarized elsewhere (eg Wade, 1992). The purpose of this paper is simply to examine the character of the business–government relationship in these so-called ‘developmental states’. It is also about the way in which this relationship may evolve now that governments in the region have had to come to terms with the material, political and institutional consequences of the 1997 ‘Asian Crisis’. One clear indicator of the severity of this crisis, which forms the backdrop to this paper, is the resultant level of public debt,

Table 1 Public debt and recapitalization cost as % share of GDP in 1998 Thailand S. Korea Public debt 1996 Public debt 1998* Estimated cost of recapitalization* Funds disbursed Expected extra cost Debt after capitalization Total interest payment Portion for recapitalization Fiscal surplus/deficit* Government bond yield Source: IMF International Finance Statistics. Asian Business & Management 2002 1

3.7 14.6 31.9 23.9 8.0 46.6 5.0 3.4 2.8 10.8

8.0 10.4 16.0 12.5 3.6 26.5 1.9 1.2 2.9 7.2

Indonesia (*1997) 23.9 72.5 58.3 10.6 47.7 106.6 16.7 9.2 1.4 15.7

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including costs of recapitalizing failed banking systems, in the economies of the region. The figures for the three regional economies that came under IMF tutelage are set out in Table 1.

The East Asian Development Experience It makes sense at this point to reflect briefly on the rapid development of the East Asian economies over the past 40 years or so; see Table 2. What has occurred is nothing less than a major historic discontinuity (Schwab and Smadja, 1994), and the 1997 crisis will probably prove only an interruption of this development, not a termination. Within little more than a generation, the leading economies of the region have experienced a historically unprecedented rate of economic growth and commercial expansion. Economic historians are intrigued by the fact that emerging economies in the region have achieved higher growth rates than those of Western economies in comparable periods of the development process (Eckes, 1998). In East Asia, real product has doubled decade after decade. By the 1990s, Japan and the Northeast Asian ‘tiger’ economies had achieved levels of economic well-being approaching those of the richest nations of the world and their largest companies were engaged in a phase of dramatic regional and, in some cases, global expansion. Except in Hong Kong and perhaps the Philippines, the governments of all these states, including Japan, had actively used ‘industry policy’ to accelerate and direct economic development. Indeed, it was the conspicuous success of these economies that accounted for the close interest of so many of the world’s governments, global financial institutions and development economists in industry policy and in associated business–government relationships. They

Table 2 Income growth: GNP per capita in US$ 1970 1980 1990 1994 2000 Japan 1,940 10,440 26,090 34.630 34,715 S. Korea 270 2,330 5,770 8,220 8,581 Taiwan 389 2,334 8,111 11,604 13,248 Hong Kong 940 5,790 12,670 21,650 23,597 Singapore 940 4,850 12,740 23,360 22,710 Thailand 210 720 1,530 2,210 1.949 Malaysia 390 1,800 2,400 3,520 3,248 Indonesia 80 490 560 790 617 Philippines 220 690 750 960 1.046 China n/a 280 410 530 783 Sources: Figures for 1970, 1980, 1990 and 1994, The Asia-Pacific Profile; Table 4A, page 221; edited by Bernard Eccleston, Michael Dawson and Deborah McNamara; Routledge in association with The Open University, London, 1995. (Figures for Taiwan, from World Bank National Accounts Stack.) Figures for 2000 as reproduced by Asia Week, 26(28), 21 July 2000. Asian Business & Management 2002 1

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were and are interested in identifying the precise role of industry policy in development and in identifying the most effective mechanisms of industry policy, the latter aspect having both institutional and cultural dimensions. Both aspects are the subject of much detailed research by others (see Fitzgerald, 1995). Of greatest relevance to this paper are East Asian attitudes to industry policy and to government–business relations. Much East Asian opinion differs substantially in this regard from majority opinion in the West. This is probably because industry policies are widely seen to have enjoyed a record of steady success in their part of the world. So it makes sense to summarize a few instances of East Asian industry policies that have contributed positively to economic development. No attempt is made here to offer a balanced picture of industry policy successes and industry policy failures. This purpose is simply to show how it is that attitudes are generally so much more favourable towards industry policy in Asia than in the West. The examples help us understand why this is so. The examples also provide us with insight into the relationship between government and business.

East Asian Industry Policy Historically, the first Asian ‘miracle’ economy was Japan. Within 40 years of military defeat, Japan’s per capita income was roughly equal to that of the victorious United States and some sectors of Japanese industry had become world leaders. A prominent feature of Japanese economic management over the period was a quite unique, strongly interventionist industry policy. This policy framework embraced national vision, new industry creation for the future, and controlled rundown of sectors in decline (Allen, 1981). One of the best-documented industry policy successes relates to the government-sponsored Japan Electronic Computer Company. This was conceived by the Ministry of International Trade and Industry (MITI) in 1960 to give Japan a domestic computer industry. The initial industry policy instrument was a socalled ‘public policy company’ (Johnson, 1982), the spectacular success of which was fully documented by a Harvard research fellow (Anchordoguy, 1988). Between 1961 and 1981 it enabled the Japanese government to channel US $2 billion of low-interest loans into domestic Japanese firms (only) in the industry and decisively helped create Fujitsu as we know it today (Anchordoguy, 1989). The policy mechanism used for the purpose has its parallels in the East but is unknown in the West. Japan’s interventionist policies in that period, including provision of cheap capital and the ‘targeting’ of particular industries for development, are now widely known and understood (Johnson, 1989). Despite wide-ranging and fundamental rethinking in Tokyo over more recent years, government Asian Business & Management 2002 1

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bureaucrats continue to promote collective research and ‘encourage competitiveness in target industries because of special economic benefits they are expected to generate for the entire economy’ (Tyson, 1991: 297). Indeed, MITI’s Agency for Industry Science and Technology is still directly funding high-tech projects involving high-speed computers, advanced robot technology, advanced material processing, and the like (Hatch and Yamamura, 1996: 67). The implication is crystal clear: official Tokyo regards industry policy positively (Kosai, 1987) and, it may be fairly assumed, judges that it still has a useful role to play. More recent policy mechanisms are, arguably, more subtle and are perhaps more international in scope. For example, one 1990 initiative of MITI is designed to secure for Japan cheaper thermal coal from overseas countries, including Australia. To realize this objective MITI established a subsidiary, the New Energy Development Organization, which directly subsidizes overseas geological surveys and provides soft loans and subsidies for feasibility studies. It also provides debt guarantees for loans from Japanese commercial banks. Australian beneficiaries of this Japanese government policy include the North Goonyella mine, owned and operated by White Industries and Sumitomo Coal Mining (Long, 1998). Such an example illustrates the intimacy of the Japanese government–business relationship. Although the particular case may not be representative or even important, it does highlight the depth of government/ bureaucratic involvement in Japanese business and the broad scope of ministry–private sector linkages. Another contemporary example of ministry–private sector collaboration in Japan is a MITI-sponsored project to develop a 300-seat supersonic commercial aircraft (TNW, 1-9-97). This major project involves US and UK firms as well as Japanese companies and has an estimated development cost of two trillion yen. The mere existence of a pioneering project of this scale well demonstrates the continuing willingness of the Japanese bureaucratic-political elite to conduct an activist industry policy. There is no evidence to suggest that either Japan’s own troubles, or the 1997 crisis, have changed official attitudes to such endeavours or to the mind-set behind them. Somewhat similar policies and very similar attitudes are found in Taipei (Cheng, 1998) and Singapore (Clark, 1996). Other examples of successful industry policy can readily be found in South Korea. The famed ‘rational picking of industry winners’ by the Koreans is anyway little more than an imitation of the early stages of Japanese development (Lal, 1988: 232). A prominent and more than usually interesting success story is that of the Pohang Iron and Steel Company (POSCO). The World Bank (1987, 1: 45) has described this formerly state-owned company as ‘arguably the world’s most efficient producer of steel’. Yet as Wade has since observed (1990: 319), ‘this is a fine irony, for the World Bank turned down a Asian Business & Management 2002 1

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loan request in the early 1970s on the grounds that Korea had no comparative advantage in steel’. Nonetheless, as early as 1987, POSCO began to provide both technical assistance and money (US $180 million) to United States Steel for the purpose of modernizing its Pittsburgh plant (Amsden, 1989: 291). However, it is not only in its high level of efficiency and competitive performance that POSCO serves as an example of successful industry policy. One group of well-placed authors (Steers et al., 1989: 26) have written: ‘By any standard of comparison, POSCO has been a success. Not only has the venture been profitable but it has also become the largest such venture in the world.’ It is certainly the case that POSCO provides a striking demonstration of what many Asians see as the ‘need’ for state initiative to play an active role in economic development, for the Korean government had initially tried but failed to induce the private sector to undertake the project (Wade, 1990: 319). The same might be said of the semiconductor industry in Taiwan. Even before the second oil shock in 1979, the government in Taipei had recognized the need to promote a more sophisticated, ‘high-skill, high-value-added’ economy. To this end the state started directly promoting industry upgrading; this was years after the Japanese government began doing so, but long before most others. Taiwan’s publicly funded bodies like the Industrial Technology Research Institute (ITRI) have undertaken large amounts of R&D in commercial areas like information technology (Dolven, 1998a). However, the industry policy mechanisms used in Taiwan have gone beyond direct support for research and specialized education to include quasi-commercial project initiation and strategic business decision making. So, not surprisingly, a detailed study of the development of Taiwan’s integrated circuit industry (Wu, 1992) concluded that: ‘The government of Taiwan has played a leading role in the development of Taiwan’s IC industry.’ Similarly, another more broadly based study of the semiconductor industry as a whole concluded (Meaney, 1994): ‘initiative for the developmenty. came from the entrepreneurial state and not local capital’s search for profits’. Indeed, the commercially successful company, United Microelectronics (UMC), was first established in 1978 as a joint state sector–private sector venture under the leadership of the former. The same was later true of Taiwan Semiconductor (TSMC) even though the latter included foreign as well as Taiwanese capital. In these cases the role of government was crucial both to technological advance and to the commercialization of the high technology, since it is known that the two largest privatelyowned electronics firms at that time, Tatung and Sampo, decided not to enter the semiconductor market. As in Korea, the state in Taiwan took on a particular entrepreneurial role, in the interest of industry creation and technological upgrading, when private business was unwilling to do so. It is instructive to note how this record is judged at home. In 1997, by which time Taiwan’s information technology industry was generating in excess of US Asian Business & Management 2002 1

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$17 billion in annual revenue, a staff writer of the semi-official Free China Journal (Cheng, 1998) wrote as follows: ‘The rise to prominence of Taiwan’s information technology industry can be attributed to a happy marriage of private sector ingenuity and solid government support.’ This statement nicely illustrates the way in which officials in East Asia are fully at ease with close public sector–private sector collaboration; such ease is not always apparent in Western capitals. It is also worth noting that when globally significant corporations, such as UMC and TSMC, begin their corporate life under public sector tutelage, their home government and the public bureaucracy possess a very high level of knowledge and understanding of their operational requirements. There is also deep commitment to their commercial success. This knowledge, understanding and commitment to the success of privatized enterprise, by the public bureaucracy, tends to be maintained. The above examples come from Japan and the ‘tiger’ economies of Northeast Asia. It is there, above all, that industry policy has been pursued with greatest enthusiasm and, in majority opinion, with greatest success (Unger, 1995). However, Southeast Asian economies in turn, beginning a few years later, looked to Japan and the ‘tigers’ for a model of economic advancement and identified state-driven industry policy as a useful option. The results, to date, do not include such obvious successes as achieved further north. Indeed, some projects, like Indonesia’s ‘national car’, and an even more ambitious aircraft industry project (MacIntyre, 1994: 262) have been doomed by the 1997 crisis. Yet such examples are still part of the story. Malaysia, in contrast, has successfully developed the Proton car. Less obviously, Thailand’s single most important regional industrial development project, the Eastern Seaboard Project, would not have been possible without Thai government intervention (Jomo, 1997: 76). One example, followed by a separate comment on Singapore, will suffice to illustrate the character and appeal of industry policy in the Southeast Asian region. In 1983, the Malaysian Prime Minister decided to promote the manufacture of a national car. To this end a joint venture was established between a 100 per cent government-owned holding company and a global Japanese manufacturer (Machado, 1994: 294). The resulting company, Proton, is not the world’s most efficient car producer. Nor has it always lived up to its ambitious objectives with regard to local content or technology transfer. It has, however, been given the benefit of very heavy tariff protection. So the result is that Proton cars dominate the Malaysian passenger car market. They have also achieved creditable success in at least some export markets. Moreover, except for the early years, the company has been consistently profitable. So whatever the shortcomings of the venture, and these are not all minor, this example of Malaysian industry policy has established a major new industry and created a completely new ‘brand’ of car and successfully brought it to the global Asian Business & Management 2002 1

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marketplace. In the process it has created a source of national pride for many Malaysians (Jomo, 1994: 263). So while Proton may not be an unqualified success, most Malaysians see the balance of advantage from the project flowing strongly in their favour. Despite its limitations, the Proton saga is widely seen by Malaysians as a vindication of their government’s industrial development policy. Obviously enough, in a case where government itself directly negotiates the establishment of a major manufacturing enterprise, close political and bureaucratic links with senior management are the norm. It is useful to add, however, that while business–government relationships in Southeast Asia have developed in a manner at least as close as in Northeast Asia, they are different and have long been regarded by many as a good deal less healthy (eg Yoshihara, 1988). Indeed, ‘cronyism’ is one of the words most frequently used to describe the government–business relationship in Southeast Asia. Malaysia, like nearly all the countries of the region, operates a system of investment incentives designed to attract foreign direct investment. These incentives are especially generous in the context of special zones of various kinds, including the so-called ‘multimedia super corridor’. Incentives there include a 10-year tax holiday plus liberal visa processing for expatriate staff (Gomez, 1997). The priority given by governments to the attraction of foreign direct investment, by use of incentives, may itself facilitate the development of cooperative business–government relations. The most obvious economic development success story in Southeast Asia is Singapore, the sole ASEAN ‘tiger’ economy. Singapore’s high per-capita income rests to a considerable extent on the success of a state-developed array of inducements (Dolven, 1998b) with which to entice targeted foreign companies. It has been said that the People’s Action Party, which has governed Singapore since 1959, ‘is single-mindedly driven by pursuit of national economic growth’ (Chua, 1999). Indeed, a local book entitled The Political Economy of a City-State is subtitled Government-made Singapore, and states that the book ‘gives an insight of how Singapore is government-made in its growth and development’ (Low, 1998). Many observers of Singapore would readily accept this assertion. Two respected local economists (Tan and Toh, 1998: 23) have written similarly: ‘We believe that government policy is highly influential in shaping competitivenessy the government’s ability to leverage the resources to provide infrastructure and in creating a pro-business environment for enterprises is a crucial element to engender competitiveness.’ The government itself is proud of its role in economic development. The last national yearbook published before the onset of the Asian crisis (Singapore, 1977: 116) stated: ‘Singapore thrives as a successful business centre in the international arena. This situation has evolved gradually and has come about as a result of careful planning.’ To achieve its developmental goals, Singapore’s Economic Development Board (EDB) carries out programmes to identify and Asian Business & Management 2002 1

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299 Table 3 Average annual % growth in GDP 1980–1990 1990–1997 Japan 4.0 1.4 S. Korea 9.5 7.2 Taiwan* 12.4 9.5 Hong Kong 6.9 5.3 Singapore 6.6 8.5 Thailand 7.6 7.5 Malaysia 5.2 8.7 Indonesia 6.1 7.5 Philippines 1.0 3.3 China 10.2 11.9 Sources: World Bank ‘World Development Report’ 1998/99, Table 11.*Taiwan Statistical Data Book, Council for Economic Planning & Development.

develop the key technologies it judges critical to industry development. One of the policy instruments used is a programme of ‘co-investment’ under which the government supports targeted foreign enterprises in risk-sharing ventures which plug gaps in national capabilities or augment critical supporting industries (Singapore, 1997: 119). Other examples of industry policy could be given. However, as indicated above, the purpose here is only to explain why politicians, bureaucrats and economists in East Asian societies commonly regard industry policy much more positively than is usual in the West. They do so because, for them, industry policy has worked; it has created new industries and brought positive results. From this perspective, the occasional failure does not detract from the examples of success. Overall, industry policy is judged by many to have contributed positively to the high rates of economic growth that were achieved before the crisis of 1997; except for the Philippines, which did not seriously adopt industry policies anyway, these growth rates were unusually impressive, as can be seen from Table 3.

The New Challenge Today, the practices and mechanisms of past industry policies may no longer be acceptable or even appropriate. Past policy mechanisms have included tariff and non-tariff barriers to trade, transparent and non-transparent discriminations in favour of local firms, and disclosed and undisclosed burdens and privileges for foreign investors. Since the successful conclusion of the Uruguay Round and creation of the World Trade Organisation (WTO) in 1995, we have moved into a new global trade and investment environment. This change, which for the most part looks set to continue, may be encapsulated in just four words: liberalization; deregulation; privatization; and globalization. These words, taken together, capture what is both an intellectual and a practical Asian Business & Management 2002 1

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current of our time. At least, this was the case until mid-1997. Since then, with decisions like Thailand’s 10-fold tariff increase on cold-rolled steel (Miyauchi, 1998), the reintroduction of foreign exchange controls by Malaysia on 1 September 1998, and absence of progress at the Seattle meeting of the WTO in 1999, the picture has become rather less clear. Nevertheless, overall, the impact of the crisis has so far been to hasten and strengthen these developments, with the single notable exception of capital market liberalization. Before the ‘Asian Crisis’, most of the world anticipated greater capital market liberalization as well as trade liberalization. There was to have been an increasingly open, global investment environment underpinned by a new OECD Convention, the Multilateral Agreement on Investment, replacing the existing patchwork of 1600 or so bilateral investment treaties (Economist, 1998). Now, instead, we confront a critically important but enormously difficult updating of the ‘global financial architecture’ in an endeavour to reduce the destabilizing influence of the huge and rapid global capital flows, which are very largely unrelated to trade in goods or services, which are today’s reality (Jomo, 1998:10). Yet despite the setbacks and, on occasion, inadequate political will, liberalization, privatization and globalization look set to continue apace. At the global level, there is continuing talk of advancing on the ‘Uruguay Round’ with a more broadly-based ‘Millennium Round’ of multilateral trade negotiations. Indeed, there were pious calls for a new round of global trade negotiations from the US–EU summit in May 2000, the APEC trade ministers’ meeting in early June, the OECD ministerial meeting in late June, and at the Okinawa meeting of G8 Heads of Government in July 2000. So eventually, a new round of trade liberalization talks is still likely to occur.1 When this finally gets under way, it will probably have the explicit objective of achieving global free trade, embracing both agriculture and services, within a specified time. If successful, it would largely free international trade and perhaps also free direct foreign investment from the control of national governments and their institutions. Already, the institution of the WTO enjoys wider responsibilities than its predecessor, the GATT agreement. Other liberalization over recent years has included the disappearance or collapse of the ‘command economies’ of most former communist countries and the willingness of countries like Singapore and South Korea to accept the requirements of OECD membership. The same broad trend is also reflected in the worldwide growth of regional associations that promote the reduction of barriers to intra-regional trade and investment, such as the ASEAN Free Trade Area (AFTA). Indeed, at the 1999 ASEAN Heads of Government summit in Manila, just a few days before the failure of the WTO meeting in Seattle, the member states agreed to advance the creation of the AFTA from 2015 to 2010 (Baguiordo, 1999). These countries Asian Business & Management 2002 1

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regard their push for freer regional trade as a positive aid to their economic recovery and further growth. At the level of the individual state, liberalization is taking the form of deregulation and privatization. There are many examples of this trend in East Asia as in other parts of the world. The effect of the 1997 crisis has been to accelerate these trends in Korea, Indonesia and the Philippines. At the same time, a number of countries are taking steps to increase competition in their domestic markets by giving up protected monopolies inherited from the past. One example is Taiwan’s tobacco and wine monopoly; another is Indonesia’s oil and gas monopoly. Like others of their kind, they have entered a period of accelerating change in the certain knowledge that days of monopoly privilege are as good as over. One universally important sector beginning to benefit from deregulation and privatization is telecommunications. This is true right across East Asia, including poorer countries like Indonesia, where a ponderous national monopoly has already been largely superseded by a collection of regional companies, most of which began with foreign joint-venture partners. Indeed, in Singapore the planned full deregulation of the telecom industry was suddenly advanced by 2 years, to April 2000, at just a few weeks’ notice. Nearby Malaysia was actually one of the first countries in the world to take privatization seriously. Since 1983 more than 11 per cent of the Malaysian public sector workforce have been transferred to the private sector (7MP, 1996: 23). In Taiwan, to take another example, the Council of Economic Planning have 104 state-run companies on their privatization list and this includes the 30 per cent sale of such corporate giants as Chinese Petroleum, Taiwan Power and Chungwa Telecom. The benefits of privatization are even being recognized in mainland China, despite a continuation of socialist rhetoric, by the sale of thousands of small state firms through public offer of shares (Watanabe, 1998) and by President Jiang Zemin’s announcement that the People’s Liberation Army will no longer be allowed to engage in business (Ching, 1998). At the level of the firm, these changes are bringing about a marked strengthening of a complex, pre-existing, business trend: globalization. Globalization relates to multi-country operation by the firm of a kind characterized by much deeper and more varied international involvement than in the past. Globalization of commercial activities is occurring in research and development, design and production, supply and delivery chains, as well as in markets with the development of global brands. These developments have come about as a result of two quite different factors. One is the steady liberalization of trade and investment already referred to above; the other is the dramatic advance in communications technology. The latter has enabled business to communicate easily and cheaply across the globe, without delay and without difficulty. Of course, the actual character and scope of crossborder activity varies enormously between firms and between different Asian Business & Management 2002 1

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industries. Sometimes it is the firms themselves that go global, by locating elements of management and control across the globe, like Sony or Acer. At other times it is the firm’s real-time information flows and activities that are global, as with the sogoshosha or global airlines. Yet at other times a firm may find itself meeting a global marketplace demand for a world brand, as in the case of a McDonald’s or a Benetton franchisee. Most obviously of all, growing numbers of firms in all countries nowadays market their products or services worldwide and, as often as not, promote their major brands uniformly across the globe. In general terms, globalization embraces such elements as international partnership in component design and procurement, alliances with foreign institutions for research and development purposes, as well as the significant participation of foreign equity leading towards multinational Board membership. The ‘Asian Crisis’, by suddenly increasing ‘hard’ capital requirements of companies in the region, has resulted in a sudden acceleration of corporate internationalization. For example, PT Astra, Indonesia’s largest car maker, which had 30 per cent of its foreign debt unhedged, quickly invited its Japanese partners Daihatsu and Nichimen to increase their shareholdings in the joint-venture company to 50 per cent (Thoenes, 1998). Later on, the still insolvent company was sold to a consortium led by Singapore-based Cycle & Carriage. Similar internationalization has occurred in the Thai banking sector, where what until recently was the region’s largest bank, Bangkok Bank, has successfully raised new capital from overseas. Meanwhile, Bank of Asia and Thai Danu Bank have each been bought out by foreign banking interests (Mehta, 1998). The region’s new banking leader, the state-owned Development Bank of Singapore (DBS), has rapidly internationalized by taking a controlling interest in the Thai Danu Bank (Thailand), the Bank of Southeast Asia (Philippines), the Kwong On Bank (Hong Kong) and the Mitsubishi Buana Bank in Indonesia (Chong, 1999). Such cross-border acquisitions have become commonplace since 1997. The commercial horizons of East Asian firms, their business objectives, operational scope and business-to-business relationships are more and more extending beyond their domestic economies and into the emerging ‘global village’ of tomorrow. Inevitably, the bigger businesses become progressively less statebound, more globally aware and sensitive, and less responsive to the often narrow concerns of their home governments. Naturally, it is the more dynamic firms that are most likely to become integrated into global business structures, more inclined to make their decisions independently of their place of origin and increasingly likely to disregard the wishes and advice of their local government. This development is proving quite a challenge for those development-oriented governments, especially in Southeast Asia, some of which are still in the habit of directing ‘local’ business in the furtherance of their ‘national’ policies. It foreshadows the end of industry policy mechanisms that rely on government Asian Business & Management 2002 1

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pressure to achieve business compliance. Very soon now, if they have not yet done so, all governments will have to abandon remaining vestiges of authoritarian industry policy. Instead, they will have to recognize the need for totally voluntary cooperation with their industry leaders. In other words, coercion and compulsion are out; shared interests and inducements are in. The era of governments wielding the ‘big stick’ at business is past; many East Asian businesses are in any case already too big and transnational for that to work any more. Taipei, for example, recently found this out in its relationship with the Formosa Plastics Group (Shen, 1998). In future, governments will have to rely on inducements alone. The 1997 crisis, which has created strong pressure to open up hitherto ‘local’ conglomerates and ‘protected’ sectors to foreign equity participation, is making this increasingly obvious to all concerned.

The Crisis Although the impact of the crisis has necessarily been touched on already, it is useful to encapsulate its effects on the three most deeply affected countries — Thailand, South Korea and Indonesia, all of which had to seek International Monetary Fund (IMF) support. In the case of Thailand, the first country in the region to receive IMF crisis support, the picture is mixed. As mentioned above, some tariffs have been increased (Miyauchi, 1998) but, more significantly, the exclusionary Alien Business Law is being replaced. A new Foreign Investment Law for the first time permits foreigners to take up to 75 per cent ownership of Thai companies, inclusive of 33 sectors from which they have in the past been theoretically excluded (Corben, 1998). This is liberalization. At the same time, the ‘distress sale’ of assets to foreigners has also resulted in the increased globalization of Thai business. For example, the country’s largest conglomerate, the Charoen Pokphand Group, has sold off its majority stake in Lotus Super Centre to the UK-based retailer Tesco and its Sunny Super stores to the Belgian Delhaize Le Lion group (Jitpleecheep and Parnsoonthorn, 1999). Similarly, the hitherto exclusively Thai cartel of 48 stockbrokers has been reduced to 28, half of which are now controlled by foreigners (Barnes, 1999). Interestingly, Singapore firms are now the top foreign investors in Thai brokerages, with stakes in six firms accounting for 25 per cent of the market’s trading volume (Mehta, 1999). In Korea, the second country to receive IMF crisis support, industrial restructuring is as important as recapitalization of the financial sector. Yet, partially on account of the very closeness of ties among politicians, business leaders and bureaucrats, there is great resistance to change, and progress has been slow and difficult. In the first two post-crisis years only one prominent bankrupt company, Hansol Paper, willingly sold a major business to foreign interests (Schlachter, 1998). However, Nestle, 3M, Kodak and CocaCola were Asian Business & Management 2002 1

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all able to buy out their Korean joint-venture partner Doosan (Chong, 1998). More positively, the government lifted long-standing restrictions on foreign shareholdings in listed companies and, for the first time in Korea’s case, started actively wooing foreign direct investment. The consequence has been an immediate boom in foreign direct investment with the annual inflow increasing by 85 per cent in the year to October 1999. Indeed, the US $16 billion received in the first 10 months of that year was approximately equivalent to the total amount of FDI over all the 30 years of high-speed industrialization from 1962 to 1992. Included in the figure were a number of high-tech foreign acquisitions, including Fairchild Semiconductor’s purchase of a chip operation from Samsung and Philips Electronics’ purchase of half a flat-screen business from LG Electronics. Yet probably the most sensitive foreign acquisition was that of Belgium’s Interbrew, which took a 50 per cent interest in the country’s very well-known ‘OB’ brewery plus a controlling stake in the country’s third largest beer producer, the Jinro Coors joint venture, thereby becoming the country’s biggest brewer (DowJones, 1999). Such high-profile foreign ownership would have been unthinkable just a few years ago. Indonesia, the last of the three countries to successfully negotiate IMF crisis support, is also taking some hesitant steps towards liberalization and privatization. A draft law terminating Pertamina’s oil and gas monopoly and the sale of Astra have already been mentioned. More broadly, the nearstranglehold which Soeharto family interests once enjoyed over large parts of the Indonesian economy is steadily being eroded. The end result will be an economy characterized by somewhat less blatant cronyism, quite a lot less business regulation, a more liberal investment regime, privatization of monopolies, and increased foreign participation in local business. A foreign investment decree of 26 January 1999, for example, added to the inducements available to foreign investors and the government of President Abdurrahman Wahid plans to convert Batam Island into a free trade area, from its current status as a bonded zone. In addition, President Wahid has publicly said that the system of paying farmers fixed prices for food crops, a practice which used to benefit businessmen close to former President Soeharto’s family, is to be abolished. It is also notable that in Malaysia, which in some respects is bucking the liberalization trend by having reintroduced monetary and foreign exchange controls, the authorities are still trying to encourage foreign direct investment and international trade. Locally incorporated foreign investors are not supposed to be affected by any of the controls and those companies with Multimedia Super Corridor (MSC) status are explicitly exempted (Mahbob, 1998). The MSC is a massive information-technology zone designed to catapult Malaysia into a position of parity with the world’s IT leaders by 2020. It is one of the most ambitious state-sponsored projects ever conceived in Asia, but Asian Business & Management 2002 1

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progress so far has been modest. This is partly because of the crisis, but equally because of Malaysia’s idiosyncratic and often intemperate response to the crisis. Yet while progress is sluggish, it is not completely stalled. By mid-1999 eight firms had been granted MSC status and set up shop, including British Aerospace, NTT-MSC, and the Arthur Anderson Advanced Technology Group (Yeoh, 1999a). Moreover, the Malaysian government is doing what it can to generate momentum. In particular, it has signed a commercial agreement with one MSC company to develop a system whereby government purchasing from 3500 separate procurement centres will go on-line with direct links to 30,000 existing suppliers worldwide (Singh, 1999). At the same time, Unisys-MSC is developing an ’all-in-one’ smart card that will incorporate an ID card, driver’s licence, passport information and health records. All adult Malaysians are obliged to carry ID cards and it has been noted with pride that no other country yet possesses such a multi-function smart card (Yeoh, 1999b). It is a simple fact that no major economy of the region, despite growing and critical scrutiny of ‘crony’ relationships in some of them, offers any evidence of a government reducing its commitment to economic development and industrialization. Nor, so far as this author is aware, is there evidence that the crisis is causing a single regional government to think less favourably of industry policy. Indeed, a number of the region’s politicians and bureaucrats have recently made it quite clear that they are still actively seeking to foster new industries and new business development. For example, Taiwan’s Council for Economic Planning and Development has announced it is to offer long-term loans to biotech firms in order to spur product development in that industry (Cheng, 1998). In the case of Singapore, the Trade Development Board established an Approved Cyber Traders scheme in January 2000 to help make the island an e-commerce hub. Under this scheme, qualifying firms are to pay only 10 per cent corporate tax instead of the normal 26 per cent (Aggarwal, 2000). Similarly, a joint Malaysian government–industry working group announced the establishment of a National Council to promote development of the aerospace industry through ‘the smart partnership principle’ between public and private sectors (MD, 1997). The government of Hong Kong has substantially increased its direct role in the establishment of high-tech industry. Early in 1999, the government took the initiative in establishing a US $1.7 billion electronic–commerce centre called ‘Cyberport’; awarding the project to an apparently well-qualified favoured son, without competitive bidding (Tong, 1999). Then, just 4 months later, a HK government commission proposed the creation of a further US $1 billion project to stimulate growth in high technology called ‘Silicon Harbour’. Professor Tien Chang-lin, Chairman of the Commission for Innovation and Technology, announced: ‘The Government will support any project that will help the development of innovation and technology in Hong Kong’ (Hui, 1999). In its attitude towards industry policy, Asian Business & Management 2002 1

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it seems, post-colonial Hong Kong has fully aligned itself with mainstream Asian opinion.

The ‘New’ Industry Policy Given that trends towards greater liberalization of trade and globalization of business do indeed continue, it follows that governments wishing to craft industry policies for tomorrow will need to make their policy instruments transparent, non-discriminatory and internationally acceptable. This need will become urgent if a ‘Millennium Round’ of new global trade negotiations finally gets under way. Future industry policy mechanisms will in any case need to be WTO-compatible, transparent and legally ‘fair’. To achieve this may not be so easy. First, regulation of international trade and investment under WTO auspices will be characterized by increased global policing of the trading system with more sanctions than were available in the past (Financial Times, 16 December 1993). Second, as indicated above, governments will have to develop policy mechanisms that are effectively able to influence ever stronger, more independent, more globally-minded businesses. This implies a need to identify mutual state-business benefits in circumstances where the legitimate interests of the businesses extend beyond the interests of their home states and governments. Third, home governments will need to think deeply about the means at their disposal to achieve their objectives, given that crude mechanisms for imposing local content requirements or trade balancing will no longer be internationally permissible. Altogether, granted effective establishment of WTO monitoring and satisfactory finalization of the remaining post-Uruguay Round negotiations, industry policy has already ceased to be a purely domestic matter and has become a matter requiring broad international acceptance before it can be implemented. In a word, the rules have changed. New policy mechanisms are needed if industry policy is to remain effective and in being. This situation has not arisen by chance. Much past industry policy has been open to legitimate criticism for being both discriminatory and unfair, irrespective of its domestic impact. Further, most conventional Western economists believe industry policy is ‘anti-competitive’ and ‘anti-market’ and should be abandoned. For theoretical reasons they believe that if it were, this would lead to greater efficiency and welfare all round. Against this background it is hardly surprising that there are many in Western societies who hope and believe industry policy will die. Majority opinion among Western economists hopes industry policy will disappear from the scene as a result of continuing trade liberalization and the globalization of business. The question is: will this happen? An East Asian answer is that it probably will not. From the perspective of many in this part of the world, the objective of economic growth Asian Business & Management 2002 1

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remains the priority and anything which furthers this objective is welcome. It is therefore likely that industry policy mechanisms will simply be modified and refashioned rather than rejected. The task will be to adapt them and keep them useful in the changed international environment. From the perspective of just about every East Asian government, we have already noted that industry policies have arguably proved successful in promoting industrialization and economic development. Even the colonial government of Hong Kong tacitly recognized that this was so, by taking a few pragmatic steps in the direction of industry policy in 1993 with the establishment of an Industry Technology Centre Corporation to help nurture technology start-ups and to support research and development (HK, 1997: 99). Subsequently, the first post-colonial Chief Executive of Hong Kong announced a policy initiative that included plans for a second technology centre and a new science park (Granitsas, 1997). More recently still, as already noted above, the Hong Kong government has initiated major projects aimed at technological upgrading. In Northeast Asia, in particular, governments look back on a solid track record of what they regard as industry policy successes over three decades or more. Not surprisingly, therefore, many political leaders and bureaucrats in this region look at the record of recent decades with pride. The question for them is not a philosophical one of whether to intervene in the economy but, rather, a practical one of how best to intervene to accelerate development. Even in South Korea, where for local reasons past intervention mechanisms are today under a heavy cloud, the government still pays some attention to a ‘five year plan for the new economy’ which was formulated pre-crisis (Ungson et al., 1997: 59). Indeed, 6 months after the IMF bailout of South Korea, one well-placed local observer (Ahn, 1998: 15) concluded: ‘As long as the Confucian tradition of regarding family and personal relations as more important than formal and legal rules persists, Korea’s institutions of governance and management will fall far short of becoming a paragon of American-style pluralism and liberalism’. In other words, business and government will remain close together. From a regional perspective there are now three broad ‘economic development/industry policy’ issues to be faced. First, which of the policy mechanisms that have proved successful in the past will remain internationally acceptable in a more liberalized world economy? Second, which of them will remain effective with larger, more globally-integrated businesses? Third, and most importantly of all, what new policy mechanisms can be devised to further economic deve-lopment in an open, knowledge and innovation-driven economy? The need is for policy mechanisms that are commercially effective at the local level yet non-discriminatory and internationally acceptable at the global level. This is the contemporary challenge. Those guiding East Asian development typically understand this challenge and they and their institutions are giving it close attention. The close liaison that has long been established Asian Business & Management 2002 1

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between governments and businesses in the region may help them handle the task effectively. Some established industry policy mechanisms, like public sector-sponsored importation of new technology and public sector incubation of start-up companies, will probably remain both useful and internationally acceptable. Other mechanisms, particularly any which may be construed as containing subsidies or state handouts, are likely to invite complaint from foreign competitors and create undesirable diplomatic strife. Such mechanisms will probably cease to be useful. In their place we may expect totally new forms of state support for economic development in general and for technological upgrading in particular. The new supportive mechanisms are likely to be sectoral in scope rather than firm-specific. At the general level there is likely to be a considerably strengthened effort to fashion ‘business-friendly’ government. Indeed, as governments within and beyond the region increasingly have to compete for foreign technology and direct investment we shall probably see governments openly seeking to be more ‘business-supportive’ than their neighbours. At a more technical level, supporting policies might include sharply-focused educational initiatives plus greater state funding for basic research. In Singapore, for example, government is expected to be proactive in both developing and implementing policies and strategies to ensure that R&D activities are sustained for economic development (Hang, 1999: 34). Such activities might also include facilitative institutional mechanisms along the lines of Taiwan’s Committee for Aviation and Space Industry Development and the Taiwan Aerospace Foundation; these are quasi-governmental structures used to promote technology transfers and to upgrade local manufacturing standards (Hwang, 1998: 44). They might even include a flying circus of retired CEOs, constituting an expert cadre of industrially-experienced, internationallyexperienced, publicly-funded, available-on-request business advisers. At present, in the aftermath of crisis, nearly every East Asian government is doing what it can to assist the technological upgrading of its economy. This will not change. The competitive advantage of recent currency devaluations is seen as only temporary and, anyway, insufficient to permit competition on price with producers from the emerging giants of China and India. In any case it is predictable that new forms of state support for desired industry and commercial development will soon emerge. It is also predictable that when they do, be it in East Asia or elsewhere, they will quickly attract interest.

Conclusion East Asian governments will retain the will to actively support industrial upgrading and productivity growth and will continue to use industry policy Asian Business & Management 2002 1

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pragmatically to achieve these goals. Yet faced with the challenges of globalization and the need to adhere to WTO standards, those responsible are likely to seek new mechanisms of industry policy, which are transparent and non-discriminatory. These new industry policy mechanisms will have to be voluntary rather than coercive and combine local effectiveness with global acceptability. The economic development bureaucracies and politicians who are responsible for the dynamic economies of the region fully understand these needs. We can assume they will approach the task with intellectual vigour and will achieve at least some success. For this reason, valuable new tools of public economic management are more likely to emerge in East Asia than elsewhere. We may also witness sharper competition between a steadily growing number of governments to create business-friendly operating environments. The development of new mechanisms in support of economic development which are commercially effective at the state level and permissible at the global level will be an important achievement of political sophistication and creative ingenuity. East Asian governments, especially those of Japan and Northeast Asia, are unusually well placed to succeed. Their track record with industry policy gives them every reason to maintain their positive attitude towards it and adapt their policy mechanisms to the changed global trade environment. They also inherit an unequivocal popular expectation that they will deliver rapid economic progress despite recent problems. In addition, several of them have developed a tradition of offering their people a vision of the future to which their people can aspire and to which they can each contribute. In this way they tap into whatever sense of collective purpose exists. It is therefore more than likely that important new forms of government–business collaboration will first emerge in this part of the world. When this has come about, the result will be a new generation of more sophisticated and more widely acceptable industry policy mechanisms. These will be of more than just regional interest; they will be of global application and value. As a result, the rest of the world will not just watch and take note; provided they work, the world will copy them. Indeed, effective but ‘fair’ tools of economic development will be an enormously valuable gift to the world, not least to the so-called first world. Being non-discriminatory, these tools will not offend the free-market sensitivities of the West and are likely to be adopted there, as elsewhere, with little delay. To the extent that this outcome leads to enhanced economic development, it will benefit rich and poor nations alike. Such a scenario should be anticipated with impatience and welcomed by all.

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Note 1 Since this paper was written the WTO has held a major meeting in Doha, Qatar, at which members agreed to launch a new round of multilateral trade talks to facilitate the growth of world trade. This ‘Doha Round’ will include agriculture and is scheduled for conclusion by 1 January 2005.

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