2l Moving Up: Industrial Upgrading, Social Networks, and Buyer-Driven Commodity Chains 1n East Asian Chinese Business Firms' RICHARD P. APPELBALM Dn-ector. Imtitl/tt J~r Soo,J/. H,h.11·1,,i;d. d//d f.,01101111, Rcsc,miJ. U11frersity of CJ/1/11mi,1. S,111/<1 H<1rh"r" 1\11t1ing 11p i11 the gl1Jbal eco110111y means 11pgrtuling" 01111111/, llkll/11/;h111ring b,,.ff t11 high,-r 1·,t!11e-mlded afffrities in the cr111m/l!dit_J chain. Pt1rtiopatir!II in g!1Jht1f am11110ditJ chaiw, rvw at the bottom. 111 thl' pmt ha.1 r11t1bled jinns to acquire the gmeml k110-w!edge as urll els ted.Jni"t! skillsji1r upgrading. ,lggfej!,ated acrrm a11 economy this has reSlllttcl in s11bstc111titi! em11rm1ic cknlopmellf, at least in the case of the Emt ,b1,111 1\·1:11/i flldmtrializmg Eumr!fl!lt.r. The J/{/Jf tu•ellfy years has Jte/1 a grou'fh III tlx relc1tfre i111JJ11rtance r,( b11_Jer-dm'ell global co11111wdity chaim. rt:fc1ti1e trr the J!mchtcer-dm·w chc1in., that d.,,mu'ferized the mid-tuwtieth ce11tl/lT, B1t_)ff-dri1rn co1111111Jdit_1 chc1111s, uith thefr high!) neflrnrked, flexible jrmw o/ 111g,miz,1tio11, ll'r!lt!d nJ1ecialh .1tt111 fflj:11·r1r l/l;t;cmiwtional lectming dlhl the ill{htstri,t! 11pgrad111g that itjiisttn. ,\lol'e/Jl'f/', the i11f,m11al IJl;(;dlli::t1tl!J)/ o/hu1er-dnl'rll ,r1)1/)J/IJ//itJ chains uith thur emphmis 011 tmst and personal relat1onsh1ps U'fJltid sff/11 especial/) /arnrable to Chinese bminess Jin11s. ll'ith their C1J1TesJ1rmdi11g n:lit111ce 011 g11a11xi mtu·orks. This, in turn. sho11!cl portend SllfffSS Ji11· Et1Jt mu/ So11theast Asian co11ntries i11 which the oj}.i·hore Ch111ue b11smt.rs m1111111111ity jiltns " kt) mk Yet the abi!it; to 111me i11t1J higher 1"111e-t1ddu/ nr,11ri111h dt'til'lties 11/d) 110 lunger bt a certain ro11tr t/J ec11111)/)/1( .i/l<'<'r.1.i. Ill " 1c1Jr!d 1d1ere the gt11tratio11 1Jf U'falth lies i11creasiJ1g/i i11 deJ1'.~11. 1/Jdrketmg. a11d rl'!t1i!i11g. it is 11/Jt dear that i11dmtr1ct!i:i11g mm1tnn 11 ill be <1h!, ff/ 1110/'c 11p and f/llf f/f lc1bor-i11teJ1sfre 111at11J'act11ring. Fh1.1 1., be1<111.1e b11y,r-dri1w (r1/J/ll/lidit) cht11m ctn i110'emi11gl) amtrollecl h) globt1I rett1i! amglom,ratu, making 111mv11wt into higher t'al11e-added c1ct11itin 111011 dijfimlt tha11 bejim. Paper prcp,tn:d for Kon:,rn EconomiL Rc~c:,.lfdl lnsrirut1on .111d l:wlu \\'om,Hb t·nivu~iry Cunft-rL·nlc on A-;1,111 lndtLStn,tl Go,ernann·. Sc"ul. Kmea (Mav 1-1, 19')9). Ma, nut be cited nor rcprod,;n·d in .my fonr \\'1thour permission of tht: ,tuthor. · D1tecr .di correspondence to Rich.ml P. Appelbaum. D,r,·ctor. l11,t1tute for Social, lkh,11•1<,r,d, and hllnumi, Rese,mh. l'ni,u,in· of California ,Lt Santa Barbara, Santa 13.irhara. CA<J, IOh. LS.A. Downloaded from Brill.com09/26/2021 12:32:28PM via free access 22 INTRODUCTION AND OVERVIEW or a country to move up in the global economy, it must upgrade its manufacturing F base, rather than attempt to compete on the basis of low-cost labor. It is well understood that the developmental success of Taiwan, South Korea, Hong Kong, and Singapore has been due at least in part to their firms' ability to upgrade into higher value-added economic activities. The East Asian Newly Industrializing Economies began as production platforms for core country firms, which enabled them to eventually move into high-technology, high-value industrial production (Taiwan, South Korea, Singapore) or high-end services (Hong Kong). Such upward movement has resulted from a com­ bination of factors, including firm characteristics, the social organization of industries, and government policy. "Industrial upgrading" is assumed to be a key mechanism of economic growth and an important strategy for national development. The East Asian Newly Industrializing Economies have frequently been held up as models for other less developed countries to emulate, with other Southeast Asian nations such as Thailand, Malaysia, Vietnam, and Indonesia following in the footsteps of Hong Kong, Taiwan, South Korea, and Singapore (Kojima 1977; Yamazawa 1990; Inoue, Kohama and Urata 199 3 ). These most recent industrializers arc all countries in which Chinese entrepreneurs play key roles in their national business communities. Their connections with Chinese businessmen throughout East and Southeast Asia give them a special edge in coordinating production among networks of small- and medium-sized enterprises. As I will argue in this paper, in the post-Fordist flexible production characteristic of much economic activity today, Chinese firms have a special advantage, one which would seem to offer the possibility of upgrading throughout much of this region, resulting in national economic development. Yet the ability to move into higher value-added economic activities may no longer be a sure-fire route to economic success. In a world where the generation of wealth lies increasingly in design, marketing, and retailing, it is not clear that industrializing countries will be able to move up and out of labor-intensive manufacturing, following the lead of the late East Asian industrializers. The increasing importance of buyer-driven commodity chains, controlled by global retail conglomerates, is making movement into higher value-added activities increasingly difficult. "MOVING-UP" INTO HIGHER VALUE-ADDED ACTIVITIES: THE EXAMPLE OF HONG KONG Capital in the world today is increasingly mobile, seeking out the best locations to maximize profits (Sassen 1988). Factories close in the older core regions of the world, only to open in the semi-periphery and periphery (Bluestone and Harrison 1982; Caporaso 1981 ). Some theorists have suggested that this process of globalization has even undermined the viability of mass-production industries (Cerny 1995; Oman 1994; Doner and Herschberg Downloaded from Brill.com09/26/2021 12:32:28PM via free access RI( IIAllll P. APPII.ILII ~t l 996). The: changc:s caking place: today represent the crossing of a "nc:w indusuial divide" (Piore and Sabe:! 1981) leading to the rise of post-Fordist, flexible: production (Stor~)Cr and Walker 1989; Scott 1988). Knowledge, technology. and analytic skills, along with the advantages of flexibility, are key to success in today's modern competitive industry. J\.falecki ( 1991, 202) claims that "increasingly, flexible, as opposed to rigid and stable, links allow tirms to adjust their activities to uncertainty and co rapidly shifting conditions brought about by competitive and technology, as well as government regulation." To achieve success in flexible production systems, firms need access to infrmnation and inno­ vation. and linkages to other firms (as suppliers, buyers, or production partners), Research and Developmcnt(R & D) organizations, and marketing outlets. TI1c "com1)Ctitive advantage of nations" will be held by those who control key technologies and production networks (Porter 1990). It is important to recognize that industrialization has different impacts on economic devc:lopmcnt, depending on the specific linkages that connect manufacturing rnterprises to .l(lobal markets and to local, state, and transnational capital. \X'hile some peripheral countries rc:main primarily export platforms for low-technology, labor-intensive g()(xls mad(: by low-wage w_orkers, industrial upgrading was the key to economic development in many of th(: N(:wly-lndustrializing Economies of East Asia, as they shifted from manu­ facturing rn1111mxlities like apparel, textiles, and f0(1twrnr to higher valu(:-added production. During much of the past two decades, regional growth rates averag(:d approximately 7 percent a year - a rate which is extraordinary by world standards (Numazaki 1998). A combination of state policies, private sector activities, and global economic conditions came cogc:ther to produce a period of unprecedemd gruwth in East Asia. This was true despite escalating wages, labor shortages, and currency appr(:ciation threat(:ning com1)Ctitivrn(:SS in the very labor-intensive industries upon which they built their economic growth. TI1e succ(:SS uf this region was due in part to th(: fact that th(:ir firms upgraded into h1gh(:r value-added activities, shifting prtxluction co low(:r-wagc areas. Industrial upgrading can be defined as "the addition of knowledge with th(: potential of enhancing the profit-generating capability of a firm or an economy" (Gereffi and Tam 1 1998, 6). It involves raising product quality, upgrading t(:chnology, increasing efficiency, and learning new skills, thereby enabling firms to com1)Cte in sophisticat(:d industry segmrnts where profit lc:vels are high enough to support high wages. Industrial upgrading rcquir(:s tirms to find ways to design, market, and retail th(:ir own pruducts in global markets, br(:aking through th(: barriers to market entry that arc im1x>s(:d by compani(:s who poss(:SS design expertis(:, and thereby have rheir llWn brand-nam(: labels and th(: ability to manipulat(: consumer tastes through advertising ( Korzmiewicz 199 j ). In the 1950s and 1960s, East Asian governments, with financial and technical assistance from C .S. aid programs, encouraged the growth and expansion of textile: and garment pnxluction (Gcrcfti 1991; Bonacich and Wall(:r 1994; Bonacich and Ap1)Clbaum, fi.irthcoming). Mor(: 1 Gcrcttl ,tn'--1 T,1n1 ( l lJLJX I duraL tuizc 111dustnal upgradin.i,.: 111 tl'rlll;"o of _lm,,ln.t 1/,,1// ( from s11111--.k w uimplcx g11111..ls ()f the ~.tmc rypcL 11Jffe-d.1J11,;.:/Y 111pb1.1/Jc<.1tt:d tHdl1!lllh .1d111/lo (frlm1 ,ts,cmhly through "PeLiflL;ltio11 m.muf.tl turlllg. l>fl_l:lll.d hr~mdn;lllll' manufacturing, and l'\'cnrually ->ngin.t! design). 111/l'd1e,tor,d /11"1/:..:.,Lulf,Ji ifrom 111dlllJf.t<..turinl! finished item~ to hidier value-added ,1n1\·irie~) .