PUBLICATIONS & REPORTS

Contents Introduction

After examining how one might evaluate environment-related costs, including energy costs, this paper uses industrial census and survey data to compare the cost structures of manufacturing plants in five East Asian economies around 2006. The aim of this comparison is to provide insight into how important energy costs might be to foreign multinational enterprises (MNEs) when choosing production locations. Expenditures on raw materials (including parts and components) accounted for the largest shares (usually about half or more of output) in all economies. In contrast, wage shares were usually much smaller, 8-10 percent in Japan and Korea and 3-6 percent in Malaysia, Thailand, and Indonesia. Shares of purchased energy (electricity and fuels) were even smaller, 2 percent in Japan, Korea, and Malaysia, and 4 percent in Thailand and Indonesia. This suggests that energy costs were a relatively unimportant cost component in most plants in all economies. Comparisons of foreign multinational plants (MNEs) and local plants in the three Southeast Asian economies reveal large variation of MNE-local differentials of cost component shares among economies or industries. On average, energy and wage shares were lower in MNEs than in local plants and MNEs had lower energy and wage shares than local plants in most of the 15 industries examined. However, most differentials were relatively small and MNEs had higher energy shares in a number of instances. The most important implication of these comparisons is that reducing the costs of raw materials is the largest potential source of cost reduction for both local plants and MNEs in these three Southeast Asian economies. Potential gains from reducing energy costs (and wage costs) are much more limited for the average MNE. These empirical patterns reinforce the general academic consensus that energy and labor costs are usually minor factors in MNE location decisions. And because energy costs are a major portion of environment-related costs, this suggests that environmental costs may also be a minor factor for most MNE location decisions. However, cost structures vary among industries and firms or plants, and some MNEs do reap substantial gains from reducing labor and/or energy costs.