June 3, 2020

Financial Crisis and Threat to Asian Developing Countries (Ex Japan)

The most important thing to business in the developing countries is to source for buyers amid this global inflation and financial breakdown. Although outsourcing was much talked about and practiced among US and European and other developed countries, the trend becomes more important given the more competitive landscape amid financial breakdown and global inflation. The countries, which feel the pinch, are developing countries, which are competing each other for foreign direct investments, particularly in Asian Pacific Region ex-Japan.

Among the famous outsourcing destinations are Bangalore in India and Dalian in China, which cater to US and Japan companies respectively. Since the upgrading of these countries’ design and development capabilities, many high end value chain process have been shifted to these destinations with the hope that the low cost of production will enhance competitiveness. The activities range from software design, call centers, financial analysis, technology development and other proprietary ownerships which are now designed and produced in these destinations. The positive side is, that these activities could help create and promote strong industrial linkages and upgrade the local’s capability.

The apparent benefits to the host countries have much caused the efforts by individual countries to attract investments from overseas, through government protection, tax rebates and other benefits. These efforts intensified in the recent months in view of the slow down of demand from US and other developed countries.

 

One of the concerns among developing countries in Asian Pacific is that they are not able to compete with China and India and now emerging countries such as Vietnam and Cambodia, which are mainly attractive because of their low labor cost. The high number of local graduates churned out by Universities in China and India pose another challenge to the countries. Further, the small market base and low and less sophisticated purchasing power, barrier of entry caused by protectionist approach, low industrial support caused by absence of linkages and most worrisome to the countries is lack of technology savvy labor force.

These factors have mainly responsible for the slow upgrading of local producers to high value chain production, and entrapped them at the lower production chain which emphasizes on low cost and speed of production. In other words, the proprietary ownership and design and development activities are low in these countries, and there fore, eroded further the competitive edge, if there are any.

To overcome this, and to continue to attract investments, these countries survive on constant government’s projects. Although the trend we see is that many local capable producers start to spread their wings to other countries, the areas of involvement are mainly construction (mainly residential or office blocks), piping and highway construction. The most important sectors, namely the technology know how, aviation, network and other electronic industry are left to foreign investors, who will invest only when there is strong local support. Thus, the recent worry is the hollowing out of these existing industries to other countries.

When the world economy is growing healthily, the decision to relocate is less urgent, as the considerations are more diverse; normally time zone, cost, infrastructure, labor skill, protection, industrial linkages and supporting industries. However, world flagship companies do not have these luxuries anymore; amid financial crisis and world economy’s slowdown, the main concerns are margin, accessibility and strong local industrial support. This caused much concern to the Governments in the region; policies over policies are churned out recently to prove and attract investments.

The “deindustrialization” does not only happen in developed countries, it is also a trend in the globalized world, particularly to Asian developing countries and countries which could not upgrade their industrial base will be left out indefinitely. In other words, if a country is detached from the global network, it will be uphill task to bring oneself back to the landscape.