Trade in Asia - Literature review Example

Running Header: Trade in Asia Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Q 2 Introduction Multinational corporations in Asia are characterized by international products fragmentation. According to Anukoonwattaka (2011) the process of global production of fragmented products began in Asian countries from the past three decades. MNCs in Asia are driven by firm level decisions in regard to the location and organization of their production system. The corporations have adopted this strategy with an aim of saving costs related to factors of production. The swift growth of production networks in Asia has significantly transformed international trade and patterns of production in the Asian countries. This research paper is going to explain why many multinational corporations in Asia utilize multiple production locations. The paper will also show the production links among the North Asian Economies. Moreover, the paper will discuss the prospects for the spread of IPNs in low wage economies. Reasons why Many Multinational Enterprises in Asia utilize multiple production locations According to Samson and Daft (2011) multinational enterprises in Asia utilize multiple production locations in order to benefit from factor cost advantages. MNCs in Asia are able to reduce their production cost by locating their production units in different parts of the world. This is because of the fact that some inputs used in the production process are cheaper to produce in some countries hence this provides them with an opportunity to reduce their production costs. World Trade organization (2011) emphasizes that the ongoing industrialization in Asian countries has rapidly increased labor costs hence the need for the multinational corporations to locate their production processes in different parts of the world with lower labour costs. Multinational corporations in Asia also utilize multiple production facilities in order to benefit from economies of scale. Anukoonwattaka (2011) notes that certain stages of production involve high fixed costs and thus the need to produce in large scale from specialized providers in order to benefit from economies of scale. Multinational corporations locate their production processes in countries where they have large domestic market so as to increase their returns to scale. This makes the MNCs manufactured products to be cheaper in a country that has a large market domestically. For instance, multinational automobile companies in Japan have located their production units in India due to the growing demand of automobiles in that country. The Indian economy is growing rapidly hence it offers a huge market for the Japanese automobiles. According to Nakamura (2009) the low international trade costs enables the multinational corporations to reduce their costs hence improve their profits. International fragmentation of production requires Asian MNCs to manufacture their products in one location and ship them in another location for final assembly. Furthermore, operating different production processes entail complicated management system. The shipping and management costs are referred to as international trade costs. These costs also involve tariff costs, communication costs, legal and regulatory costs as well as distribution costs. Moreover, the Asian MNCs incur international costs whenever their goods across international borders. However, by locating their production processes in different parts, the enterprises are able to reduce their international costs hence improve their profitability. The enterprises locate their production processes in countries with low international costs hence this enables them to save on their operating costs. Multinational enterprises in Asia operate multiple production processes due to the need to access upward customers and downstream suppliers with ease (Anukoonwattaka, 2011). Asian MNCs have realized the need to locate their production locations in close proximity with supporting industries. This is because of the fact that industries having a vertical production structure require input –output relationships and this necessitates the creation of forward and backward linkages between firms. This in turn leads to the concentration of enterprises dealing with the production of certain products in a particular location. Location selection by Asian MNCs is strongly determined by the presence of other key industries in a given country or given operating location. Therefore, multinational enterprises in Asia operate multiple production facilities in order to be close to support industries hence this assists them to reduce their production costs. Moreover, it assists them to obtain their raw materials with ease and to sell their outputs effortlessly. Growth of Investment and Trade Links among the North Asian Economies Shong (2008) notes that the North Asian economies have embarked on integrating their economies by establishing trade links among themselves. This is because each of the country offers unique factors of production hence the need to establish trade linkages in order to enhance growth in the region. According to the Asia pacific Trade and Investment report 2011(2011) foreign direct investments among the northern Asian economies has grown rapidly from 1999-2010 at a rate of 30%. . In 1999 investments among the northern Asian economies was valued at approximately $ 60,000 million. By 2005investments among the Asian economies had grown to $80, 000million while by 2010 the investments among the northern Asian economies stood at $90,000. On the other hand exports among the North Asian economies have grown by 21%. Trade among the North Asian economies increased by 5% from 2008 to 2009 while in 2009-2010 trade among the economies increased from 25% to 35%. Moreover, trade among the countries between 2010 and 2011 trade increased by 10%. The Global Forum on International investment (2011) notes that 50% of the products produced in North Asia have been traded among the regions and this has made trade linkages within the region to grow at a fast rate. Trade within the region has doubled from 2000 to 2010. The increased investment and trade links among the North Asia economies enables the MNCs to reduce their production cost by providing them with an opportunity to obtain cheap factors of production within the region. According to the Global Forum on International Investment (2011) different nations in the northern Asian region have unique factors of production. Therefore, by establishing trade linkages, the MNCs are able to locate their production processes in the different areas of the region and this enables them to reduce their production costs as they are able to source the raw materials at the source. Prospect for the Spread of IPNs to Low Wage Economies According to Sciortino, Caouette and Guest (2009) south Asia and the greater Mekong region has experienced population mobility hence the regions are characterized by large number of people. This offers MNCs with cheap source of labour. Besides, with the integration of the global economy, the regions are experiencing growth in economic opportunities and this has attracted the IPNs to locate their operations in this regions. Moreover, the regions are experiencing improved infrastructure hence this has made the region to become a gateway between India, China and other ASEAN countries. This means that the IPNs are aiming to utilize the economic corridors created by these economies in order to expand their operations hence reach more markets for their products. Furthermore, the growth in the region has fostered inter global investments and trade. This has provided the IPNs with an opportunity to enhance their operations due to the increased trade in the region. Anukoonwattaka (2011) emphasizes that the South Asia and greater Mekong region offers the IPNs with an opportunity to combine trade and investment hence their spread in those regions. Moreover, the region offers the IPNs with non-trade barriers and this is important in reducing their international trade costs hence their prospects for moving to the south Asia and the grater Mekong region. Conclusion In conclusions, MNCs in Asia operate multiple production facilities in order to gain from factor cost advantages, gain from economies of scale and also to benefit from low international trade costs as well as to easily access downstream customers and upstream suppliers. Investments and trade linkages among the northern Asian economies has grown in order to enable the MNCs in this region to access the unique factors of production found in each country with ease. On the other hand IPNs are spreading to south Asia and the Greater Mekong region due to the economic growth in this regions and due to the fact that they are gateways to global markets. References Anukoonwattaka, W.(2011). Driving forces of Asian International Production Networks. History and Theoretical perspectives, 3(1), pp. 7-19. Asian-Pacific Trade Investment Report 2011.(2011). Trade and Investment Opportunities. United Nations, pp. 1-181. Global Forum on International Inveatment .(2011). Trade and Investment Linkages and Policy Coordination. Trade Policy, 1(1), pp. 1-15. Nakamura, T.(2009). East Asia Regionalism. Oxon: Routledge. Shong, J. (2008). International Management. Aberdeen: Arberdeen University Press. Sciortino, R., Caouette, T., & Gueast , P 2009, Region Intergration and Migration in the Greator Mekong Sub-Region, Asian Review, 4(1), pp. 1-16. World Trade Organization. (2011). Trade Patterns and Global Value in Asia. IDE-JETRO., 1(1), pp. 1-127. Read More