Varieties and alternatives of catching up asian development in the context of the 21st century

Th ese questions suggested that we needed to recon-sider and refi ne not only our understanding of Asian development based on the conventional catch-up industrialization theory but also

Varieties and Alternatives of

Catching-up

Edited by Yukihito Sato and Hajime Sato

Asian Development in the Context of the 21st Century

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Editors Varieties and Alternatives of Catching-up Asian Development in the Context

of the 21st Century

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Interdisciplinary Studies Center,

IDE-JETRO

Chiba , Japan

Area Studies Center, IDE-JETRO Chiba , Japan

Our project began with a question that was raised by Shingo Ito, who is also a contributor to this volume: ‘Has Taiwan completed catching-up yet?’ Th is question sounded quite simple at fi rst, but after brief consid-eration proved to be broad and deep, and some fundamental questions struck us Taiwan seems to have already graduated from catching-up

If so, when did it graduate? And what indicators show that Taiwan has already graduated? Th ese questions suggested that we needed to recon-sider and refi ne not only our understanding of Asian development based

on the conventional catch-up industrialization theory but also the theory itself

We asked researchers who had studied industrialization in Asian tries to join the project Th e countries that they researched included South Korea, China, Malaysia, Indonesia, and India Th eir broader pic-ture of Asian development contributed to expanding the scope of our study Th e early latecomers Taiwan and South Korea attained high-speed growth through catch-up industrialization and then started to gradu-ate from catching-up However, late latecomers such as Southeast Asian countries, China, and India have not simply followed the early latecom-ers but have begun to seek development paths diff erent from catch-up industrialization, considering changing conditions under globalization

coun-Th eir deviation from catch-up industrialization was integrated into our study

Starting the project, we immediately found that our questions were much more complicated than we had initially thought and that our approach to the questions varied widely Accordingly, we spent a long time discussing the problems in building and consolidating a common ana-lytical foundation Should we argue on the level of the macro- economy, industries, and sectors, or fi rms? Should we focus on the reductions that have occurred in disparities between Asian latecomers and advanced countries in income, technology level, or some other factors or should

we focus on the mechanisms that brought about the reductions? How should we address the relationship between catch-up industrialization and other development mechanisms, which are intimately connected?

As the Introduction shows, we agreed that we should examine try/sector-level catching-up, focus on the mechanisms, and distinguish catch-up industrialization from other mechanisms and investigate their interactions as a central research topic A more detailed explanation is provided in the Introduction

Of course, we have not solved all the problems, and in fact, there are many more unsolved problems than solved ones Furthermore, solv-ing one problem often creates new problems For instance, our study includes contrasting cases—one chapter shows an industry that success-fully graduated from catching-up and another shows an industry that failed to graduate Although the respective chapters demonstrated the process and mechanism in each case, we were still unable to integrate the case studies and clarify all the factors that caused the diff erences between them

Th e many remaining questions signify that the catch-up tion theory, which was presented by Gerschenkron more than half a cen-tury ago, is not yet exhausted and we can derive new research questions from the theory if we extend and modify it Th e discovery of the theory’s potential may be the most signifi cant contribution of our study, and we wish to realize this potential in future work We also hope that our work will encourage other researchers to study Asian economic development

Th is work is the result of our two-year project ‘Catch-Up Industrialization

in the 21st Century’ from 2013 to 2015, sponsored by the Institute of Developing Economies (IDE-JETRO) We completed our research proj-ect thanks to the support, advice, and encouragement of many people

We would like to express our deep gratitude to all of them Many people

in Asian countries gave interviews and off ered valuable information and insightful views based on their plentiful experience Our study was also refi ned by suggestions from many scholars in this research fi eld In par-ticular, Dr Akira Suehiro, Dr Hitoshi Hirakawa, Dr Ryoshin Minami, and Dr John Humphrey shared their profound thoughts on catch-

up industrialization and provided useful comments Our colleagues,

Ms Taeko Hoshino, Dr Momoko Kawakami, Mr Yasushi Ninomiya, and

Dr Byeongwoo Kang, attended many meetings and discussed our work, which contributed greatly to deepening it Th e support of IDE’s editorial and administrative staff helped us to conduct our projects We also highly appreciate the assistance provided by our editors at Palgrave Macmillan

1 Introduction: Varieties and Alternatives of Catching Up:

Asian Development in the Context of the Twenty-First

2 Innovations Derived from Backwardness: Th e Case of

Yukihito Sato

2.2 Research Questions and Analytical Approach 28 2.3 Pure-Play Foundry Model in the Fabrication Sector:

2.4 MediaTek’s Success in the Design Sector: Innovation

2.5 Conclusion 48

3 Th e Narrow ‘Breadth of R&D’ and the Bottleneck

of Technological Catch-Up: A Case Study of Taiwan’s Flat Panel Display Industry from the Perspective of the R&D

Shingo Ito

3.2 Th e ‘Ultra-Compressed Catch-Up’ of Taiwan’s

FPD Industry and Its Subsequent Diffi culties 57 3.3 Th e Characteristics of R&D Management of

3.4 Th e Contraction of the ‘Breadth of R&D’:

Th e Suspension and Stagnation of AMOLED

4 Industrial Development and Linkage Formation in Korea:

5.2 Framework 127 5.3 Th e First Wave of Innovation 130 5.4 Th e Second Wave of Innovation 137 5.5 A Th ird Wave of Innovation? 144

6 Advantages of Backwardness and Linkage Eff ects:

8.3 Back-and-Forth Industrial Development:

Empirical Evidence from Indonesia 222

9.4 Conclusion: Lessons from the Development of

Makoto   Abe Director, East Asian Studies Group, Area Studies Center, Institute

of Developing Economies, IDE-JETRO, Japan He has researched and written widely on issues relating to South Korea’s economic development, especially focusing on chaebols

Shingo   Ito Senior Economist, China unit, Research Department-Asia, Mizuho

Research Institute, Japan His research interests include the development of Taiwan’s industries and cross-Taiwan Strait economic relations

Tomoo   Marukawa Professor, Institute of Social Science, University of Tokyo,

Japan He has published extensively on the Chinese economy, the labor market, industrial development, and industrial agglomerations

Hiroshi   Oikawa Professor, Faculty of Commerce, Kansai University, Japan

His current interest is in Malaysia’s industrial development and he has published

on various aspects of foreign direct investment, entrepreneurship, and the global value chain

Jyoti   Saraswati Professor of International Economics, Stern Business School,

New York University, London Campus He has published widely on the tion of high-tech industries in the developing world, including a recent book on the Indian software industry

Hajime   Sato Deputy Director, South Asian Studies Group, Area Studies Center, Institute of Developing Economies, IDE-JETRO, Japan His research

interests include the political economy of development in Asian countries and institutional change in late industrialization

Yukihito   Sato Director-General, Inter-disciplinary Studies Center, Institute of

Developing Economies, IDE-JETRO, Japan He has published widely on the political economy of Taiwan’s industrial development, especially focusing on the formation and development of its high-tech industry

Yuri   Sato Executive Vice President, IDE-JETRO, Japan She has worked and

published extensively on the Indonesian political economy, industry, and ness, especially on conglomerates as well as small and medium fi rms with a long- term perspective

Hidemi   Yoshioka Professor, Faculty of Law, Kumamoto University, Japan Her

research interests include South Korea’s economic development and her recent book is on the development and transformation of the South Korean semicon- ductor industry

Fig 2.1 Technology level of Taiwan’s fabrication sector (line width

Fig 3.2 Number of OLED-related patent acquisitions in the USA

Fig 4.3 Capital spending by major LCD panel fi rms 113 Fig 5.1 Crude steel production of the leading Japanese and

Fig 7.1 Catch-down innovation and other related concepts 196 Fig 8.1 Catch-up industrialization: the model of

Fig 8.2 A model of industrial development for natural

Fig 8.3 Estimated manufacturing value added in Indonesia,

Fig 8.4 Manufacturing value added in Indonesia, 1960–2014 224 Fig 8.5 Rise and fall of Indonesia’s manufactured exports,

1975–2010 232 Fig 8.6 Changes in the composition of resource-based,

labor-intensive, and capital-intensive goods in Indonesia’s

Fig 8.7 Index of terms of trade in Indonesia, 1968–2013

Fig 8.8 Rise and fall of Indonesia’s manufacturing shares of GDP,

1970–2014 238 Fig 9.1 World market share of major palm oil producers

(1960–2013) 251 Fig 9.2 World market share of major palm oil exporters

Fig 9.3 Exports of Malaysian crude and processed palm oil

(1960–2013) 253 Fig 9.4 Land area of palm oil plantation by ownership 256

Fig 10.2 Firm types and contributions to industry revenues 283

Table 2.1 Composition of the world’s 20 largest semiconductor

Table 3.3 Number of LCD panel-related patent acquisitions in

the USA (by company and manufacturing processes) 68 Table 3.4 Number of LCD panel-related patent acquisitions in Taiwan

(cumulated data up to 2010, by nationality and company) 69 Table 4.1 LCD component, material, and equipment suppliers

Table 4.2 OLED component and material suppliers located in Korea 97 Table 4.3 Local subsidiaries of Japanese LCD components, materials,

Table 6.1 Steel consumption and introduction of integrated

steelworks 166 Table 6.2 Linkage eff ects of the steel industries in Asian countries 172 Table 8.1 Th e historical transition of Indonesia’s leading export items 226 Table 8.2 Th e top 10 export items of Indonesia, 1993 233 Table 8.3 Th e top 10 export items of Indonesia, 2011 237 Table 9.1 World major production of 17 edible oils (1990–2013) 270 Table 9.2 Annual average prices of world vegetable oils (1990–2013) 271 Table 9.3 World major production of 17 edible oils (1990–2013) 272

Table 10.1 Technical and commercial capabilities of software service

Table 10.2 Leading software service fi rms from major software service

Introduction: Varieties and Alternatives

of Catching Up: Asian Development

a faster pace and to radically transform themselves from low-income cultural economies to middle-income industrialized economies As Rodrik ( 2014 ) points out, ‘[w]ith the exception of natural-resource bonanzas, extraordinary high growth rates are almost always the result of rapid struc-tural transformation, industrialization in particular’ (Rodrik 2014 , p. 8)

In the 1990s, however, the development of latecomer countries has increasingly deviated from the single and rigid path of catch-up industri-alization Early developing countries such as South Korea and Taiwan have

Y Sato ( ) • H Sato

Institute of Developing Economies (IDE-JETRO) , Japan

started seeking other paths beyond the end point of catch-up tion Other countries have attempted paths other than catch-up industri-alization based on their individual advantages, and some of these countries have discovered unique paths to success It seems that these changes have become more apparent in the new century In this context, this volume reconsiders our understanding of the development of latecomers in Asia based on the catch-up industrialization theory by taking these changes into consideration and, in so doing, aims to reassess and elaborate on the theory

Th is introductory chapter consists of the following four sections

Th e next section examines the changes in the development of Asian comers as the background of our research Th e third section describes our goals, tasks, and approach Th e fourth section reviews theoretical and empirical studies on catch-up industrialization Lastly, the fi fth section summarizes the nine chapters of the volume and draws some implications,

late-if not conclusions, from them

of per capita GDP in the USA in 1963 to more than 40 % in 2013 Southeast Asian countries such as Malaysia and Indonesia grew moder-ately in the 25 years from 1964 to 1988 and the gap between them and the USA hardly changed However, in the next 25 years from 1989 to

2013, their speed of growth exceeded that of the USA and they succeeded

in considerably closing the income gap India’s economy was stagnant compared to the other prospering countries during the fi rst 25 years, and the gap between it and the USA widened In the second 25 years, India began to grow at a faster pace than the USA and the gap had shrunk to its original level by 2013 China is estimated to have performed similarly

to India during the early years, but then achieved unprecedented growth after introducing reforms in the late 1970s Although its per capita GDP

was only slightly more than 1 % of that of the USA in 1988, the fi gure had risen to as high as 12.8 % in 2013.

In most cases, a substantial portion of economic growth in Asian countries can be attributed to industrialization Indeed, these successful cases of industrialization generally correspond to the theory of catch-up industrialization that has been forged gradually over the years, primarily based on the idea of the ‘advantages of backwardness’ put forward by Gerschenkron ( 1962 ) However, the growth mechanisms of Asian coun-tries began changing around 1990

Some of these changes were caused internally by the progress of

up industrialization itself South Korea and Taiwan reached the tion stages of catch-up industrialization in the 2000s Th e per capita GDP of these two countries now exceeds 20,000 USD and some sectors

comple-of their high-tech industries can be considered state comple-of the art, confi ing that they have almost fi nished the process of catch-up industrializa-tion Accordingly, some questions specifi c to this stage have emerged First, although a latecomer has the possibility of closing the gap with advanced countries by exploiting the advantage of backwardness, it can-not complete the catching-up process by depending solely on this catch-

up mechanism because the advantage of backwardness disappears before completion Th erefore, other mechanisms were necessary for South Korea and Taiwan to fi nish the catch-up process and to compete head-to- head with advanced countries Second, a closer inspection of the situ-ation reveals that in South Korea and Taiwan, some industries have still struggled to fi nish the last stage and reach the level of advanced countries,

Table 1.1 Income growth of Asian countries

USA Japan Korea Taiwan China Malaysia Indonesia India Per capita

GDP (USD)

1963 3,151 704 138 189 – 288 73 89

1988 21,483 24,593 4,813 6,369 281 2,050 515 362

2013 53,042 38,634 25,977 21,902 6,807 10,538 3,475 1,499 Comparison

Source: Authors’ elaboration based on data from UN, Statistical Yearbook for

1963, World Development Indicator Data Query ( http://data.worldbank.org/ indicator/ ) for 1988 and 2003, and National Statistics, R. O C.( http://www.stat gov.tw/ ) for Taiwan

whereas other sectors have already succeeded in completing the catching- up process Th ese diff erences across industries indicate that the mechanisms for completing catch-up industrialization are, to some degree, industry-specifi c Th ird, at the advanced stage of catch-up industrialization for countries such as South Korea and Taiwan after the 1990s, their econo-mies have become highly complex because of the development of diverse industries, which may be a result of catching up Consequently, the industries have begun to dynamically interact with each other, generating another development mechanism As a result, catch-up industrialization has become merely one mechanism of development, yet nevertheless a very important one

Other changes are external, and have aff ected both advanced latecomers and late latecomers Important changes since the 1990s include the progress

of communication and transportation technologies, the shift of technology

in the manufacturing sector from integral to modular type, the tion of transnational fragmented value chains, the end of the Cold War, the progress of economic liberalization—particularly in China and India, which have the world’s two largest populations—and the rapid growth of interna-tional capital fl ows both in volume and speed, among others Most of these changes can be summarized in one word: globalization

It is important to understand that globalization and other changes have nullifi ed some of the main premises for catch-up industrialization For instance, the conventional catch-up industrialization strategy, which often explicitly or implicitly depended on the domestic market, is far less eff ective for many countries Th is shift has occurred mainly because radical changes in technology and institutions have substantially reduced the barriers between domestic and overseas markets Meanwhile, changes relating to globalization have produced opportunities for creating diff er-ent mechanisms from those of conventional catch-up industrialization

As discussed below, new mechanisms include modifi ed versions of

up industrialization as well as entirely new types

To sum up, the development of latecomer countries since the 1990s cannot be understood solely according to the conventional view of catch-

up industrialization Th e internal and external changes in development mechanisms in latecomer countries require us to reconsider and recon-struct the framework of our study

1.3 Goals, Tasks, and Approach

Th e theory of catch-up industrialization has been the standard view of the development of latecomer countries It has two core propositions:

fi rst, economic growth depends on technological progress; and second,

a latecomer may achieve technological progress faster than advanced countries by exploiting advantages of backwardness Th e theory com-bines these two propositions and maintains that a latecomer country

is equipped to take advantage of the opportunity to attain compressed economic growth As discussed in Section I, however, the theory is now being challenged by various changes in the Asian countries, especially since the 1990s Th ere is an urgent need to reexamine our view of the development of latecomers and refi ne the theory of catch-up industrial-ization to acquire a more accurate and comprehensive understanding of the development of latecomer countries and address current trends Toward this goal, our study takes on three tasks

Th e fi rst task is to closely examine the processes of catch-up ization taking into consideration the aspects that have not been included properly in the conventional theory of catch-up industrialization More specifi cally, we look at factors other than just technological ones, such as demand for the manufacturing goods produced by latecomer countries,

industrial-in contrast to the conventional theory, which generally tends to focus

on technologies and the supply-side factors Nontechnological factors may generate opportunities for latecomer countries to build up more diversifi ed development paths, although they may also present obstacles that hinder their development In addition, we examine the interactions between technological and nontechnological factors

Th e second task is to analyze the relationship between catch-up trialization and other development mechanisms, particularly forward and backward linkage eff ects It is highly likely that catch-up industrialization and linkage eff ects and other mechanisms might complement or substi-tute each other Th e interaction between development mechanisms have not been fully addressed by the conventional theory of catch-up industri-

indus-alization, although Gerschenkron ( 1962 ) briefl y hinted at the tion of linkage eff ects and the advantage of backwardness when citing the example of interactions between the steel industry and the railway industry

Th e third task is to highlight other newly emerging mechanisms besides catch-up industrialization that make a signifi cant contribution

to development Th is task also includes exploring factors and conditions that have caused these mechanisms to become dominant Th rough this task, we attempt to place catch-up industrialization as one of various development mechanisms Furthermore, clarifying the alternative mech-anisms and their foundations is expected to contribute to our review of the conditions for catch-up industrialization

In addition to these three tasks directly related to our goals, our research also contributes to the reconsideration of the roles of various actors, such as local fi rms, multinational corporations, and governments,

as well as the interactions among them Studies on catch-up tion have been closely associated with debate over which actor leads the development of latecomer countries, particularly with respect to the role

industrializa-of government in development Our study attempts to reassess the role industrializa-of various actors from an alternate viewpoint of the conventional theory of catch-up industrialization

To accomplish the tasks discussed above, our study employs a case study approach at industry and sector levels Th e industries studied in this project include the semiconductor industry, the fl at panel display industry, the steel industry, the palm oil industry, and the software service industry Why do we choose this approach? Th e catching up by a latecomer can

be discussed at three levels: the macro level, the industry/sector level, and the fi rm level At the macro level, catching up means reducing the income gap between the latecomer and advanced countries In mainstream eco-nomics, this issue is treated as a convergence problem Indeed, studies

on a latecomer’s development originate from a macro-level interest in reducing the income gap between developing and developed countries

However, macro-level analysis cannot reveal the complicated structure

of development mechanisms which are the amalgamation of gies, markets, management practices, relations among fi rms, government policies, social conditions, and so on, as these factors are abstracted and reduced to aggregate variables such as ‘capital’, ‘labor’, and ‘aggregate production function’ To address development mechanisms more specifi -cally, we need to conduct more detailed analysis that looks at how one or some industries in a latecomer economy develop Of course, the research results for one or some sectors may not be applicable to other sectors or

technolo-to the whole economy To overcome or at least minimize this limitation,

we choose to analyze sectors that are signifi cantly relevant to macro-level development For example, the targeted sectors for this study have pro-duction scales that are important in the country, represent many other sectors with common characteristics, and tend to induce development

in other sectors or pioneer new development models followed by others

In contrast, a fi rm-level approach would be more suitable than a sector- level approach for investigating complicated phenomena in detail Furthermore, it might be more eff ective in analyzing global and border-less economic activities Th is approach may, however, concentrate on factors specifi c to individual fi rms, which means that social capabilities constructed nationwide can be disregarded and relations among fi rms can be regarded as secondary factors In other words, fi rm-level analysis leaves little room for a concept such as ‘Korean fi rms’ In an extreme case, an analysis on catching up by one fi rm in a developing country with another fi rm in a developed country cannot be distinguished from

an analysis about competition between fi rms in advanced countries Th is case is far from the original motivation for the development studies based

on an interest in reducing the income gap between developing and oped countries

Sector-level analysis has two advantages over fi rm-level analysis First, the result of an important industry is generally more relevant to macro-economic performance than even the largest single enterprise Second, sector-level analysis can comprehend multilayer factors in industrial development On the one hand, it regards fi rms as important elements of

a sector On the other hand, it also enables us to look at social conditions that aff ect all fi rms in the sector in that country and to examine institutional

similarities and synchronized behaviors among fi rms as well as the actions among fi rms in the sector

Regarding the fi rst and second tasks, an industry-level approach will enable us to closely and integrally analyze various technological and non-technological factors that interact with one another in the complicated structure of catch-up mechanisms, as well as the interactions between catch-up mechanisms and other development mechanisms Case studies

at the industry level are essential for this third task, the core of which is to discover cases of other development mechanisms besides catch-up indus-trialization Focusing on the industry level rather than on the macro and

fi rm levels has these merits

1.4 Preceding Studies on Catch-Up

Industrialization

Th e fi rst part of this section reviews the long-term accumulation of the theoretical and empirical studies on catch-up industrialization that have mainly examined the role of government in it Th e second part looks at two trends in the subsequent development of studies on catch-up industri-alization: one is to attempt to construct more comprehensive approaches beyond the polarized view on the role of government, and the other is to refl ect on transformation caused by the changes in the real world

of Markets and Government

Th e theories of catch-up industrialization can be traced back to List in the nineteenth century, a leading proponent of the German historical school, and Veblen, a pioneer of American institutional economics As a matter of fact, catch-up industrialization policies can be found in much earlier periods as well (Chang 2007 , Chap 2) For example, Britain’s King Edward III in the fi fteenth century attempted to promote Britain’s

‘backward’ wool-manufacturing industry by various measures such as inviting Flemish weavers and prohibiting the export of raw wool

Th ese early catch-up industrialization policies and theories were based

on the notion that to compete with leading countries and catch up with their industries, governments should protect their infant industries from imported manufactured goods and encourage the introduction of advanced technologies (as well as invite skilled foreign people) Th us, these policies led to import substitution industrialization (ISI), with the goal of ulti-mately gaining military and economic advantages over rival countries After World War II, the problems of late industrialization were pri-marily discussed by the so-called early development economists In the postwar period, many latecomer countries, including various newly inde-pendent countries, were searching for directions for nation-state building and ways to promote economic development Th erefore, urgent eff orts were made to determine eff ective strategies for economic growth Among the latecomers emerging after the war, it was natural that the idea of catch-up industrialization through the ISI policy was revived with greater emphasis on economic, rather than military, purposes In particular, as the Prebisch–Singer thesis—that the terms of trade deteriorate for export-ers of primary commodities compared with countries that export manu-factured goods—became widely known in the 1950s, industrialization tended to become a political goal for underdeveloped countries, defying the comparative advantage implications of specializing in the production and export of goods based on their initial endowments

In the 1950s and 1960s, there were basically two mutually related arguments concerning the theory of the mechanism of late industrial-ization Th e fi rst was whether latecomers should follow the same devel-opment path forged by the forerunners; in other words, the question

of identifying the pattern of late industrialization Th e second was what kind of strategy and policy latecomers should adopt to achieve industri-alization; in other words, the question of fi nding the right strategies of late industrialization

Regarding the fi rst question, Rostow ( 1960 ) gave an infl uential view

on catch-up industrialization, although it basically concerned ization more widely He argued that latecomers would follow the same rigid and linear path that was taken by advanced countries in fi ve stages: traditional society, preconditions to take-off , take-off , drive to maturity, and the age of high mass consumption

In contrast, Gerschenkron ( 1962 ) considered that latecomers were capable of pursuing more compressed paths than advanced countries could, although he also conceded that industrialization with technologi-cal progress is the single way to development He proposed the famous concept of ‘the advantage of backwardness’, which means an opportunity

to utilize the backlog of technologies developed in advanced countries as

a source of compressed growth Furthermore, he contended that the more backward a country, the greater are the advantages of backwardness and the more compressed the path He further argued that for a latecomer to accomplish a ‘big spurt’ of industrialization and grow faster than advanced countries by exploiting the advantages of backwardness, the role of gov-ernment and institutions in providing capital, entrepreneurship, and the size of factories should increase in proportion to the degree of backward-ness Also, specifi c industrialization ideologies are necessary to overcome the disadvantage of backwardness

For the second question on the strategies of late industrialization, one point of contention was whether to pursue balanced or unbalanced growth, meaning whether a country should attempt to nurture all indus-tries simultaneously or choose one or two key industries when starting industrialization Rosenstein-Rodan ( 1943 ) and Nurkse ( 1953 ) argued that underdeveloped countries should adopt a balanced-growth strat-egy in which all industries start growth at the same time; otherwise they would face the narrowness of their domestic markets and industrializa-tion would be likely to fail

In contrast, Hirschman ( 1958 ) argued that it was not feasible for latecomer countries to invest simultaneously in all industries and that, even if successful, doing so would result in a dual economy, with a self- suffi cient industrial sector and a traditional sector having no relationship with each another According to him, underdeveloped countries lacked resources in the broadest sense, including entrepreneurship and mutual linkages among industries He contended that the right strategy for start-ing industrialization is to concentrate investment in one or two key sec-tors that have wider and stronger linkage eff ects within the country than other sectors, as this would trigger a transformation in society and bring about incentives for economic growth In this sense, he argued for the strategy of unbalanced growth

Despite these signifi cant diff erences, these visions and ideas of early development economists share two traits in common First, they explic-itly or implicitly assume and agree that latecomers should pursue indus-trialization, rather than specializing in sectors such as agriculture and mining that align with its initial endowments based on comparative advantage Second, they share the view that government has a critical role to play in the processes of catch-up industrialization However, the early development economists were heavily criticized by neoclassical economists in the 1970s and 1980s based on two points: methodology and ideas For the former, early development theories were criticized as neither rigorous nor scientifi c as they basically did not use the math-ematical tools and methods that neoclassical economics had developed (Krugman 1995 )

Regarding ideas, many neoclassical economists promoted free trade policies over protectionist trade policies, emphasizing the role of free markets and free trade as the source of economic success and the contin-ued relevance of the idea of comparative advantages Th ey also contended that state intervention was only justifi ed in cases of market failure in the classic microeconomic sense Furthermore, it was argued that the source

of rapid growth in East Asian countries, which attracted great attention

in the 1980s, lay in their relatively free markets and export-oriented icy, rather than in state intervention through import-substitution policy (Balassa 1988 ) A more radical neoclassical approach that stresses state failures in terms of rent-seeking is becoming increasingly infl uential, starting with Krueger ( 1974 ) It is argued that industrial policy, such

pol-as state intervention bpol-ased on import-substitution policy, generates distorted incentives, or even corruption, which results in the ineffi cient allocation of resources

Th is dominant neoclassical view on the East Asian experience and the policy package of liberalization later dubbed the ‘Washington Consensus’,

is based on the idea of comparative advantages, and is more interested in the international division of labor among countries than the catch-up industrialization of latecomers Th is view and policy, however, were heav-ily criticized in the late 1980s by the developmental state approach Th is approach shed light on the critical role of industrial policy and govern-ment in economic development in a variety of ways, based on a deeper

understanding of the development experience of East Asian countries than on mainstream economists 1

Broadly speaking, there are two strands in the developmental state approach: the political and the economic (Fine 2013 ) Although the two were not clearly distinguished in the early studies like those of Evans, Rueschemeyer, and Skocpol ( 1985 ), each has developed individually, although they continue to share the view that government matters

Th e political school in the developmental state approach has focused on the political conditions and processes that bring about eff ective imple-mentation of state intervention (e.g., Haggard 1990 ; Evans 1995 ), while the economic school has examined the content and result of economic policy (e.g., Amsden 1989 ; Wade 1990 ) Both these approaches counter the Washington Consensus to some extent, by strongly arguing that East Asia’s ‘success was not so much about getting-prices-right as it was about getting-state-intervention-right’ (Nayyar 2013 , p.  125) Making some concession to the developmental state approach, the World Bank ( 1993 ) argued that the market-friendly approach was the main cause of the East Asian success

Industrialization: Beyond the State–Market

Dichotomy

As can be seen, the theories discussed above present the experience of latecomers in terms of their success or failure in catching up at the nation- state level Th eir starting point for analysis is the dichotomy between the state and the market However, other types of catch-up industrialization theory have emerged that do not necessarily start their analysis with such

a dichotomy and regard the state and the market as elements of a society

testing the convergence among countries in terms of productivity Suehiro ( 2008 ) followed the social capability approach and illustrated various fac-tors related to catch-up industrialization by putting emphasis on the roles

of various actors, including not only government but also local fi rms and multinationals Hattori and Sato ( 1997 ) also examined the divergence of catching-up patterns between South Korea and Taiwan and identifi ed the social and political factors responsible for these diff erences 2

Lall ( 1992 ) followed a more technology-centered approach by ing the idea of ‘technological capabilities’ whose level aff ects the speed and success of catch-up industrialization He argued that technological capabilities at the fi rm level are aff ected by everyday ‘learning by doing’, technological absorption, and innovation, but considered that they are ultimately regulated at the nation-state level In turn, he conceived tech-nological capabilities at the nation-state level as a function of various insti-tutions and incentives such as education and tax systems Th e national innovation system approach also has a wide-range view of technological development (Nelson 1993 )

Th ese approaches point not only to the wider role of the government, but also to various political, economic, and social factors that aff ect the pace, depth, path, and level of catch-up industrialization By extending this viewpoint to identify the characteristics of social or technological capabilities, various studies have put forth the possible causes and mecha-nisms of successful catch-up industrialization Th ese have included polit-ical and macroeconomic stability, the role of mid-level organizations such

as business associations and trade unions, management know-how, and the level of labor, in addition to the more traditional mechanisms such as the role of government (e.g., industrial policy and government capabili-ties) and market (conditions including free trade)

Real-world trends have also prompted the transformation and

diversi-fi cation of catch-up industrialization theory One of the most thy trends is the increasing interest in latecomer countries’ innovation (Amann and Cantwell 2012 ) Some studies have actively argued for paths and mechanisms of transformation that progress from learning to

notewor-2 Also see the other articles in the special issue ‘Development Mechanisms in Korea and Taiwan’ in

Developing Economies , vol 35, no 4 (December, 1997)

innovation 3 An important background behind this trend is the progress

of industrialization in South Korea and Taiwan, which had formed the empirical foundation for the catch-up industrialization theories As South Korea and Taiwan’s catch-up industrialization has approached comple-tion, it has been indicated that acquiring innovative capabilities has become their major challenges instead of learning productive capabilities Kim ( 1997 ) has conducted a pioneering work in this line of research Based on the South Korean experience, he constructed a distinct model

of transformation that captured the progression from learning to tion His model consists of two stages In the fi rst stage, the latecomer acquires, assimilates, and improves a foreign technology In the second stage, the latecomer upgrades from mature and conventional technologies

innova-to new and emergent technologies by repeating the three steps tion, assimilation, and improvement) More recent studies like that of Lee ( 2013 ) further concentrated their focus on innovation He analyzed patent creation at the country, sector, and fi rm levels in South Korea and other latecomers and indicated favorable strategies for latecomer govern-ments and fi rms

Studies on Taiwan’s experience show a diff erent view on the advanced stage of catch-up industrialization compared with studies on South Korea’s experience Although Taiwan has also struggled to advance from catch-up industrialization to innovation-led growth, it has depended not only on enhancing technological capabilities, but on creating unique business models Based primarily on case studies of Taiwanese fi rms, Hobday ( 1995 ) illustrated that a latecomer fi rm can acquire the capa-bility for original brand manufacturing (OBM), namely the capability for innovation, by taking advantage of original equipment manufactur-ing (OEM) and original design manufacturing (ODM) Amsden and Chu ( 2003 ) also showed that Taiwanese fi rms grew into global play-ers through the use of an OEM/ODM business model Wang ( 2010 ) explained the characteristics of Taiwan’s development by presenting a fast follower model, in which a latecomer can sustain growth by quickly

3 In actuality, learning and innovation cannot be clearly distinguished from each other For instance,

‘innovation’ in Amann and Cantwell ( 2012 ) includes introduction of technologies that are new to

a latecomer In this context, the two concepts overlap

learning technologies that were just developed in advanced countries and

by producing products with equal quality at low prices He also indicates that Taiwan’s growth would one day reach its limit if it continued to depend on this model and did not succeed in transforming itself into a complete innovator

In comparison with the existing studies mentioned above, our study has several unique characteristics Th ese diff erences are described in the fol-lowing paragraphs

First, our approach is more comprehensive in two aspects compared with the conventional theory of catch-up industrialization, as well as with the modifi ed theories based on the observations of late-stage catch-up industrialization Th e fi rst aspect is that, similarly to the social capability approach and the national innovation system approach, our study regards government and the market as key parts of the mechanism of development and examines other factors and mechanisms as well Th e second aspect is that our approach also includes a wide range of growth factors such as mar-ket expansion and we seek to examine the relationships among these vari-ous factors although we also consider technological progress as a principal force for growth and recognize the increasing importance of innovation

In existing studies technological progress is supposed to be a major source

of economic growth and all other factors tend to be subordinated to it Second, our study recognizes that the path of catch-up industrialization includes certain stages One source of this idea is the recent studies that highlighted the importance of the progression from learning to innovation

In particular, we intensively investigate the fi nal stage before a latecomer’s catching up is completed and explicitly identify and discuss the diffi culties specifi c to this stage

Th e third feature of our study is to look at other development nisms besides catch-up industrialization and examine the relationship between the various mechanisms Th rough these analyses, it is possible to identify prominent characteristics and signifi cant premises of the theories

mecha-of catch-up industrialization

Th ese characteristics of our study indicate that it takes a broad perspective

on late industrialization and can approach the topic in a way that has been disregarded in the existing literature Th e broad approach of our study is also expected to prompt a reconsideration of the role of govern-ment in the development of a latecomer in the twenty-fi rst century

1.5 Research Results and Concluding

Remarks

Th is section begins by summarizing the results of the individual chapters

in this volume It then integrates the results to draw general conclusions

Our study includes nine chapters As the second section shows, our research encompasses three tasks as follows: the fi rst is to deepen the understanding of the mechanism of catch-up industrialization taking into consideration other factors besides technology; the second is to examine the relationship between catch-up industrialization and other develop-ment mechanisms; and the third is to discover additional mechanisms that are entirely diff erent from catch-up industrialization and dominant

in the development of some latecomer economies Th e nine chapters can

be classifi ed into three categories based on the task that is being chiefl y addressed, although each chapter also includes arguments and discussion about other issues besides the main target of analysis

of Catch-Up Industrialization

Chapter 2 examines Taiwan’s semiconductor industry as a successful case

of catch-up industrialization and shows that its success can be attributed

to catching up not only technologically, but also in nontechnological tors It was essential for the development of the manufacturing sector of the semiconductor industry that Taiwan was able to establish a pure-play

fac-foundry model and capture the emerging demand for fac-foundry service ahead of advanced countries Th e backwardness of Taiwan’s semiconduc-tor industry not only produced an opportunity to formulate the pure- play foundry model, but also forced the choice of a seemingly risky but potentially promising option MediaTek, which is a leading company in the design sector of the semiconductor industry, succeeded in capturing the potential demand in China and other emerging economies using its unique business model including total solution for its customers’ product development and has become one of the largest fabless semiconductor companies in the world MediaTek’s experience as a latecomer enabled it

to create such a business model

Chapter 3 shows that it is important for the industries of developing countries in the fi nal stages of the catching-up process to widen the scope

of their research and development (R&D) and improve their ability to respond to market needs, even in the face of limited managerial resources and amid rising uncertainty regarding the direction of technological development and changes in market structure Th e chapter analyzes the characteristics of R&D management in Taiwan’s fl at panel display (FPD) industry by focusing on the twists and turns in the process of the develop-ment of active-matrix organic light-emitting diode (AMOLED) display, an advanced type of FPD. In the early years Taiwan’s FPD industry invested considerable resources into the development of products other than liq-uid-crystal display (LCD) such as AMOLED in response to increasing uncertainty However, the lack of a strong brand and solid alliances with specifi c major vendors led to the industry focusing its R&D on areas with high marketability, which ultimately led to the stagnation and suspension

of R&D on AMOLED. Th is weakened the ability of the Taiwanese FPD industry to adapt to the ensuing changes in market structure

Industrialization and Other Development

catching up to a leadership position in the leading industry since the 2000s Th is chapter shows that the backward linkage eff ects of FPD production spread domestically as Korean FPD fi rms accumulated tech-nological capabilities and succeeded in catching up with and then surpass-ing Japanese FPD fi rms beginning in the mid 2000s Th e technological capabilities of Korean FPD fi rms enabled Korean suppliers to grow and upgrade their capabilities through the existing network of affi liates and subcontractors, as well as through the increased movement of engineers between fi rms At the same time the transition of Korean FPD fi rms to leading positions strengthened their bargaining power with foreign sup-pliers Th is change has encouraged foreign direct investment (FDI) in Korea by Japanese suppliers seeking to access its large market and new technology Th is increase in FDI has thus led to the development of FPD components, materials, and equipment industries

Chapter 5 examines how South Korea’s steel industry caught up with the Japanese steel industry technologically by focusing on the relation-ship between the phases of innovation and the speed of catching up tech-nologically, as well as the institutions and industrial organizations that accelerated the catch-up process Th ere were two big waves of innova-tion in the steel industry after World War II.  Korean steel companies succeeded in accelerating the catching-up process by concentrating their investment on specifi c phases for each innovation Th e fi rst wave of inno-vation was the construction of large-scale integrated steelworks at the coastal area which required concentrated investment For this purpose the state-owned monopoly fi rm, Pohang Steel (POSCO), was established

Th e second wave of innovation was the development of high-quality steel sheet used for automobiles Th e catching-up process accelerated with the market entry of Hyundai Motor Group through vertical integration and POSCO’s eff ort to cultivate new users in acute competition with it Chapter 6 looks at the steel industries of several Asian countries which have generally been designated as national strategic industries By exam-ining their diverse development patterns, the chapter fi nds that the steel industries in Asian latecomer countries typically started growing through backward linkage eff ects from the growth of steel-using industries Furthermore, once the countries had successfully utilized the advantages

of backwardness to introduce steel production, the industry contributed

to the formation and strengthening of a development inducement mechanism in society Next, the chapter argues that to understand how linkage eff ects are formed among industries and how disadvantages of backwardness are substituted, it is necessary and inevitable to highlight factors specifi c for the time, country, and industry By focusing on link-age eff ects and the (dis)advantages of backwardness, the chapter also dis-cusses how even steel industries, which were once a symbol of national industrialization, are strongly and increasingly aff ected by the power of globalization in the twenty-fi rst century

Catch-Up Industrialization

Chapter 7 demonstrates a unique development mechanism, naming it

‘catch-down innovation’, which has been observed in China and India For developing countries to catch up with developed countries in terms

of per capita income, it is often assumed that they must catch up logically Interestingly, however, some fi rms in China and India in the last decade have developed several indigenous technologies that cater to spe-cifi c, low-income demand and the social environment of consumption in these countries, resulting in commercial success In our examination, this type of technological progress is referred to as catch-down innovation

techno-Th e chapter fi rst discusses the similarities and diff erences between catch- down innovation and similar ideas presented in the 1970s such as ‘inter-mediate technology’ and ‘appropriate technology’ Th en, by presenting

fi ve cases such as the video CD market and guerilla mobile handsets, this chapter presents a hypothesis that in countries with vast domestic markets stratifi ed by urban–rural and regional disparities, catch-down innovations have a higher chance of success

Chapter 8 examines the eff ects of natural resources on the course of industrial development Th e chapter off ers a model that assumes the coexistence of natural resource industries and nonnatural resource indus-tries in one country and shows how the prices of natural resources and the institutions of a country aff ect its pattern of industrial development

Th e model extends the logic of catch-up industrialization and combines

it with the ongoing debate about natural resource, namely whether natural resources are a curse or an opportunity for developing countries

Th e assumptions of the model fi t with Southeast Asia, which participates

in the regional dynamism of non-resource-based industrialization, while keeping natural resource industries active Th is chapter uses the model

to examine the experience of Indonesia and demonstrates that industrial development can move backward when there are surging resource prices without eff ective policies

Chapter 9 attempts to delineate a model of resource-based ization, by focusing on the experience of the Malaysian palm oil industry

industrial-It is widely recognized that the electronics industry has played a central role in Malaysia’s industrialization However, it is also necessary to bear

in mind that resource-based industries in Malaysia, including the palm oil industry, still maintain a high degree of international competitiveness

Th e chapter examines how the palm oil industry upgraded its exports from crude palm oil to processed palm oil and became the world’s largest producer and exporter of palm oil for over 40 years until it was surpassed

by Indonesia in the mid 2000s It is true that Malaysia is blessed with suitable natural conditions for oil palm cultivation However, the chapter argues that such natural conditions are necessary but not suffi cient for the successful development of the industry and it highlights the importance

of other factors such as government policies, technological features cifi c to the industry, and changing circumstances in the world economy Chapter 10 illustrates the case of the software services industry in India Th is industry is the largest in the developing world and the leading Indian software fi rms have been successfully competing against estab-lished Western software service fi rms in the most lucrative segments of the service market for over a decade Th e chapter examines the mecha-nisms and processes through which the Indian software services industry

spe-in general, and its major spe-indigenous fi rms spe-in particular, have developed

It fi nds that while substantive and contrasting forms of state intervention played an important role in facilitating the industry’s rapid development, changes in market conditions and indirect yet fortuitous outcomes from industrial policy in other sectors also proved crucial For instance, policy initiatives that had nothing to do with the software industry were integral

to its development story Th e chapter specifi cally addresses the claims

that India represents a paradigm shift in the pattern of development, namely the ability to leapfrog over the manufacturing phase, and fi nds these claims to be exaggerated

Second, we fi nd that it is important to examine the relationship between catch-up mechanisms, namely the advantages of backward-ness and linkage eff ects, as discussed in the cases of South Korea’s FPD industry and the steel industries in South Korea and some other Asian countries Th e relationship between technological catch-up and linkage eff ects works diff erently across industries and time For some industries, opportunities to utilize the advantage of backwardness appear through the demand produced by backward linkages from the development

of downstream industries; for others, the opportunity arises through competitiveness enhanced by forward linkages from the development

of upstream sectors We also fi nd that the backward linkages would remain underdeveloped until less-developed upstream industries catch

up and upgrade their own capabilities to the extent that they at least do not hinder more-advanced downstream industries or until downstream industries complete the catching-up process and become competitive enough to aff ord to support upstream industries