A successful industrialization process, which consists of forming an internationally competitive industrial layer, goes hand in hand with ‘technical progress’ (bottom panel of Fig. 10.2) in addition to simple capital deepening and the ensuing factor accumulation, which is only a visual aspect of industrialization, consisting of factory buildings and machinery. Technical progress means getting more outputs from the same amount of inputs in the country. That is, technical progress means more value added (more GDP) from the same amount of labour (population); a country with higher technical progress compared to another will command a higher per capita GDP.
Technical capabilities: primary features and necessary skills
Production capability | Technological capability | R&D capability | |
---|---|---|---|
Primary skills | |||
Absorptive skills | ● | ● | |
Manufacturing skills: ability to manufacture world class products | ● | ● | |
R&D skills | ● | ||
Features | |||
Learning-by-doing spillovers | ● | ● | |
Imitation | ● | ||
Absorption | ● | ||
Innovation: product and process improvement | ● | ||
Innovation: generation of new products and processes (technology) | ● | ||
Activities | |||
Technology transfer activities | ● | ||
R&D activities | ● |
Following Radošević and Yörük (2015: 5), the taxonomy of technical capabilities relating to the industrialization process can be divided into three categories (Fig. 10.3). Firstly, the ‘production capabilities’ are capabilities involved in manufacturing with a given level of technology at world levels of productivity. A skilled workforce is the key to operational efficiency. It is important that the productive capability is defined here for the given level of technology . Productive capabilities could encompass incremental improvements and innovation , and not ‘fundamental changes’ in products and production processes through product and process engineering. Advanced productive capabilities depend on skilled engineers (and not researchers).
The second category of technical capabilities is the technological capability (TC). It refers to operational commands to make effective use of technological knowledge in production and investment.3 TC is critical for international competitiveness.4 Whether development of new products or processes (innovation ) is a component of TC is debatable. The appropriate definition seems to relegate innovation to a third capability, the R&D capability (RDC). However, TC should also include the capability to significantly change product and processes through ‘unorganized’ innovation and technology transfer (TT) and imitation (I) activities. TT and I activities benefit critically from the absorptive capacity (AC), which refers to the ability of a firm to recognize the value of new external knowledge, assimilate it, and apply it to commercial ends.5 AC is critical to the firm’s ‘innovative capabilities’ and is a function of the firm’s prior level of related knowledge.
Thus, TC could be usefully defined as the ability to make effective use of technological knowledge in an effort to assimilate, use, adapt, and incrementally change existing technologies6 through organized or unorganized innovation and TT and I activities. TC receives major inputs from SFL. In fact, for both the productive and the technological capabilities the key nurturing ground is the shop floor.
It is important to distinguish TCs at firm, industry, and national levels. While related to each other, TCs at these three levels may diverge. It may be possible, for example, that a firm in a country has unique TCs compared to its domestic and international peers while the average TC of the domestic industry may compare poorly internationally. But in general, such examples would be exceptional and TCs at all three levels would diverge substantially. National TC refers to capabilities at the level of the nation.7 Thus, it would cover also TCs of the actors such as universities and the public entities complementing firm capabilities.
The third category of technical capabilities can be classified under RDC. Unlike the previous two classifications of capabilities, RDC is not primarily nurtured by the shop floor. It is critical for firms which are close to, or on, the world technological frontier (WTF). Countries and firms which are relatively far away from the WTF might prefer TT rather than own R&D.8 This is because returns to TT spending—whose success depends on TC rather than on RDC—might command a higher return than R&D spending. As the firm gets closer to the WTF , its R&D activities and highly skilled personnel, cooperation with universities and research institutions, and intellectual property rights become more important success factors.9
R&D has two aspects, one being a driver of world frontier innovation and the other as a driver of I activities or a factor of AC.10 One could argue that in developing countries TT would be a more critical driver of industrialization than RDC. However, as Radošević and Yörük (2015) argue, based on empirical evidence, to the extent that R&D improves the AC, it could also be a critical driver of industrialization in developing countries.
10.1 The Latecomer Industrial (Manufacturing) Firm, Technical Capabilities, and Learning
Manufacturing firms have played an important role in the transformation of western economies towards industrialized and developed structures and led the way for rapid growth.11 During the last century new industrial firms with ‘dynamic capabilities’ predominantly in East Asia have successfully penetrated global high-technology industrial products markets. In other countries, very few firms have been able to replicate that success.
The rise of East Asian industrial firms to the global scene raises an important question: Why have firms in other countries not been able to record the same success? If the firm were a simple legal or organizational unit, as modelled in the microeconomic textbooks, one would have expected the emergence of globally competitive industrial firms in many other countries. The success of East Asian (and other) firms must be due to the build-up of certain firm-level skills; there must be something special about these industrial firms in overcoming substantial barriers to enter the global industrial goods markets and leading the industrialization process in a country.
Then, the question becomes: How does the firm build capabilities? In the mainstream explanation, the resource-based view, the firm builds a comparative advantage by picking resources and building capabilities, thereby creating economic rents. In the resource-picking strategy, the firm collects and analyses information to outsmart its competitors and designs and constructs organizational systems to enhance the productivity of the acquired resources. The firm then leverages resources to increase their efficiency in reaching the firm’s growth goals.12
However, while the resource-based view of the firm presents a satisfactory explanation of how a firm may sustain its existing competitive advantages, it does not sufficiently explain how those competitive advantages have been created in the first place—especially how the ‘latecomer firms’ from East Asia broke into knowledge-intensive industries such as semi-conductors.13 Mathews (2002) argues that the East Asian high-technology firms conducted their own sector-targeting strategies, together with the exploitation of linkages , resource leveraging, and learning. Thus, “their success in penetrating the global high technology product markets were not mere results of low factor costs or government subsidies” (which we should rephrase as industrial policies) “or just plain luck.” Rather, their conscious ‘organized learning’ strategy helped them in successful penetration14 as they pursued the strategic goal of “raising real incomes through catching up with the advanced firms, and moving as quickly as possible from imitation to innovation .”15
Manufacturing firms, which come on the scene not as first–movers, have to overcome two key barriers: technology and branding. Both involve learning. The standard organization and management theory concentrates on the accounts of the success of the incumbents through concepts such as first-mover advantage, barriers to entry by industrial and technological advances and switching costs of consumers away from existing brands, and sustainability of existing competitive advantages.16 However, the literature does not adequately concentrate on explaining how some of the ‘latecomer firms’ have succeeded in penetrating into high-technology markets dominated by the incumbents and overcoming all those barriers.
10.2 The Industrial Firm as a ‘Learning Firm’
Samsung leapfrogged from a mere discrete device producer to the most vibrant and largest memory chip producer in the world. It managed effectively the two antecedents of technological learning: prior knowledge base and the intensity of efforts. Samsung used technology licensing and the recruitment of high calibre scientists and engineers in building its prior knowledge base and crisis construction as a strategic means for increasing the intensity of its efforts. Samsung also used internal competition and cooperation to accelerate technological learning.
It is important to discern that the shop floor acts like a non-theoretical university; at the shop floor, new knowledge is produced and existing and new knowledge is disseminated to generations of workers. That is the same as the one of the key task of the university—and to some degree the secondary schools. Lack of manufacturing activities denies a country education of that applied university. In many developing countries the state spends scarce resources to fund universities that are supposed to prepare manpower to work in the industry. Production facilities, in many cases funded by private investors, naturally acting as applied universities in fact can thus complement the state’s (secondary and) tertiary education efforts.
The two ‘universities,’ the shop floor and the academic, are worlds apart in many countries. In the latter, the academicians are encouraged to produce scientific research that is uncoupled with the agenda of shop-floor university. The students are educated in a theoretical environment unaware of real-world situations. The shop-floor university, on the other hand, does not benefit from theoretically more equipped academicians in improving their productivity, processes, and products.
Exporting may also provide a source of discipline and pressure for the firm-level learning process, learning by exporting (LbE). Nevertheless, some form of institutionalization is necessary to increase and sustain gains. In East Asia , the latecomer firms’ LbI and LbRD processes benefited from subcontracting and original equipment manufacturing (OEM) mechanisms acting “as a ‘training school’ enabling them to overcome entry barriers and to assimilate manufacturing and design technology .”19 They also benefited from LbE, which intensified “learning and acted as a focusing device for technological assimilation, adaptation and innovation . In contrast with the R&D and design-led strategies typical of leaders and followers, latecomers began with incremental improvements to manufacturing processes which led on to minor product innovations .”20
The national capabilities are complex combinations rather than a simple sum of firm-level capabilities; they are determined by the interplay of incentives, firm-level capabilities, and institutions.21 At the national level, in the initial stages of growth, SFL is very important in gaining competitive advantage. In the more advanced stages of development, acquisition of technological knowledge becomes the critical competitive factor. This is driven by the international capabilities of the manufacturing firm through the learning processes rather than through mere production capacity.22 Thus, firm-level LbI and LbRD, when summed up, lead to enhanced TC at the national level.