Reorganisation of production

Growth in East Asia is best interpreted in terms of the step from the first to the second unbundling. The first unbundling was the separation of consumption and production, facilitated by a fall in trade costs, which promoted the movement of raw materials and finished products. In the second unbundling, promoted by a fall in communication costs, production processes can be decomposed into a series of tasks. A special part of the experience of East Asia involved the formation of production networks, that involved not just task sharing across borders (as observed elsewhere in the world) but also connections between locations of industrial agglomeration at the same time. Study of the experience of East Asian production networks has made an important contribution to the research literature in economics, because of their special features. Key empirical questions and results reviewed in the chapter include the drivers of participation in production networks, variation between industries in the weights on fragmentation and agglomeration, shock transmission in production networks but also their resilience and robustness, and the relevant set of supporting policies. Also considered are the consequences of the reorganisation of production, both with respect to the impacts of global value chains and to other impacts at the firm level. The chapter includes a discussion of what is called the third unbundling or cross-border services unbundling, driven by another information and communication technology revolution, which will facilitate division of labour at the personal level. This latest development will facilitate fragmentation within those networks, and create new opportunities for developing economies to participate in trade in services. The new digital technology is also promoting the development of new business models, for ecommerce and for financial transactions. Just as fragmentation and agglomeration were observed in the second unbundling, there is an interesting question of its balance in the third. Both are likely, and that given the presence of benefits of agglomeration there will be competition among cities to host those concentrations. That leads to a focus on the nature of the urban amenities which might attract people with the skills and capabilities relevant to the agglomerations.