4.4 Localization of Production and R&D by
4.4.2 Occurrence of an Inward Direct Investment
Th ere is no doubt that the factors mentioned above had an infl uence on the localization of production by Japanese suppliers. However, taking into account the fact that in the 2000s not only suppliers of glass sub- strates but also a large numbers of other Japanese suppliers established manufacturing plants in Korea, there are presumably other important factors that played a role. Furthermore, it is reasonable to infer that the Korean government’s foreign investment inducement policy was more a means of creating the conditions for local production by Japanese sup- pliers rather than an intrinsic reason for their localization. What, then, was the decisive factor behind the Japanese suppliers’ decision to establish plants and R&D centers in Korea?
Momomoto and Lee ( 2012 , pp. 167–8) point to the capture of grow- ing demand for components, materials, and equipment as the most important objective of the Japanese fi rms’ investments in Korea. Th is is closely related to the strategy adopted by Korean fi rms in catching up with and then surpassing Japanese fi rms in the FPD market.
First, Korean FPD fi rms succeeded in reducing product costs and expanding market share by carrying out a strategy of investing large amounts of capital to reap economies of scale in production, and this strategy allowed them to catch up with Japanese fi rms. As a result, the main market for FPD components, materials, and equipment shifted from Japan to Korea. Th is trend is suggested by the capital spending made by FPD fi rms. Figure 4.3 show that during the early to mid-2000s, investment hardly increased in Japan, while it increased year over year in Korea. Th e same holds true for individual fi rms. In 2002, Samsung Electronics and LG Philips LCD made capital spend- ing of 140.1 billion yen and 111.7 billion yen, respectively, twice the amount made by Sharp (72.0 billion yen) (Electronic Journal 2006, p. 118). Under these circumstances, Japanese suppliers recognized that
‘the Korean market has grown’, 30 predicted that ‘the Korean market is
30 Th e author’s interview at a local subsidiary of a Japanese FPD equipment fi rm in Korea on 5 September 2012.
expected to signifi cantly expand in the future’, 31 and thought that ‘we must seek markets outside of Japan’. 32
However, even if Japanese suppliers choose to emphasize sales to the Korean market, they should be able to simply export their prod- ucts from Japan. Th ere must be other reasons for shifting their plants and R&D centers to Korea. Another important factor in the decision to localize in Korea was that Korean FPD fi rms were attempting to shorten the duration of product development and the start of mass production with the objective of obtaining fi rst-mover advantage. As part of this strategy, Samsung and LG strongly requested their suppliers to respond rapidly in verifying test results during the development process, solving problems that occur at the start- up of mass production, and delivering products. In particular, Samsung urged its suppliers to respond more quickly because Samsung’s engineers were exposed to severe competi- tion with rival companies as well as other in-house development teams in the development of new products and technologies. Th is caused
31 Th e author’s interviews at local subsidiaries of two Japanese FPD materials fi rms in Korea on 7 September 2012 and 7 November 2013.
32 Th e author’s interview at a local subsidiary of a Japanese FPD components and materials fi rm in Korea on 4 September 2012.
0 500 1,000 1,500 2,000 2,500
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 (billion yen)
Other country firms Taiwanese firms Korean firms Japanese firms
Fig. 4.3 Capital spending by major LCD panel fi rms (Source: Author’s elabora- tion based on data from Electronic Journal ( 2006 , pp. 118–120, 2011, pp. 118–
120). Notes: (1) FY is Fiscal Year (April–March). (2) The data for 2002–2005 include capital spending by 36 major fi rms (including 17 Japanese, 5 Korean, and 12 Taiwanese fi rms) by nationality. Data after 2006 include capital spend- ing by 40 major fi rms (including 11 Japanese, 3 Korean, and 6 Taiwanese fi rms) by nationality)
Japanese suppliers to realize that they would be unable to keep up with the demand for increased speed by Korean customers if they remained in Japan. 33 Additionally, it is useful for FPD suppliers to have close rela- tionships with leading customers starting from the development stage because they can obtain technical information from customers and use it for new product development, thereby producing a lock-in eff ect. 34 For these reasons, Japanese suppliers decided to locate their plants and R&D centers near Samsung and LG.
In fact, one Japanese supplier reduced its delivery time from about 8 months to 5 or 6 months as a result of establishing a manufactur- ing plant near its Korean customers. 35 Another Japanese supplier also reduced its delivery time from 1 month to about 1 or 2 weeks through local production. 36 Moreover, it is common for suppliers to frequently visit customers’ R&D centers and plants when developing next-gen- eration panels and starting up mass-production lines. Before setting up production bases in Korea, Japanese suppliers who visited Korean customers from Japan were unable to respond speedily because of the travel time and because they had to wait for instructions from the head- quarters in Japan. One Japanese supplier said that verifying tests con- ducted on customers’ development lines took a week when using the company’s R&D center in Japan but now only takes 2 days at the R&D center in Korea. 37
Th e facts in this section imply that with the transition from catching up to leadership positions at the Korean FPD fi rms, the increase in FPD
33 Th e author’s interview at the local subsidiaries of a Japanese equipment components fi rm and three Japanese FPD components, materials, and equipment fi rms in Korea on 4, 5, and 24 September 2012 and 5 November 2013.
34 For example, in the case of manufacturing equipment, because of the enormous eff ort required to test and correct the defects in the equipment so that it meets the specifi cations, once an FPD fi rm adopts a certain supplier’s manufacturing equipment, it becomes diffi cult to switch to another supplier (the author’s interview at a local subsidiary of a Japanese FPD equipment fi rm in Korea on 5 September 2012).
35 Th e author’s interview at a local subsidiary of a Japanese FPD equipment fi rm in Korea on 24 September 2012.
36 Th e author’s interview at a local subsidiary of a Japanese equipment components fi rm in Korea on 5 September 2012.
37 Th e author’s interview at a local subsidiary of a Japanese FPD equipment fi rm in Korea on 5 September 2012.
panel production in Korea has attracted inward direct investment from Japan. In other words, in Korea, an ‘inward direct investment induce- ment mechanism’ has occurred since the 2000s and this has led to the development of FPD component, material, and equipment industries through the exploitation of the ‘advantages of backwardness’.