ESSAY for Economics of Emerging Economies Lecture

Climbing the industrial ladder is essential for industrialization.

How can emerging economies proceed from labour intensive industries to the next rung of the ladder?

Author: University of PaviaFilippo Vescovo Accademic Year 2010-11mat. n^395125 June 2011

Contents

Introduction............................................................................................................ p.3

Chapter 1 – Development, Growth and the role of Manifactury1.1. The Industrial Stages Model framework............................................ p.5

1.2. The World scenario............................................................................ p.7

Chapter 2 – The role of the State in industrializing economies2.1. Strong support from the people......................................................... p.10

2.2. Low level of corruption..................................................................... p.11

2.3. High skilled "state-managers"............................................................ p.11

2.4. Smart "state-entrepreneurs"............................................................... p.12

Chapter 3 – Growing national industries3.1. The "Infant Industry" argument......................................................... p.13

3.2. Evidences and lessons from successful cases.................................... p.13

3.3. Timing................................................................................................ p.14

3.4. Incentives........................................................................................... p.15

3.5. Failure of infant-protection policies.................................................. p.16

Chapter 4 – The role of technology4.1. The "tech-ladder" and the learning process....................................... p.17

4.2. The first technological jump.............................................................. p.19

4.3. The second jump................................................................................ p.19

4.4. Internal and external resources for the up-grade............................... p.20

4.5. Strategies for the "tech-climb"........................................................... p.21

Chapter 5 – A regional perspective: the industrial clustersThe flowchart approach............................................................................ p.23

Conclusions............................................................................................................ p.27

Bibliography........................................................................................................... p.29

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2

Introduction

The industrialization process has been proved to be an inevitable step for the economic development of a society. But having an industrial base is not sufficient to reach the living standards of today's OECD countries. Emerging economies, which present resource-based and labour-intensive productions, should try to improve their manufacturing sector in order to attain higher Value Added (V.A.) activities, and so, sustain their development process.

In the real world, however, the spread of this process seems to be very limited, with few concentrated areas, due to dynamics like economies-of-scale, economies of agglomeration, and cumulation of learning capabilities. In this way, a limited number of major centers are likely to inglobe for theirselves this "climb" process, leaving to the remaining countries a marginal role, with little involvement of production and related activities.

As we will see during the paper, the process of the "climb" of the industrial ladder has many different issues to be taken into consideration. After a little briefing, where we will introduce the theoretical framework,some of those topics will be discussed: the role of the state, the infant-industry argument, the role of technology and the creation of industrial clusters.

These issues are all related to essential dilemmas that emerging countries actually face on their "climb". The scope of this paper is not to solve these global dilemmas, but to give some insights to them, thanks to previous studies and by the observation of real cases.

The first chapter is dedicated to the theoretical framework of the industrial development. The questions we will try to answer are: Why industrialization is important for economic development? How does the process take form? Which is the world situation?

In the second we will explore which should be the role of the state in this process. Why governments are crucial to the industrial process? Which are the main features of a development-friendly State?

The third chapter is focused on strategies for the creation of a national industrial sector. Why to protect infant industries? How did it worked in the past successful cases? Which are the main features of those tactics?

The fourth chapter talks about knowledge, learning and technology, crucial assets for the industrial development. How these dynamics work? How they interact with the industrialization process? Which could be the strategies to absorb and create knowledge and capabilites?

The fifth and last chapter shift the focus on a regional perspective, and it talks about the industrial clusters. How do they take form? Why they are so important for the industrialization process?

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1. Development, Growth and the role of Manufacturing

It is widely accepted that the development of an economy is highly related to its industrial

base. First Europe, then United States and Japan could develop their economies, and so their

living standards, only after having created a manufacturing base.

Industrialization has been fundamental to economic development. Only in circumstances such as extraordinary abundance of land or resources have countries succeeded in developing without industrializing. Not only is industrialization the normal route to development, but as a result of the globalization of industry, the pace of development can be explosive. Twenty years ago, Qiaotou in China was a village. Today, it produces two thirds of the world’s buttons.1

But industrialization is a very wide and general term: we can classify an industry by sector,

intensity of capital, and many other variables. One of them, crucial for the greater context of

the economic development, is the classification based on their Value Added. The higher is the

Value Added, the deeper would be the impact in the economy, and so the economic

development.

In today's economy, productions with high Value Added are the ones in which knowledge,

capabilities and innovation are the main factors. An example is given by the fashion industry.

Nike is famous mainly for its sneakers, which process of production chain involves many

activities, located in different countries: while low-V.A. ones (like physical production) are

located in the emerging countries, the high-V.A. ones (like marketing) are instead situated in

rich OECD countries. This example teaches us that, in order to improve the economic

conditions of a country, an up-grade toward higher V.A. activities should be made. This is the

essence of the concept of the "industrial ladder climb" that we are going to explain in a more

theoretical version.

1.1. The Industrial Stages Model FrameworkFirst theorized by Balassa2, the Industrial stages model states that:

“A developing country, in an open economy context, industrialises and goes through industrial upgrading, step by step, by capitalising on the learning opportunities made available through its external relation with the more advanced world. According to this evolutionary approach, each nation is on a continuum within one of different "industrial stages", and as it moves forward, it takes on a new series of competitive tasks in the world economy and leaves less sophisticated activities to countries at the lower level of economic development.3

1 Industrial Development Report 2009, UNIDO, p.XVI.2 BALASSA B., A Stages approach to comparative advantage, World Bank Staff Working Paper, Washington,

1977.3 UNCTAD Trade and Development Report, 1995.

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The process can be presented as following:

Pre-industrial is the stage where the economic system does not present relevant

manufactury presence: the society is based on the exploitation of natural resources, and so it

is not developed, with high poverty rates. Stage one, labour-intensive and resource-intensive is similar to the previous, but with the addition of basic, cheap and manual-skilled activities.

The second stage – capital-intensive – is characterized by more advanced technologies and

fewer levels of poverty; the manufactury sector is based on scale economies, for the

production of standardised products with mass labour inputs provided by the local population.

The technology- and knowledge-intensive stage sees a sharp increase in the level of skills and

capabilities of the labour force, and with that also the productions, which switch to higher

V.A. and complexity. When this stage is complete, those activities becomes more

sophisticated and "advanced", reaching the status of mature economies.

This model of industrial development can be used to analyze the economic history of

nearly all the world countries. Only few of them could really "skip" one or two stages before

getting into the more advanced places, and this is mostly the case of little economic systems

and in particular situations.

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Stage Broad category Broad industries Products

S4 Mature economy High-tech' and High-precision instruments,service industries sophisticated serv., fashion

S3 Technology and knowledge- High-tech' and Telecommunications,intensive industries consumer durables Biotech', cars, precision instrum.

heavy electrical machinery,Micro-electronics

S2 Capital-intensive industrial Heavy Industries a) Machine-Intensive(intermediate/ machine tools, industries & producer capital & office machinerygoods) b) Raw material- Intensive

Iron & steel, petrochemicalsplastcs, metals, artificiail fibres

S1 Labour-intensive industries Light Industries textiles, footwear, potterytoys, wood products

S1 Resource-intensive industries Agro-processing canning, leather, plywoods

Pre- Primary producers Primary products minerals, basic agricoltureIndustrial (natural-resources intensive)

source: course material

Table 1 – Stages in industrial Growth

A paradigmatic example comes from Iran. The country's former monarch, the Shah

Mohammad Reza, after a huge increase in the oil prices in 1973 (and so, massive inflows of

revenues) stated that Persian economy would have became among the most advanced

countries in ten years. He started, so, by importing lots of goods and advanced technology

machineries by the Western world. The policy did not work at all: Iran in 70s was between the

pre-industrial and the first stage, without skilled employees and infrastructures. As

Kapuściński tells us4,

Shah spent billions around the world, and from various continents, ships full of goods are directed to Iran. Once they arrive in the (Persian) Gulf, Iran discovers that it does not have ports. There are, but actually they are too little and obsolete to serve big cargos. Hundreds of ships wait for their turn in the Gulf, a pending that in some cases take 6 months. These "parkings" would cost billions to Shah's treasury.

Step by step, the goods are unloaded, but then Iran discovers that it does not have warehouse. In the open air, in the middle of the desert, tons of goods wait months, and most of them become waste.

The goods should be transported within the country: at this point Iran discovers that the country does not have any transportation vector. Shah so decide to buy two thousands of trucks from Europe, but then he discovers that in Iran there are no drivers. After long debates, the government decides to send its airplane to South Korea and they come back full of drivers.

This story does not only teach us that the process should be gradually. It teaches also that

the economic development is a complex process that does not depend only on the resources

that a country has. It involves also political, social, geo-political and historical issues.

The other lesson is that reaching the higher stages is not easy and it can take many

decades: East Asia NICs and few others, in this sense, are fascinating exceptions (that we will

pass through in the course of the paper).

1.2. The World ScenarioIt might be intersting – before getting deeper into the dynamics of the industrial ladder

development – to take a look at the situation of the world economies, and so understand

which are the countries that are actually facing the issues we are addressing in this paper.

Figure 1 (next page) proposes the map of world nations and the composition of their

economies according to the share of their activity by sector.

4 KAPUŚCIŃSKI R., Shah of Shahs, 1982.

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Figure 1 - GDP Composition by sector5

source: CIA, Wikipedia ( http://en.wikipedia.org/wiki/File:Gdp-and-labour-force-by-sector.png )

The chromatic tonality of the sates is given by three components: green (agriculture% of

GDP), blue (services) and red (industry). We can identify four groups of nations:

– Mature economies (Stage 3 and 4), such as North America, EU, Japan and Australia;

they present tonalities very close to blue: their economies in fact show an average of service

share between 70 and 90%.

– Industrializing countries (Stage 1 and 2a), such as East Europe, China, Indonesia,

Brazil and East Asia, with violet tonalities. Those are countries that present good GDP growth

rates and a consistent industrial sector (between 20 and 40% of GDP).

– Raw-material-intensive economies (Stage 2b), like the ones in Middle-East (rich of

oil), North Africa, certain other states of Africa (like Angola and Nigeria), and – for a certain

extent – South America countries. Those economies are characterized by high export rates of

raw materials and commodities, while their industrial sector is not much developed. Their

tonalities are between violet and red, similar to the previous segment, but this is due to large

employment in extraction and mining industries, characterized by low V.A.

– Agricultural-based economies (Pre-industrial), like many of the African continent,

Myanmar, and certain countries of central Asia6: this group is composed by the poorest and

most underdeveloped countries. They have tonalities close to green (over 40% of GDP share

due to agricultural sector), with basically no traces of manufacturing sector.

5 To see more detailed information country by country, see CIA database: https://www.cia.gov/library/publications/the-world-factbook/fields/2048.html?countryName=World&countryCode=xx&regionCode=oc&#xx

6 India might be included here: despite the expansion of the service and ITC industries, large part of the population is still living in a pre-industrial world, in very poor and weak conditions.

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As the scope of this paper is to focus on the dynamics that make economies jump from the

first two stages of the ladder to the upper ones, we will discuss the situation of the second and

third cluster. Before, I would like to spend just a couple of words on the excluded ones.

The first group – mature economies – represents the objective of the middle groups: having

a wealth country, rich in knowledge, employment and good living standards. Unfortunately,

just nearly one sixth of the world population actually live in those advanced economies.

The fourth cluster, represents instead the exactly contrary state: the bottom of human

being, we might state. These countries – most of which are located in the African continent -

are usually in conditions where setting up a manufacturing sector is not yet among priorities,

due to some 'traps' that keep them into extremely poor states. Terry O'Brien7 suggests that "the

bottom billion" has first to solve issues of conflict (both internal and external), mismanaged

dependency on natural resources, weak governance and "landlocked with bad neighbors".

* * *

2. The role of the State in industrializing economies

Economists from different schools have different views about what should be the role of

the State in the process of economic development. In my point of view, when a country finds

itself in the middle stages of industrialization, (competent) governments should "step up" and

set specific policies with specific objectives.

The various input for the 'industrial climb' do not appear randomly, nor they affect the

process of development by themselves: there is a need of a higher authority that helps those

factors to fit in the greater picture of the economic development. Like Shaffaedin says8, "the

opportunities should be created, they are not God-given", and most of the time the market

alone does not have the necessary tools to create them, especially at the first stages.

Consider, as an example, the role of Foreign Direct Invesments (FDIs). In many

industrializing countries, foreign investments represent the main hope of development. But

FDIs do not come to a nation with the intention to help it "climbing the ladder": these money

inflows are seeking good environment to produce efficiently and big markets to sell and make

profit. In my opinion, the challenge is to share – using a strategic and managerial behavior by

the governments – as much as possible the value brought by that certain foreign company, and

make it part of the "big picture" of economic development. With an active role of the national

7 O'BRIEN T., The Bottom Billion: Why the poorest countries are failing and what can be done about it: Some insights for the Pacific? , in Economic Roundup report of Australian Treasury, 2007, p. 106-110.

8 SHAFFAEDIN M., Is industrial policy relevant in 21st century?, MPRA Paper 6643, University Library of Munich, Germany, 2006, p.36.

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institutions, an FDI inflow will have much more chances to become a win-win event both for

the company and the country's industrial (and so, wealth's) aspirations.

In my personal view, governments of middle industrial stages, should act like managers

and entrepreneurs, setting up strategies to develop their industry while looking at the global

markets and trends. They should also understand "where the world economy is going" and

how to positionate the own country in this picture. They should communicate diligently with

other firm managers – both the domestic and the foreign ones – to understand their problems

and so find a way to help them and create positive cooperations.

Unfortunately, this condition is very difficult to achieve: un-competent government teams,

unstable consensus among populations and corrupt politicians meant for many developing

countries decades of "sitting still" in low levels of the ladder. Anyway it did not always go

like that, and the East Asia NICs represent – in my point of view - a fascinating example of

"managerial-entrepreneurial-governments".

Korea in the 50s was a poor country which most of population was composed by farmers

and basic-goods manufacturers with no presence of any oil or important good source: a stage-1-country with no big expectations. Then the geo-political enviroment, and what we might

call "the course of history" gave to this country – with an important help by Japan – the

chance to industrialize. Competent, strong, and smart governments during 70s and 80s let

Korea take advantage of these conditions, and in 30 years its economy reached the highest

stage of industrialization.

The Korean government played a crucial role in the shift of the industrial activities from import substitution toward exportables in 1964. It was done by intervening directly in the "choice" or "priority" activities which were, at that time, textiles and electronics9.

The NICs experience suggests to us what should be the features of an efficient government

that seek industrial climb.

2.1. Strong support from the peopleGovernments of the East Asian NICs were not the best example of democracy, but we can

argue that they at least had the support of the population. When a middle-stage country seeks

to be involved in higher V.A. activities, many trade-offs between short-term-benefits and

longer-term-investments result, and a government must have the support of the population to

implement such policies.

At the beginning of the 00s, Germany implemented policies for the control of wages while

9 CHANG H.J., Kicking Away the Ladder, Anthem Press London, London, 2002, p.128.

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all other European countries were increasing them. Thanks to this long-term policy, the

country's industrial sector increased its productivity and consolidated its position among

export world's leaders, with great performances in terms of competitivity and export.

2.2. Low level of corruption Governments should design the policies according to their strategy and their objectives,

not because of particular interests.

A negative example comes from Italy. Giancarlo Cimoli, for many years managed the

public railway company Trenitalia, leading it close to bankruptcy through very-inefficient

performances. Due to his political influence and networks, instead of being cut off from

public positions, government gave him the head office of another public big company –

Alitalia – which eventually ended with the same results.

2.3. High-skilled "State-managers"According to the definition given by Henry Fayol10, with the term "manager" we address a

figure with certain capabilities:

a) planning

b) organizing

c) leading

d) coordinating

e) controlling

Yes, these are all skills required to the central goverment when we look after 'climbing the

ladder'.

Planning, for example, is essential. Many of the successful industries that led the newly-

developed economies on their way to the upper stages of the ladder have been planned before.

Even if there are no universal rules, the strategies should be development-oriented, country-specific and based on the realities of the international markets and its dynamics. For example,

the Korean's steel sector was planned and further developed by its government (with the help

of Japan) during the 70s and 80s, resulting in one of the key factors of the country's amazing

development.

With the term organizing addressed to the government, I do not mean that we should look

back at communist or socialist experiences, where industry were State-owned and the private

10 FAYOL H., Administration industrielle et générale - prévoyance organisation - commandement, coordination – contrôle, Paris, Dunod, 1966.

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sector had no relevance. Instead, I think about complementarities with private sector,

entrepreneurs and foreign companies: finding physical place to set up industrial areas,

opening spaces where companies and governments can build synergies and putting incentives

in order to develop the main strategies.

Leading and co-ordinating – as well –should not be interpreted as the old collective-State paradigma, instead as an active force which "works for the improvement of the industrial

position on the ladder". These features are shared with the concept of "State-entrepreneur",

that we will discuss in a moment.

Especially at the beginning, when manufacturing is synonim of low V.A. and skills are

weak, in my point of view a long-term-view is necessary, and only strong national institutions

can give this dimension. In this context, controlling becomes a very important factor. MNEs

that come to a country to set up production facilities or extract natural resources should be

disciplined. Allowing big companies pay below-poverty-thresold wages to domestic

employees (i.e. Nike in Indonesia in early 90s) or letting them ruin the environment means

restricting the chance of industrial and economic improvement.

2.4. Smart "State-entrepreneurs"The role of the State in the industrialization process is not just to allocate resources and

coordinate them: there is a pro-activity side that should be developed. Like Chang11 says,

there must be provided a vision of the future, and the state, as a central agent, can play an important role in providing such a vision.

Then, there might be asked, why the task of exploration and exploitation of opportunities

(as in the definition of entrepreneur) should be given to the State instead of private firms? Is

the State a smarter entity?

Actually, governments resulted in many occasions less efficient than the private sector,

driving the economic system to mis-allocation and slowing the growth.. Anyway, the main

point is that the State is – by definition – the only agent which represnt the interest of the

whole society, and that is why governmental institution are the only actors that can work for

the empowerment of the country's strategic position in a systematic way. They have the power

and – most of the time – the authority to find the resources to implement effective policies

that otherwise private sector could not provide. For these reason, and for many of the

evidences that the history gave us, I believe that governments should play an important role in

the economic and industrial development process.

11 CHANG H.J., Globalization, Economic Development and the Role of the State, Zed Books, London, 2003, p.55.

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3. Growing national industries

In the second chapter we talked, in general terms, about the importance of the State in the

industrialization process and the necessity of an active role from the government. Now we

will see in concrete which policies should be taken by the institutions in order to 'grow' a local

industrial sector.

3.1. The "Infant Industry" argumentFirst theorized by Friedrich List in 1841, the theory of infant industry protection is quite

simple. It says that if a country wants to start developing an industry, government must

protect from foreign competitiveness and subsidize the "infant" business in its first phases of

expansion, until the sector reaches an economies-of-scale dimension. The idea is that while an

industry is set up, before reaching efficiency and scale-economies, there is an initial lack of

experience, skills and networks. Only within a certain time period, those crucial assets would

be built. Otherwise, by exposing the new-born industry to international competitiveness, there

would be the possibility that the import of foreign products would "kill" the infant before its

development.

After a certain period, as the firms develop their production capacity and their

competitiveness, the government should introduce or gradually increase the pressure of

competition in the market by allowing new entrants to the field. The pressure on enterprises to

perform is applied first through the introduction of domestic competition followed by gradual

import liberalization12.

The infant-industry protection is an issue that have been argued for almost two centuries,

but today we can surely state that those policies – when well implemented - actually worked.

Given this evidence, the problems to focus on is how to put this general strategy into work,

and so, reach the industrial development objective.

3.2. Evidences and lessons from successful cases

The history of industrialization of both early-industrializers and latecomers teaches us a couple of important general lessons. Firstly, with the exception pf Hong Kong (Province of China), no country has managed to industrialize without going through the infant-industry-protection phase. In all successful cases government intervention, both functional and selective, in the flow of trade and in the economy in general has played a crucual role. Secondly, across-the-board import substitution and prolonged protection have also let to inefficiency and failure. Thirdly, the experience of premature and across-the-board trade liberalization, whether during the colonial era or in more recent decades, has been disappointing13.

12 SHAFFAEDIN M., Is industrial policy relevant in 21st century?, MPRA Paper 6643, University Library of Munich, Germany, 2006, p.46-47.

13 IBID., p.32.

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A very intersting research in this field has been made by Shaffaedin14. He observed that all

the most successful stories saw the use of a strategic long-term policy that mixed government

selective intervention and gradual liberalization. Those countries (mostly East Asia NIEs)

experienced rapid expansion of export of manufactured goods, accompanied by fast

expansion of industrial supply capacity and upgrading.

The common process can be generalized as following:

A) infant protection phase, with different kind of government help, and with different

intensity (in certain case subsidization, in other tarriffs, attraction of FDIs, etc..);

B) gradual and selective economic liberalization (opening to international trade,

abolishment of tariffs, cutting off of subsidizes);

C) completely open economy (Washington Consensus rules), with a mature and highly-

competitive industry.

In this scheme it becomes crucial the way in which protected industries switch into the

free-trade scheme (step B). As pointed out by Shaffaedin (see the quote), the liberalization

process should be gradual, selective and at the same moment with the right timing. Another

issue to take care of would be also the creation of an incentive-system by the government.

3.3. TimingAs regarding time, Brazil has been for many years the paradigma of inefficient "eternal"

infant-protecting policies. By prolonging too much the time of protection, many of its

industries did not have the right market-incentives to improve their technologies, and so the

country's industrial sector could never really 'take-off' as other NICs, which could compete in

a global dimension in few decades.

It is not easy for a government to understand when is the right time to put pressure and

expose the infant industries to international competition. Singapore, for example, decided in

the 1972 to raise its wage level in order to give an input to the switch to higher VA activities.

The policy failed, mainly thanks to macro-economic turmoil (oil crisis). The industrial

restructure program was eventually re-tried in 1979 and this time it worked well.

Regarding the "timing" of the "switch", two main evidences came out:

1) It is not easy to find the right time! While it is not easy to understand if a subsidized

product could compete in the international markets, institutions must take into account also

14 SHAFFAEDIN M., Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?, UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development, 2005.

14

macro-economic volatility (see Singapore).

2) When an industry is selected to be a candidate for the switch from import-substitution

to export-orientation (which is not always obvious, not all the industries must necessarily

follow this way), competitiveness should be increased when the industry is close to the

maturity. In that way, state incentives would be replaced by market incentives.

3.4. Incentives The provision of protection to a selected industry should not be without conditions and

limit. Like Korea's successful story teaches us, national istitutions should fuel the industrial

sector with incentives and sanctions according to the performances of the industry. Those

performances can vary according to the scope of the specific sector/company, but usually they

take the form of exported goods, acquisition of knowledge, efficiency, product quality,

production cost and competitiveness. These indicators – although they all play important roles

in our scheme – should be differently weighted during the different phases of the industrial

development of a sector/company.

For example, in the very first phase, when an industry is just facing the domestic market,

both skill- and knowledge-acquirement aspects result more important. In a second phase,

instead, export indicators and production performances would gain more relevance15.

After having put their industries into work, a large part of East Asia NICs adopted policies

of financial subsides in exchange of export-performances. Those strategies fueled the

competitiveness, and so the export rates of those countries, providing new resources that

eventually have been re-invested for the support of the industrial up-grade.

I would give an example of a concrete incentive policy. Let's assume that a government

observes that manufacturers of a certain focal industry are producing goods lower in quality

and with a higher price than those made abroad. A useful action could be to give substantial

prizes and assure future investments to the company that will be able to make the same goods

in a way to make them competitive in the international markets.

15 In this sense, it becomes intersting the parallelism with a managerial control practice called "Balance Score-Card". In this practice, used by MNEs, the core-managers utilizes a scheme for the evaluation of their subsidiaries that adopt a set of performance indicators which provides a comprehensive framework that translate company's vision and strategy into a coherent set of performance measures. A similar (and of course, adapted) approach might be used by governments in the implementation of their industrial policies, with goverment's institutions in place of CEO, and industrial sectors in place of subsidiaries.For a clear explanation of the BSC strategies, see "The Balance Scorecard. Measures that drive Performance" of Kaplan R.S. & Norton D.P. In Harvard Business review, Jan/Feb 1992, p.71-79.

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3.5. Failures of infant-protection policiesNot all the countries that adopted infant-protection policies obtained the success. Since

80s, many Latin America and African countries failed in the "industrial climb" process, facing

instead a process of de-industrialization.

As observed by Shaffaedin16, these countries embarked a process of structural reform

including uniform and across-the board and often premature liberalization. Results were, in

the best cases (Mexico and Brazil) an acceleration of manufactured exports, but weak

improvements in the technological ladder, and so poor increase of MVA.

These experiences tell us that premature and non-selective switch to out-ward orientation

(from import substitution) reduced the incentives for investment in the manifacturing sector

due to reduction in its profit margin resulting from import liberalization. At the same time, it

increased the risks of investment due to increased competition in the domestic market and the

lack of sufficient market information and marketing channels for exports. Thanks to this,

while resource-based and labour-intensive industries could be installed, very little upgrading

took place.

* * *

4. The role of TechnologySo far, we have talked about the role of governement in the process of industrial

development and the infant industry protection measures. In this chapter, the focus will be

shifted on a more intrinsic aspect, which is the technological development process and its

dynamics.

When we talk about "climb the industrial ladder", we are also talking about a parallel

process that we might call "climb the technological ladder". In fact, as a general rule, we can

argue that to jump into higher industrial stages, we need to upgrade the technology used.

There is no way by which a country will develop its industrial sector without having access to

more sophisticated and innovative technologies.

The diffusion of new technologies is not only important to improve the industrial sector

and – more generally – the economic conditions of a country. Data clearly shows us that who

owns high-tech industries will have much better performance in terms of export.

16 SHAFFAEDIN M., Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?, UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development, 2005.

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Table 2 – World export and Technology, 1985-2000

As can be seen in the Table 2, in the period 1985-2000 high-tech registered the highest

growth rates in term of export, and is still achieving higher total export shares. In the other

hand, economies based on resource and primary products have seen an increase in the gap

with high-tech economies.

4.1. The "tech – ladder" and the learning processAccording to the level of knowledge, capabilities and technology, we can purpose another

stages scheme complementary to the one we presented in the first chapter.

Figure 2 – Stages of Economic development and capabilities

We can identify three main stages: factor-driven (corresponding to pre-industrial and stage-

1 and 2 clusters), efficiency-driven (stage 2 and 3) and innovation-driven (stages 3 and 4).

In the factor-driven phase, the level of manufacturing knowledge and technology is

relatively low, and mainly linked to the exploitation of resources - both natural and in terms of

labour capital - or basic productions;

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Annual Distribution DistributionProducts growth rate 1985 2000

Primary products 3,75 23,1 12,4Manufactures 9,09 73,5 83,5of which

Resource-based 6,60 19,4 15,6Low Tech 8,85 14,2 15,6Medium Tech 8,45 28,5 29,6High Tech 13,19 11,6 22,9(of which, ICT) 15,40 5,3 14,0

source: Chang (2006)

In the efficiency-driven phase, technology is mainly linked to scale-economies

productions, usually consumer-goods designated to the domestic use and export; here

industries do not exactly 'innovate', but they tend to focus on seeking the most efficient way

of production, which takes place mainly with imitation or FDIs.

Innovation-driven phase, is the moment in which new processes and products are being

created, where the borders of the "technological frontiers" become widened.

In jumping from one stage to the next, it becomes crucial what we might define the

"learning capabilities" of a country. This term indicates the mere capacity of assimilation of

knowledge and skills by an economic system (and so, its industry, enterprises, students,

people). While a country is climbing the ladder and higher-technology productions are

introduced, also those capabilities should improve to assist and fuel the process.

The process of capability-building involves so many variables that can not be easily

schematized, also due to country specificities. It takes form in many ways: from the

investments on the education system to the skills developed abroad by the emigrants, from the

abilities learned by the domestic workers on the foreign-owned facilities based in the country

to the diffusion of higher technological goods within the country. Learning calls for

conscious, purpositive efforts – to collect new information, 'try things out', create new skills

and operational routines and strike new external relationships17.

One of the main features of the learning process is that it is gradual and dynamic. We often

hear about third-world countries asking for high-technological transfer. Sometimes these

arguments are senseless: if a country does not have any receptivity and assimilating assets (for

example, lack of skilled/graduated human capital), technological transfer is not going to

happen, even if the MNEs gives to the local actors all the detailed documents of their new

technologies. Examples like this show us that – generally speaking - the process of the

improvement/learning capabilities and the effective development of the industrial

technologies go 'hand-in-hand'. Thirty years ago Philippines invested a lot in high education,

achieving a relatively high rate of high-level graduated people, compared to the state of its

economy. The move did not resulted in a big impact on the development process: Philippines'

neighbors that choose more gradual policies are showing much better performances.

The process of learning and the nature of the capabilities involved are much different when

an economy is switching from resource-based to efficiency-based and when is passing to

innovation-driven.

17 LALL S., "Technology and industrial development in an era of globalization", n Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006, p.284

18

4.2. The first technological jump: from resource-based to efficiency-drivenIn the first jump, learning capabilities are much more linked to technical skills than

advanced or more sophisticated knowledge. The focus here should be on the formation of

technical and particular manual skills, which are the features requested to the human capital

for the typical second-stage activities.

Italy here gives us a clear example of such a policy. In the second post-war, the intense

process of industrialization was assisted by the creation of public technical schools called

ITIS and IPSIA. These institutes formed millions of technicians, mainly in the fields of

mechanics, chemical and electronics. These young experts called "periti" eventually migrated

to the big industrial poles such as Turin (automobile sector), Mestre (chemical sector) and

Milan, resulting one of the crucial input of the post-war industrialization process in Italy.

But the skill-forming process takes many forms: vocational training, in-firm training,

specialized training outside the firm and informal trainings are only few examples. Basic

schooling and literacy may be sufficient to absorb simple industrial technologies, while

advanced schooling and tertiary education become important as more complex knowledge is

tackled.

4.3. The second jump: from efficiency-driven to innovation-drivenWhen an economy has reached the second stage, the 'tech-climb' process becomes more

complicated, for two reasons:

– the nature of the knowledge is much more sophisticated, and requires higher

capabilities by the receptors;

– foreign MNEs would hardly de-locate their R&D or advanced technology to an

emerging country, threatened by the possible leakage of know-how and the most-of-the-times

uncertain framework of IP protection. Furthermore, emerging countries not always present a

sufficient mass of human capital with high skills.

Regarding this last point, one particular data tells us the main story: 90% of the world

R&D-FDIs are located to OECD countries. The remaining 10% is concentrated in few areas:

97% of this is in South East Asia and and certain countries of Latin America. This fact tells us

about how hard is, for emerging countries, to attract high-knowledge FDIs, especially for

those countries which are located outside of these concentrated areas18.

18 LALL S., "Technology and industrial development in an era of globalization", in Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006, p.282

19

As we said, the process of the climb of the 'tech-ladder' is dynamic: the outputs of the

second stage becomes the inputs of the higher stages. In the second phase, when an industry is

working in order to improve and make its processes more efficient, it is – in a certain way –

making research and so improving its skills and capabilities. In a word, it is increasing its

"experiential knowledge", which will be one of the main inputs of the innovation stage.

4.4. The internal and external sources of tech-upgradeThe process of the tech-development has two dimension:

– an internal-one, that deals with internal-generated knowledge;

– an imported-one, that has to do with various actors coming from outside.

Said this, the two processes should not be considered indipendent: instead, they are highly

inter-connected, and each one feeds the other. For this reason, a country that is seeking the

industrial development should not consider just one of the two sides. Finding a 'balance'

between the external factors and the internal capabilities should be "the way". In one case,

there would be the risk that FDIs come to a country just to exploit its resources and its cheap

labour without relevant improvement; in the other, too much emphasis on the internal

resources can prevent the state from important knowledge and investment inflow

opportunities.

The process in fact takes two different forms according to the state of an economic system:

for advanced areas it will depend more on endogenous resources, while fundamental channels

for developing areas has to do with international transfer of technology and imitation19.

In this sense, Korea is a shining example. At the beginning of its industrialization process,

in the 60s, the government relied a lot on the Japanese investments as a way to improve the

technology: the neighbor brought the many basic skills that at the time were not present in the

country. But the government did not sit on laurels: they instead created institutions for the

provision of technical teachings, started big public enterprises in order to create

conglomerates (cheabols), and – most important - setting up active industrial policies in order

to absorb the knowledge and 'know-how' brought by the Japanese

At the end, the balance between internal-generated and external-imported dynamics can

result more tendent on one of the two sides. According to this evidence, Lall20 recognizes two

broad successful strategies for the developing world to promote skills and learning for

19 TAMBERI M., Specialization and Growth Perspectives in the South Mediterranean Area, The European Journal of Comparative Economics, Vol.3, n.2, p.290, 2006.

20 LALL S., Competing with Labour: Skills and Competitiveness in Developing Countries, Geneva, International Labour Office, Issues in Development Discussion Paper 31, 1999.

20

competitiveness: to rely mainly on internal-created actors – the so called "autonomous" – or

the FDI-dependent.

4.5. Strategies for the Tech-ladder climbAccording to the argument just reported, it can be made a classification of the technology-

development policies in relation to their tendence to one of the other approach: on one pole

the strategies that rely completely on foreign injections of technology and knowledge (usually

in the form of FDIs or cooperations with foreign entities) without the creation of domestic

complementary entities, on the other policies that focus on the internal resources and a way to

maximize their learning capabilities.

Figure 3 – Tech-Development Policies in relation to their dependence on external-imported technology/knowledge21

At on extremity we find the very autonomous strategies: Iran and North Korea heavily

relies on internal resources, both because they face great restrictions in international trade/

investments and for political reasons. This situation force them to rely heavily on their own

resources. This strategy, that reminds me the principles of autarchy, is very little effective

compared to the other strategies: very closed systems resulted – in the medium and long-run -

much slower learning speed than open ones.

Moving right, we find more balanced autonomous strategies. They are focused on the

acceleration of the learning capacities of the domestic firms instead of building around FDIs.

Here, government deeply intervene with industrial policies such as infant-industry protection,

21 This scheme has been inspired by the Paper of Sanjala Lall, Competing with Labour: Skills and Competitiveness in Developing Countries, (1999) and the book by H.J. Chang, Rethinking the Economic Development, (2006).

21

by providing direct credit and with the creation of centralized and coordinating institutions.

Korea and Taiwan adopted this way on their tech development: at the beginning they were

more dependent on FDIs, but then, when in the 70s and 80s they made the last step they

switched to a very independent approach. Once they reached the last stage, with many global-

competing and innovation-creating firms, they decided for the ban of FDIs inflows. The

policies we discussed in the third chapter can be considered part of this group.

In the middle we find the mixed strategies: they present autonomous policies combined

with a relevant interaction of external actors in the learning-process. A classical example is

China and its current approach: strong FDIs' opennes combined with strict constraints that

brings foreign MNEs to collaborate with indigenous actors. The arrow reminds the switch of

the Chinese strategy from a more autonomous' one – with the highly emphasis on the

massively-subsidized SOEs22 - to a higher degree of FDI-dependence. A relevant part of

nowadays' emerging countries – especially the big ones – can be insered in this group.

Going further, we can identify the active FDI-dependent strategies, which is one of the two

sub-group of the greater category of the FDI-dependent. While the country is heavily

dependent on FDIs, there is still room for industrial policies, but with a lower intensity. The

source of technical change remain largely outside, in the hands of trasnational corporations

(TNCs); for this rason there is less need to intervene to promote infant industries. Industrial

policies here are needed to ensure the development of relevant skills, capabilities and

institutions required to ensure that TNCs keep transferring new technologies and functions23.

Singapore is a typical example of active-FDI-dependent strategy: its (winning) strategy saw

the creation of an Economic Developmnet Board (EDB), that guided its industrial

development process, with active policies in the fields of incentives, industry selection and

skill-trainings.

The category located at the most right position is occupied by the passive FDI-dependent strategies. In this case, countries focus on attract TNCs in order to aupgrade its tech-ladder

without relevant domestic policies. This is the case of Malasya, Thailand and Mexico, where

foreign big companies are attracted mainly by the low wages for unskilled or semi-skilled

22 China during the 80s and until the middle of 90s created and subsidized big public enterprises called State-Owned Enterprises (SOEs). After inefficient results and important loss registered by those colossuses, the Chinese president annouced, during the 1997's 15th National Communist Party Congress, the privatization of SOEs. After this important reform, regional conglomerates and FDIs saw relevant increases, and so the Chinese economy performances.

23 LALL S., "Technology and industrial development in an era of globalization", in Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006, p.295.

22

labour, good infrastructure and FDI-friendly policies. In this scenario, it becomes crucial – for

the countries – to figure out how to induce TNCs upgrade their activities from simple

assembling into more advanced activities with greater local content. While Malasya could

successfully make this step, many other – such as Bangladesh, Mauritius, Sri Lanka – showed

very little improvements.

Successful industrialization depends on the ability of each country to cope effectively with

technical change. Internal and external factors must find a balance and reinforce each other:

as we have just seen sometimes it works with a greater focus on the domestic resources and

with a direct investment on them, some others TNCs can be a crucial instrument for the

technology improvement.

* * *

5. A regional perspective: the industrial clusters

Until here, we have talked about many aspect of the industrial development: the role of the

state, how to grow domestic firms and the strategies for improve the technology. But a

question has not been made yet: where does the process of industrialization happen?It might seem a banal question, but actually it is not. While the wider process of economic

development is vast and spreads within a country or region, the industrial development takes

place mainly in areas called "conglomerates" or "industrial clusters", where firms – especially

manufacturers – concentrate their activities. For example, we often hear about the dynamism

of the ICT sector in India, but actually we do not take into consideration that this process

takes place in very limited areas of the country.

Having said this, then I think that it becomes essential – for the context of the industrial

ladder's climb – to think about specific policies that focus on the process of industrial-cluster-

building. According to Kuchiki and Tsuji24,

Industrial cluster policy is subtle and complex, requiring not only a traditional combination of targets and policy measures but also related arrangements such as economic refors, deregulation, construction of infrastructure, establishment of legal system, and so on. In addition, any successful economy must now meet global standards; without carrying out the reforms necessary for meeting these standards, no region can attract global resources.

An interesting attempt has been made by the two authors in the explanation and

generalization of the "industrial clustering process".

24 KUCHIKI A. & TSUJI M., The flowchart approach to industrial cluster policy, IDE-Jetro Paper, Palgrave McMillian, New York, 2008, p.4.

23

The result was a scheme called "The flowchart approach".

Figure 4 – Flowchart Approach to Industrial Cluster Policy

The scheme provides that industrial policy can be effective in forming industrial clusters

by working in three complementary and interlinked platforms:

A) Establishment of industrial zones or export-processing zones

B) Building capacity

C) inviting "Anchor Firms"

D) Complementary firms

The flowchart approach – which is better located in a regional-dimension more than

national - offers two basic guidelines for the implementation of the policy. First - like in the

infant-industry argument - the timing and order of the policies is crucial. Second, there must

be clear the economic agents responsible for building the various type of capacity necessary

for the industrial policy, choosing among government, local institutions, semi-public actors

and private firms.

In this scheme, a central role is played by the "anchor firm", which attract and gives work

to the related firms, without taking into account the positive inter-firms spill-overs. Many

examples of the relevance of this model can be given: Canon in Hanoi (Vietnam), Toyota in

Tianjin (China), Technopolis in Austin and Silicon Valley in California (USA).

24

Those experiences suggest us a pair of intersting insights:

1) when we talk about the industrialization process, national perspectives are not enough

and a regional view should also be taken in great consideration;

2) local and regional institutions have an important task in this sense: by being more

close to the local issues, they can provide more specific and adapted policies for the process

itself

* * *

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26

Conclusions

In this paper we discussed four important aspects of the industrial development of

emerging economies: the importance of the state, the infant-industry policies, the technology

development and learning processes and, the role of the industrial clusters.

Regarding the first issue, we presented many arguments prooving the importance of the State in the process, wether the policies adopted are based on its involvement or not. The

great complexity of the industrialization process, with its infinite and interlinked variables,

would very hardly turn into an economic development for the country by itself. For this

reason, it emeges the need of an important leader-figure, with the task of providing the proper

inputs, using managerial and entrepreneurial behaviours. The specific features required to the

governments have been indentifies as: (1) strong support from the society, (2) low level of

corruption, (3) proper skills, (4) managerial and entrepreneurial approach.

In the second issue, we understanded why it is important for emerging economies to

develop an own industry, and how this process can take place. As the many examples exposed

in the chapter, almost every industrialized country used a certain form of infant industry

protection, with very good performances when combined with the right timing and the proper

incentives.

The third topic treated was the role of the technology. After having illustrated the relevant

correlation between the two processes of industrial and technological development, we tried

to set up a general stages scheme according to the capabilities reqired to the relative industry.

In this way we identified three stages: (1) the factor driven, (2) the efficiency-driven and the

(3) innovation-driven. The process of switch 1→2 and 2→3 have dimonstrated, though, to be

much different one to the other, with the involvement of different policies, actors and

constraints: in this sense, reaching the last and higher step of industrialization seems to be a

very hard task for certain emerging countries. Anyway, different strategies can be adopted by

them, choosing among high or low degrees of autonomy (respectively, "autonomous" and

"FDI-dependent" policies).

The last issue that we discussed was at a more regional perspective: the industrial clusters.

We saw that, while the discussions of industrialization usually take countries as subjects of

analysis, the core of the process actually takes place in limited areas called "conglomerates"

or "clusters". Because of that, specific regional and cluster policies should be considered by

27

the emerging countries, taking into account the complexity of the inter-firms interactions and

spill-overs.

The picture emerged from the topics we discussed is that the process of industrial

development is very complex, and it involves many different factors. Simply because of this, a

single successful strategy by which one economy can develop its manifacturing system, does

not exist.

Given this consideration, we observed that successful industrializations took place when

the economic system could cope effectively with the state of the technologies, assimiling and

improving them within the society. In this sense, various measure can, and must, be

undertaken by the national actors: people, entrepreneurs, enterprises, regional institutions and

- with a particular relevance – govenments. The role the latter is determinant, given their

nature of public-interest guarantor and national sovereignity institution. As we have observed

in the paper, in the recent economic history many successful stories saw intensive government

interventions, with great results in terms of knowledge- and technology-improvement. These

experience suggest us that there is a significant role for the national institutions in providing

the proper inputs needed for sustain the process of development.

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