Global sourcing and value chain specialization – Policies that promote

368 What happens when a country begins to industrialize from diverse locations such as in industrial estates or special economic zones? First, a country establishes production blocks, rather than a whole industry. It is much easier to prepare a minimal set of locational advantages than to foster an entire industry. Once production blocks commence, multinational enterprises MNEs can obtain local information to allow investment set-up costs to be drastically reduced. Host countries become accustomed to MNEs and learn how to deal with them. By listening to their complaints, trouble- shooting becomes possible and the investment climate will thus improve. If necessary infrastructure and institutional arrangements are prepared along the way, more and more production blocks may be attracted. This early development strategy is fundamentally different from infant industry protection or import-substitution strategies, with or without foreign direct investment FDI applied by Japan, the Republic of Korea or Chinese Taipei in the 1950s to 1970s. The mechanics of production networks move production blocks from advanced areas to those that lag behind. Production networks actually help address development gaps between countries and regions and achieve geographical inclusiveness for East Asia. In the past 15 years, CLMV actually had higher economic growth rates than ASEAN as a whole. 15.3. Industrial agglomeration and middle-income development strategy Some East Asian developing countries have been successful in starting up industrialization by fully utilizing the mechanics of production networks and they have now attained middle-income levels. Today, the issue has become how to make the transition from a middle-income to a fully developed economy. If we simply extrapolate GDP per capita, a number of East Asian developing countries including Malaysia, Thailand, China, Indonesia and the Philippines may reach US 10,000 or higher within 10 to 15 years. Such simplistic macroeconomic growth cannot be automatic. Indeed, it will certainly require substantial economic transformation. The strength of East Asia lies in the formation of its industrial agglomerations. Production networks in the region have reached a new stage of development Figure 15.5. Fragmentation of production between the United States and Mexico, on the other hand, mostly consists of “cross-border production sharing” in which