Global Value Chain, Cities and Urban Amenities: Case Study of ASEAN and East Asia

Shandre Mugan Thangavelu, Fukunari Kimura and Dionisius Narjoko
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Shandre Mugan Thangavelu: Jeffrey Cheah Institute for Southeast Asia, Sunway University Institute for International Trade, University of Adelaide

Chapter 10 in The Comprehensive Asia Development Plan (CADP) 3.0: Towards an Integrated, Innovative, Inclusive, and Sustainable Economy, pp 294-321 from Economic Research Institute for ASEAN and East Asia (ERIA)

Abstract: Regional and global production value chains and networks are important features, as well as the key driver of, economic growth and integration in East Asia and the Association of Southeast Asian Nations (ASEAN). The impact of global value chains (GVCs) on East Asian manufacturing and services activities, and hence on its economic development, is quite significant (Kimura, 2018; Baldwin, 2011; ASEAN, 2019). Recent evidence shows that domestic value added in the exports of ASEAN Member States (AMS) has been relatively high and stable since 2010 (ASEAN, 2019). The domestic value added in exports ranges from around 47.0% for Singapore to 90.3% for Brunei Darussalam. The foreign value added in exports is 39.0% for Singapore and 6.7% for Brunei. East Asia and ASEAN are undergoing significant structural transformation due to the dynamism of regional and global value chains. This is driving deeper economic and regional integration. In fact, the global value chain (GVC) network is driving the economic transformation of East Asia from both the demand side in terms of forward-looking and dynamic consumerism, and supply-side effects of fragmentation and agglomeration – integrating deeper regional and global production networks in both manufacturing and services. The transformation of GVCs through digital and telecommunication technologies is creating new economic opportunities and inducing greater creative destruction in the respective East Asian and ASEAN economies. The effects of GVCs are not a new phenomenon in Asia. In the 1970s, United States (US) retailers and big brand-name companies started offshoring their labour-intensive activities (Gereffi, 2014) in search of cheap labour advantages. However, in recent GVC transformation, the pace of GVCs has accelerated in terms of the speed, scale, depth, and breadth of global interaction (Elms and Low, 2013). The fragmentation process has intensified since the 2000s beyond the manufacturing sector to services such as accounting, medical procedures, and call centres (Gereffi and Sturgeon, 2013). GVCs have also proliferated geographically, involving more countries in various regions, and have become organisationally manifest in more complex and multilayer inter-firm networks across the globe. This production configuration –the most important feature of the global economy today (De Backer, De Lombaerde, and Iapadre, 2018; OECD, 2013) – is driven by technological progress; advances in the transport and logistics sector that lead to a significant decline in trade costs; more liberal regional and national policies supporting freer trade and investment flows; and the opening up of emerging economies, especially China and India (Kimura, 2018; Baldwin, 2013; De Backer, De Lombaerde, and Lapadre, 2018). The key transformation of the GVCs is the depth and degree of integration and interdependence of economies in the region on global activities. There is a significant shift in trade patterns in the regional and global economy from the exchange of final goods to The Comprehensive Asia Development Plan 3.0 (CADP 3.0): Towards an Integrated, Innovative, Inclusive, and Sustainable Economy trade in parts and components. The geographic dispersion of production has substantially increased economic interdependence amongst economies around the world, especially in terms of investment flows and the intensification of flows in intermediate goods. WTO and IDE-JETRO (2011) estimated that trade in intermediate goods in 2009 represented more than 50% of non-fuel merchandise trade. The share of intermediate input trade was even higher (more than 50% of goods trade and almost 70% of services trade) in Gurría (2015) and roughly two-thirds in Johnson and Noguera (2012). In his latest book on the new globalisation, Baldwin (2016) described 21st century trade as a growing exchange of parts and components along with the international movement of production facilities, personnel, and know-how. The other aspect of the GVC transformation is the level of growth of service activities and linkages in the production process. The fragmentation of production processes within and across countries due to technological advancements from telecommunication and information technologies has intensified the growth and interdependence of production processes between manufacturing and service activities. Services serve as inputs and linkages across value chain processes, making them the ‘glue of supply chains’ (Low, 2013) – sometimes referred to as the ‘servicification’ of production (Hoekman and Shepherd, 2017; Thangavelu, Wenxiao, and Oum, 2018). In the seminar work on the role of services in production and international trade, Jones and Kierzkowski (1990) firmly argued that the speed and efficiency with which service links operate clearly has a bearing on the optimal degree of fragmentation, and that gains from service liberalisation may exist in the form of greater participation in production processes. Baldwin (2016) considered services such as telecommunications, transport and logistics, trade-related finances, and customs clearance as necessary to coordinate fragmented production. The importance of services in GVCs is manifest in the large and increasing share of services in value-added trade, rising from 30% in 1985 to more than 40% in 2009 (Heuser and Mattoo, 2017). The impact of servicification in Asia is also reflected in Thangavelu, Wenxiao, and Oum (2018), which showed that the degree of servicification of manufacturing activities in ASEAN has increased over the years. The recent transformation of the GVCs also highlights the importance of unbalanced growth within and between countries due to the unbalanced industrial and competitive responses. The key dimension of regional economic disparity is the level of responsiveness of key cities in domestic economies to absorb, diffuse, and disseminate key technologies and specific tasks to firms and workers to respond to dynamic shifts in the GVCs. The key competitive responses are driven by the flexibility of skilled workers to ‘unbundle’ the technologies and activities; technology-intensive infrastructure such as science parks, universities, and research centres; and social infrastructure such as urban amenities (hotels, restaurants, libraries, internet cafés), and soft and hard connectivity. Glaeser, Ponzetto, and Zou (2015) highlighted the importance of cities creating urban networks that generate innovation and entrepreneurship to spur the economic growth of the domestic economy and region. Urban networks, through urban amenities, increase global economies of scale via innovation in services and global linkages, although the return on local domestic activities could decline due to the trade-off between urban congestion and living. In turn, the returns of urban networks to attract skilled workers to move to and live in large cities and megacities due to the higher returns from global urban networks (see Table 10.1). Urban networks and agglomeration not only impact service innovation but also manufacturing activities, as urban amenities create economies of scale and knowledge spillovers for firms to innovate and increase their entrepreneurial activities (Chen, Hasan, and Jiang, 2020). The study also highlighted the agglomeration effects through the presence of top-tier universities in Asian cities creating linkages and raising the effectiveness of firm-level R&D activities. In this chapter, we explore the development and transformation of GVCs in ASEAN and East Asia in terms of skills development, ‘unbundling’1 of manufacturing and services activities due to telecommunication and information technologies, and the importance of urban amenities to retain and maintain skilled labour in the key cities to drive economic growth. We used city-level data for East Asia and ASEAN from the United Nations (UN), Department of Economic and Social Affairs, Population Division, to understand the relationship between cities, GVCs, and urban amenities. The results of our study indicate the importance of cities and urban amenities as leverage both during the pandemic and in the post-pandemic recovery. Cities and urban centres will be key to develop, attract, and sustain digital technologies and maintain the degree of openness necessary for the pandemic recovery. The next section discusses GVC transformation in East Asia and ASEAN. Section 3 explores the population agglomerations and trends of cities in East Asia. In section 4, we consider the topology of GVC transformation and unbundling effects of GVCs. We examine skills and their unbundling into tasks in section 4. Section 5 provides a policy discussion in terms of the pandemic recovery.

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