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Asia Pacific University of Technology & Innovation

Technology Park Malaysia, Bukit Jalil,


57000 Kuala Lumpur.

Name

Lee Kang Wei

Student Number

TP025674

Intake Code

UC3F1504IBM

Module Name

Asian Success and Global Economy

Module Code

BM002-3-3-ASGE

Assignment Description

Individual Assignment

Lecturer

Dr. Behrooz Gharleghi

Hand Out Date

6th July 2015

Hand In Date

17th August 2015

Word Count

: 2300 words

Contents
Acknowledgement....................................................................................................... 4
Executive Summary..................................................................................................... 5
1.0 Introduction.......................................................................................................... 6
2.0 Existence of Hollowing Out Phenomenon..................................................................7
2.1 Case in Japan..................................................................................................... 7
2.2 Case in Taiwan................................................................................................... 8
2.3 Case in United States........................................................................................... 9
3.0 Theoretical Cause of Hollowing Out Phenomenon......................................................10
3.1 Technological change......................................................................................... 10
3.2 Supply and Demand........................................................................................... 10
3.3 Global Competition (CHINA)............................................................................... 10
4.0 Conclusion......................................................................................................... 12
References........................................................................................................... 13

Acknowledgement
I would like to take this opportunity to express my gratitude to my lecturer, Dr. Behrooz for
his guidance, monitor and constant encouragement throughout the assignment. Besides, I
would also like to thank my parents, friends, and classmates for their helps and supports in
completing the assignment. Thank you again to those who helped me out.

Executive Summary
The main purpose of this assignment is to understand the reason why the Hollowing Out
phenomenon that causes foreign and domestic investors leaving their countries and investing
in countries that could potentially lower manufacturing or operation cost but still poses a
threat to full employment plans. This assignment requires the identification and critical asses
of the various factors that will lead to the phenomenon and does it have a significant proof
that is occurring.

1.0 Introduction
According to Ong, J., Kit, W. and Kwan Tai You, K. (2005), Hollowing-out is the process
by which the shares of total employment in high-ranked and low-ranked jobs have expanded
relative to middle-ranked jobs over time, where jobs are ranked by their initial wage. Thus,
more high-level jobs are created, such as professional and managerial positions, but there is
also a growth in the relative share of low-level, typically personal service jobs (caring jobs
being a good example). These increases in employment shares have come at the expense of
mid-level jobs, typically administrative and production jobs. Hollowing-out is a phenomenon
that has been increasingly observed in the UK and many other developed countries. Such
research has only gained prominence in the last 5 or 6 years, but refers to the period since the
late 1980s/early 1990s, or even earlier. The aim of this report is to summarise and discuss this
literature, rather than add new research. This is a relatively new, but rapidly expanding area in
labour economics research. This report will therefore not provide a comprehensive review of
everything that has been written on the topic, but rather focus on some of the most influential
papers.
In the perspective of national competitiveness, hollowing out is a major concern. Many
economists consider a strong manufacturing sector as the engine for sustained economic
growth. The main view is that as the manufacturing sector declines, there is a substantial loss
of high paid manufacturing jobs. Although new jobs can be found in the service sector, they
are usually at much lower wages with fewer chances for advancement (Davis and Huston
1992; Peck 1996). This development reduces consumers buying power and demand levels
for the overall economy. A major factor in the discussion of the hollowing out phenomenon
is the increasing freedom and flexibility that corporations have to move their production
capacity to different locations around the world. Firms can avoid the impact of regulations,
strong domestic currencies, land prices and high wages by moving to areas with cheaper
labor, fewer regulations and more available land. The motivation for foreign direct
investment (FDI) activities can thus provide an important insight into the potential impact of
investment outflows on the domestic economy (Levinson, M., 2015).

2.0 Existence of Hollowing Out Phenomenon


2.1 Case in Japan
The motivation and impact of FDI activities in Japan have changed over the postwar years. In
the 1960s and 1970s, outward FDI was considered to have a positive impact on the Japanese
economy. During this period, Japan faced the problems of rising energy prices, insufficient
land for expansion and a shortage of labour. By relocating the labour and energy-intensive
industries overseas, public and private investment in the manufacturing sectors focused on
producing higher technology, value added products (Hirono,1996). In the 1980s, more intense
international competition led Japanese manufacturing industries to expand their FDI activities
to take advantage of cheaper labor, land, and resources. However, exports continued to hold
up well despite a strong yen and increasing FDI. Domestic manufacturing output also
increased very quickly despite increasing FDI (Hirono, 1996). In the post bubble economy
which started in the early 1990s, there has been a longer period of low and negative economic
growth in Japan. This time there is increasing concern about the flow of outward FDI in the
manufacturing sector and the potential negative impact on the overall economy. The
Existence of Hollowing Out can be observed by the tabulated data of Manufacturing Share
of GDP, Manufacturing Share of Employment and Manufacturing Share of Outward FDI in
the table below (Tejima, S. ,2000).
Twenty-Year Trend of Hollowing Out

Sourced from Tejima, S. (2000)

2.2 Case in Taiwan


Taiwan had been a capital-importing country receiving FDI from advanced countries. The
inflow of FDI had complemented its shortage of capital and helped to promote the progress in
technology. Its production pattern had maintained a close tie with the investing countries. It
imported capital and intermediate goods from the investing countries, assembled and finished
the production processes, and exported the final goods back to the investing countries. Such
pattern had generated prosperity and trade surplus for Taiwan economy in 1970s and early
80s. During this period of time, the economic integration of Taiwan to global economy is
constrained with import barriers and highly regulated foreign exchange and outward
investment (Atimes.com, 2015).
In 1985, the G5 ministers of finance met in Japan for solving trade disputes, especially that
from the trade surplus of Japan against the US. In consequence, the Plaza Accord was signed
for the joint efforts in reducing trade imbalances. Being caught in the crossfire, Taiwan was
pressured to take actions to cut its trade surplus. Several measures were taken, including the
removal of import barriers and deregulation of foreign exchange market. As the result,
Taiwan became more exposed to the global economy. Facing immense competition from 2
foreign firms, Taiwanese firms had to take actions to adapt to the new situation. Its industrial
restructuring has been undergoing ever since. On the other hand, further openness of trade,
foreign exchange and outward investment provides more alternatives for the strategies of
business development. Outward investment started to grow rapidly.
In 1987, Taiwans capital outflow outpaced its inflow and turned it into a capital-exporting
country. With the rapid increase of outward investment, the industrial structure adjustment
also took place. The growth of Taiwans traditional labour-intensive industries slowed down,
and its share in the manufacturing sector reduced. At the same time, the capital- and techintensive IT industries quickly expanded. The adjustment deteriorated employment, causing
unemployment rate to rise. The debates and concern for industrial hollowing-out has never
ceased.

2.3 Case in United States


The health of the U.S. manufacturing sector has been a long-standing concern of Congress.
Although Congress has established a wide variety of tax preferences, direct subsidies, import
restraints, and other federal programs with the goal of retaining or recapturing manufacturing
jobs, only a small proportion of U.S. workers is now employed in factories.
Meanwhile, U.S. factories have stepped up production of goods that require high
technological sophistication but relatively little direct labor. Labor productivity in
manufacturing, as measured by government data, has grown rapidly, suggesting that the
manufacturing sector as a whole remains healthy. Recent data, however, challenge the belief
that the manufacturing sector, taken as a whole, will continue to flourish. Unlike previous
expansions, the two most recent cyclical upturns in the U.S. economy have generated few
jobs in manufacturing. Moreover, statistics suggest that domestic value represents a
diminishing share of the value of U.S. factory output. One interpretation of these data is that
manufacturing is hollowing out as companies undertake a larger proportion of their highvalue work abroad. These developments raise the question of whether the United States will
continue to generate highly skilled, high-wage jobs related to advanced manufacturing.
The evidence concerning hollowing out is ambiguous, as conceptual issues and statistical
deficiencies make it difficult to determine whether the recent decline in manufacturing value
added, relative to shipments, is a short-term phenomenon or a long-term trend. Despite
improvements in recent years, U.S. statistical agencies still tend to treat manufacturing and
services as unrelated economic activities, and it is not clear that existing data series on
domestic economic activity, trade, and freight transportation adequately capture changes in
the nature of manufacturing, the sources of employment, and the creation of value.
Nonetheless, evidence suggests strongly that physical production activities account for a
diminishing share of the final value of manufactured products, with service-related inputs
such as research, product development, and marketing becoming more important. Further, the
production of many goods is dispersed across multiple locations along global supply chains,
making it difficult to determine where value is added. Such shifts pose a challenge to efforts
to capture economic value by promoting goods production in the United States.

3.0 Theoretical Cause of Hollowing Out Phenomenon


3.1 Technological change
By far the most frequent reason or theory studied for the hollowing-out of the job distribution
described above is technological change. In particular the theory of task-based technological
change (TBTC) has been developed, best associated with Autor et al. (2003). These authors
first made the case that the impact of technological change does not depend specifically on
the skill level of the worker doing a job (as was the case with the earlier skill-biased
technological change theory), but rather depends on the task that the worker is doing in their
job. In particular, technological change was argued to impact on routine jobs, where the task
being undertaken is repetitive and does not require response to outside stimuli, so that
computer technology can be programmed to undertake the task more quickly and efficiently
than any human input. Thus, when the price of computing power fell, as it has done
exponentially per task completion, it was routine jobs that were most substitutable for
technology. Due to this phenomenon, works are differently delegated and may lead to works
being offshored to other countries (McIntosh, S. ,2015) .
3.2 Supply and Demand
Supply and demand. Several members of the audience asked about the relative role of supply
and demand. Steve McIntosh confirmed that the increase in the volume of jobs that have
initial high pay appears to be due to increasing demand, in line with increasing pay levels or
at least non-declining pay. On the other hand the increased volume of jobs with initial low
pay might well be driven by increased supply whether through increased migration, or greater
participation possibly partly due to an increased gap between benefit and wage levels.
3.3 Global Competition (CHINA)
Chinas emergence as a manufacturing powerhouse is reflected in the competition with the
other Asian Economies for Foreign Direct Investment (FDI). Foreign investment in China has
started after an Open Door Policy was adopted in 1978, but it is remained comparably
limited until 1992, when the rate of economic liberalisation accelerated, the FDI amount
inflow into China increase 900 times during the time of 1980 and 2004, while inward FDI
into ASEAN economies such as Malaysia, Indonesia, Philippines, Thailand and NIE
economies of Singapore, Korea and Taiwan fell after the 1997 Asian Financial Crisis. There,
Chinas FDI inflow shares into Asia increase by 65% by 2004, While ASEAN share reduce
significantly.

FDI Inflow Chart

Sourced from Ong, J., Kit, W. and Kwan Tai You, K. (2005)
It is also found that Chinas appeal as a manufacturing base has led to it becoming a key node
within the broader East Asian production operation. This phenomenon also causes
competition to the develop marker in G3 which is USA, Europe and Japan. As the Global
MNCs relocated their low-end, labour-intensive assembly of consumer goods from ASEAN
to China, export of consumer goods to the G3 from China have increase around 5 times since
1990.
Exports of Consumer Goods to G3

Sourced from Ong, J., Kit, W. and Kwan Tai You, K. (2005)

4.0 Conclusion
Chinas ascension as a manufacturing powerhouse has changed the regional production and
manufacturing landscape. Due to the large amount of MNCs have rushed to extend their
production network into China, it has successfully establish China as a major competitor for
inward FDI and Jobs to the region. Competition for FDI is the most intense with the ASEAN,
where there is a big degree of overlap in manufacturing capabilities. To this day, China is
accountable for 65% of all FDI into Asia, which is considered a big amount, considering it
was just 2% in 1980.
Competition from China with East Asia in exports to the G3 has also intensified which is
responsible for reduction of manufacturing need in the home country. While Chinas
competitiveness in consumer goods export is well known, it has increasingly gained in low
and mid-end products, which result to Taiwanese Electronics firms relocating to China
causing manufacturing firms in ASEAN and EA to lose its competitiveness and its
employment rate to go down.
Having studied both effects of Chinas rise on the East Asia exports, we find that the
increasing Chinese demand for production has created a negative impact to the completion in
the context of employment rate and GDP. However, ASEAN and EA can start withstand the
China attraction as an Investment destination by continue to develop a niche by moving up
the value chain or by developing their service industries, in order to remain attractive
destination for FDI.

References
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Atimes.com, (2015). Asia Times - Is Taiwan hollowing out?. [online] Available at:
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Hsieh, Y. and Tseng, S. (2002). The welfare state in the 'information age': hollowing out or
restructuring in the changing labour market in Singapore?. The International Journal of
Human Resource Management, 13(3), pp.501-521.

Levinson, M. (2015). Hollowing Out in U.S. Manufacturing: Analysis and Issues for
Congress. [online] FAS.org. Available at: https://www.fas.org/sgp/crs/misc/R41712.pdf
[Accessed 17 Aug. 2015].

McIntosh, S. (2015). Hollowing out and the future of the labour market. [online] GOV.UK.
Available at:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/250206/bis-131213-hollowing-out-and-future-of-the-labour-market.pdf [Accessed 17 Aug. 2015].

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[Accessed 17 Aug. 2015].

Ong, J., Kit, W. and Kwan Tai You, K. (2005). China's Rise as a Manufacturing Powerhouse:
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[Accessed 17 Aug. 2015].

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