New Developments in International Production Networks: Impact of Digital Technologies*

• Published date: 01 June 2021
• Author: Ayako Obashi,Fukunari Kimura
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/asej.12240

New Developments in International Production

Networks: Impact of Digital Technologies*

Ayako Obashi and Fukunari Kimura

Received 24 March 2021; Accepted 11 May 2021

We conducted a standard gravity exercise using worldwide disaggregated trade data

to shed light on the inf‌luence of digital technologies on network trade. We found

that growing investment in industrial robots in relatively lagging economies,

together with imported digitally deliverable services, is enhancing bilateral network

trade f‌lows in East Asia, but not necessarily in other parts of the world. This sug-

gests that exploring complementarities between machines and human resources in

production blocks supported by better service-link connectivity may allow newly

developed economies to retain andexpand the international division of labor.

Keywords: digital technologies, gravity analysis, international production

networks.

doi: 10.1111/asej.12240

I. Introduction

Since the 1990s, East Asia (including Northeast and Southeast Asia) has led the

world in aggressively utilizing international production networks (Ando and

Kimura, 2005), also known as the ‘second unbundling’(Baldwin, 2016). The

widening and deepening of production networks has been observed continuously

in this region (Obashi and Kimura, 2016, 2017). Even during the slow trade era

in 2011–2016, parts and components trade within East Asia grew steadily, and

trade in assembled end-products also expanded, thanks to growing incomes

and market integration in the region (Obashi and Kimura, 2018). Currently,

COVID-19 seems to have accelerated the adoption of digital technologies,

which may have multifaceted inf‌luences on the international division of labor.

An immediate concern of policy-makers in developing East Asia is a possible

impact of digital technologies on international production networks.

To conceptualize the impact of digital technologies on newly developed econ-

omies, it is useful to identify the two faces of digital technology, as suggested

*Obashi (corresponding author): School of International Politics, Economics and Communication,

Aoyama Gakuin University, 4-4-25 Shibuya, Shibuya-ku, Tokyo 150-8366, Japan. Email: obashi@

sipeb.aoyama.ac.jp. Kimura: Keio University and the Economic Research Institute for ASEAN and

East Asia, Tokyo, Japan.

© 2021 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Asian Economic Journal 2021, Vol.35 No. 2, 115–141 115

by Baldwin (2016, pp. 290–91): information technology (IT) and communications

technology (CT).

1

Although both are derived from the same technologies, they

potentially have quite different implications for the international division of labor.

Information technology—including artif‌icial intelligence (AI), robots, machine

learning, and industry 4.0

2

—makes data processing faster, economizes on the

number of tasks, accelerates the substitution of machines for humans, and is thus

likely to generate concentration forces for production activities. Consequently,

some ‘reshoring’may occur, meaning that certain tasks that were once offshored

to newly developed economies return to advanced economies. On the other hand,

CT—including the Internet, smartphones, and 5G—overcomes physical distance,

reduces matching and coordination costs, encourages fractionalization of the pro-

duction process, and therefore generates dispersion forces for production activi-

ties. Indeed, CT is penetrating newly developed economies amazingly quickly,

leading to a proliferation of new businesses. Thus, it seems possible that while IT

reduces jobs in newly developed economies, CT creates jobs.

However, things may not be so simple. Although, overall, IT may accelerate

the substitution of machines for humans, complementarity between humans and

machines also emerges at the level of tasks or production stages. The cutting out

of production blocks (i.e., a set of tasks or production stages to be located

within one country/territory) in the second unbundling is constrained by techno-

logical and managerial conditions. It is not feasible to make a production block

purely skilled labor-intensive or purely unskilled labor-intensive. Rather, a pro-

duction block comprises a combination of different inputs. It may be diff‌icult

for newly developed economies to compete with advanced economies at the

frontier of digital innovation, at least in the short run. Therefore, how can they

attract or keep production blocks within their territories in the digital era? A nat-

ural solution is to seek complementarity with IT. Virtually all newly developed

economies in East Asia, including China, Malaysia, Thailand, the Philippines,

and Indonesia, are encouraging introduction of robots into production pro-

cesses.

3

Is this an irrational idea that would work against their comparative

advantage, or a meaningful step to explore complementarity? This is an empiri-

cal question.

1

The original idea of a distinction between information and communications technologies is found

in Bloom et al. (2014) in the context of intraf‌irm governance. Baldwin (2016) applies this concept to

the context of the international division of labor.

2

Industry 4.0 stands for the Fourth Industrial Revolution, which is the ongoing automation of tra-

ditional manufacturing and industrial practices using modern smart technology.It par ticularlyempha-

sizes the enhancement of eff‌iciency within a factory.

3

For example, the introduction of AI and robotics is one of the main pillars of Thailand 4.0. The

Board of Investment is providing a 13-year-maximum corporate income tax exemption for invest-

ment in target industries, the use of AI and robotics in which makes such incentives more likely to

be approved (https://www.boi.go.th/upload/content/BOI-brochure%202016-automation-20170615_

14073.pdf, https://www.boi.go.th/upload/content/no76_2562_5ce64eb915fa9.pdf, https://www.scmp.

com/news/asia/southeast-asia/article/2108938/development-plan-robotics-gets-nod-thailand).

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