Technology and Development in the Third Industrial Revolution

TECHNOLOGY AND DEVELOPMENT IN THE THIRD INDUSTRIAL REVOLUTION

TECHNOLOGY AND DEVELOPMENT IN THE THIRD INDUSTRIAL REVOLUTION edited by

RAPHAEL KAPLINSKY and CHARLES COOPER

FRANK CASS

First published in Great Britain by FRANK CASS AND COMPANY LIMITED Gainsborough House, 11 Gainsborough Road, London E11 1RS This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” and in the United States of America by FRANK CASS c/o Biblio Distribution Center 8705 Bollman Place Savage, MD 20763 Copyright © 1989 Frank Cass & Co. Ltd British Library Cataloguing in Publication Data Technology and development in the third industrial revolution 1. Developing countries. Technological development I. Kaplinsky, Raphael II. Cooper, Charles 609’.172’4 ISBN 0-203-98856-6 Master e-book ISBN

ISBN 0-7146-3389-5 (Print Edition) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Frank Cass and Company Limited.

Contents

Introduction

1

‘Technological Revolution’ and the International Division of Labour in Manufacturing: A Place for the Third World? Raphael Kaplinsky

5

Strategies for Developing Information Industries Ashoka Mody Radical Technological Changes and the New ‘Order’ in the World Economy Constantine V.Vaitsos

37

59

New Technology and Catching Up C.Freeman

83

Latecomers’ Problems Ronald Dore

97

Technology and Development in the Third Industrial Revolution

Introduction

By the mid-1970s it was becoming clear that traditional Keynesian demandmanagement could no longer cope with growing imbalances in the global economy or revitalise the slowing engine of economic growth. In place of demand management, monetarism became increasingly fashionable, especially in the political realm, emphasizing the efficiency of markets in resource-allocation and highlighting rent-seeking behaviour and other forms of ‘state failure’. Its growing influence on policy led to concerted attempts to roll back the state, initially in the rich countries and subsequently in the Third World. An alternative response to the declining attractiveness of Keynesian theory was provided by the neo-Schumpeterian structural analyists. Focusing on the supply-side of economic activity, they emphasized the central role played by technological change in economic growth. Some of these neo-Schumpeterians— notably Chris Freeman and his colleagues at the University of Sussex—added to these analyses a conception of radical technological discontinuities. They argued that since the mid-eighteenth century a series of historically distinct ‘heartland technologies’ had evolved, and each was associated with epochs (‘long waves’) of economic growth. In this view, not only technological change, but the revolutionary character of certain technological changes, played central roles in the growth process. Whilst the political influence of monetarism was rising—especially in the ‘old industrial centres’ of Western Europe and North America—there also arose a growing constituency of support for the neo-Schumpeterians. Unlike the monetarists who were intent on ‘rolling back’ the state, these analyses called for a restructuring of this role, one in which the state facilitated and ‘enabled’ the corporate sector’s attempt to come to grips with revolutionary technological change. Given their identification of microelectronics technologies as the latest heartland technology, the neo-Schumpeterians believed that policy ought to be orientcd towards maximising the diffusion of electronics-related technologies and selectively promoting the development of the electronics sector itself. These neo-Schumpeterian perspectives were seen to be of particular significance for LDCs, and for two apparently contradictory reasons. On the one

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hand, it was believed, the productivity improvements offered by the introduction of this new family of technologies were so great, that they threatened to reopen the technological gap between LDCs and DCs. Without state intervention, they foresaw that comparative advantage reversal would ensue, and formerly labour-intensive industries would migrate back to the high wage economies, assuming that LDCs would find it relatively more difficult to adopt these radical technological advances. But against this view, others argued that the new radical technological discontinuities provided an opportunity for technological leap-frogging, and hence favoured LDCs. ‘Greenfield’ LDC sites might offer a more favourable environment for the adoption of new technologies than ‘brownfield’ DC sites. By the end of the 1970s research began into the implications of radical technical change for LDCs. Although no adequate survey has yet been undertaken, it would seem that the DC-based researchers focused on comparative-advantage reversal while in the LDCs researchers concentrated more on the opportunities for leap-frogging. Because of the relative vacuum in this area of research, the Technology Working Group of EADI decided to convene a workshop to discuss these issues. This workshop was supported by the Norwegian and British aid agencies and was held at the Institute of Development Studies at the University of Sussex in July 1987. The papers presented at this workshop are now published in this first issue of the European Journal of Development Research. A number of themes were highlighted at the conference. First, is the global economy really experiencing a technological revolution and, if so, what are its implications for the Third World? Chris Freeman argues that the new microelectronics technologies are indeed revolutionary, but there is no need why this should necessarily operate to the disadvantage of LDCs. By contrast, Ron Dore (who has studied Japanese society and economic growth for many years) is sceptical of the existence of a technological revolution, and argues instead that the global economy is experiencing a multi-focused period of technological change in which the dominant feature is the growing science-content in technology. Unlike the Japanese and the first latecomers who found that there were many advantages to being ‘followers’, Dore argues, LDCs are now faced with an almost insuperable technological gap and is thus somewhat pessimistic about the implications for LDCs. Constantine Vaitsos focuses on what might loosely be called the ‘regime of accumulation’ of the current and previous paradigms of technology. He argues that with radical technological change the international dimensions of production are altering, leading to a collapse of historic sectoral boundaries. From the policy perspective, one of the most important concerns is that relating to property rights over production. The complex nature of these property rights raises new barriers to entry to newcomers and stimulates foreign direct investment, especially in the service sector. Both would seem to be adverse to the interests of LDCs. The role

INTRODUCTION 3

which GATT is playing in this international restructuring is given particular prominence. Raphael Kaplinsky addresses the notion of ‘technology’, arguing that the traditional neo-Schumpeterian perspective on embodied technologies was too narrow to capture the essence of the current phase of innovation. In contrast, he develops a more explicit conception of ‘social technology’ with somewhat different implications for LDCs. The economics and the politics of location are changing as a consequence of innovations in both embodied and social technology. Whilst this does not necessitate a backward step for LDCs, it does suggest a somewhat different insertion of LDCs into the international division of labour in manufacturing. In LDCs there is less reticence about the role which the state has to play in supporting the electronics industry itself. Ashoka Mody compares the preparedness of a number of Asian NICs and Brazil to take advantage of new opportunities in the electronics sector. He illustrates the key role played by the state in Korea and considers the desirability and appropriateness of state interventions in a number of crucial areas, including trade policy, technology policy and the role of foreign direct investment. This workshop opened a series of important questions and provided few answers. Although reference is made to a number of completed research projects in relevant fields, it is clear that much research is still required before clearer analytical and policy judgements can be reached. It is because this researchterrain is so rich and because the policy implications are so significant that the European Journal of Development Research has devoted its first number to an exploration of these issues. CHARLES COOPER RAPHAEL KAPLINSKY

4

‘Technological Revolution’ and the International Division of Labour in Manufacturing: A Place for the Third World? Raphael Kaplinsky*

I. INTRODUCTION There are three central issues in the discussion which follows. The first concerns the question of what constitutes a ‘technological revolution’ and relates to the role played by embodied technological change in the evolution between technological paradigms. In particular it concerns the relative importance given to the development of microelectronics technology at this historical juncture. The second relates to the interaction between technological change and the international division of labour. And finally I will attempt to anticipate the future role of the Third World in global manufacturing specialisation. In covering this terrain much of the discussion will be informed by a detailed sectoral analysis recently undertaken of the global automobile sector [Hoffman and Kaplinsky, 1988]. This comprises an investigation into the emerging pattern of global production and sourcing of auto components, and involved detailed fieldwork in Japan, the US and Europe. It concludes by contrasting the anticipated New International Division of Labour (NIDL) in the era of ‘machinofacture’ (ably sketched out by Frobel et al. [1980]) with the new international division of labour emerging in the era of ‘systemofacture’. Whilst the auto industry is representative of merely one type of industrial sector (the mass production of discrete products), I believe that there are systematic ways in which its conclusions can be generalised across other sectors. This is important since there are reasons to believe that the spread of the new production paradigm is likely to be uneven, not just across sectors, but also across regions. This provides an important window of opportunity for developing country decisionmakers. Many of the detailed points made in later discussion are drawn from this study of the auto sector as well as from Kaplinsky [1985] and [1989]; readers who want more justification of particularly contentious points are referred to these texts.

* I am grateful to Charles Cooper and David Lehmann for comments on an earlier draft.

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Three brief caveats are required before proceeding. First, unlike Dore (in this volume) and Rosenberg and Frischtak [1984], I am convinced that are indeed witnessing a major transition in industrial era. However, the detailed nature of this transition is debatable and my own frame of reference has a greater historical scale than the 50-year cycles identified by Kondratieff, Schumpeter, Freeman and others. It involves the transition between the three major industrial eras since the onset of the industrial revolution. The first, beginning in the sixteenth century, involved the transition between handicraft production and manufacture; the second (after the late eighteenth century) saw the transition between manufacture and machinofacture; and the most recent (beginning in the late 1970s) is seeing the growing dominance of a new paradigm which I refer to as systemofacture. (This scale of change and its periodicity is analagous to Piore and Sabel’s transition between mass production and flexible specialisation [Piore and Sabel, 1984].) The second major caveat is to warn against the tooeasy conflation of the terms ‘LDCs’ and Third World’. There is an enormous difference between the South-East Asian NICs and Sub-Saharan Africa, much greater in fact than that between the industrially advanced countries (IACs) and the NICs. Much of the discussion which follows applies more to the NICs— especially the so-called ‘second-tier NICs’—than to the industrially least developed countries, although it will of course be relevant to both groups. And, finally, it is important to note that most of the discussion applies to the industrial sector. There are important developments occurring in biotechnology which in my view are not only of great historical significance, but which relate most clearly to agriculture, especially to the industrialisation of agriculture.1 It may be that some of my discussion is relevant to this but I make no pretence of having thought through these issues in a clear manner. II. ‘TECHNOLOGICAL REVOLUTION’: THE TRANSITION TO SYSTEMOFACTURE I begin with the recognition that the global economy is in crisis, defined in the proper sense of the word to represent a turning point. At this period of transition in industrial history, it is possible that the inherited pattern of global industrial specialisation will change, leading to an altered role for the Third World in this international division of labour. In order to understand this change of role it is necessary to treat the subjects of long waves and flexible specialisation before outlining the emerging era of systemofacture. Technology and Long Waves By the end of the 1970s, when it had become clear that demand-management alone was insufficient to rectify international imbalances and to bring supply into balance with demand, Freeman and his colleagues at the University of Sussex

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 7

picked up the issue of long waves which was first raised by Kondratieff and subsequently elaborated by Schumpeter.2 What Freeman and his colleagues offered was a path to understanding the achievements of Japan and the Republic of Korea, both of whom had achieved success by focusing on technology and the supply-side of production. In adopting this perspective these long-wave proponents were changing the framework of the policy debate, providing for example a theoretical point of entry to the reindustrialisation policies which became increasingly popular in the 1980s. Another particularly valuable outcome of this set of theories was the identification of the major technological developments which Schumpeter first referred to as heartland technologies. Freeman extended the initial insight of Schumpeter and offered a threefold classification of technological change.3 The first of these are incremental changes, occurring continuously and representing minor changes in product and process. The second set are radical innovations which comprise a more significant set of technological breakthroughs, as in the case of nylon and polyethylene. The third and final set of technological changes are the revolutionary ones such as the steam engine, the railroads, the internal combustion engine and microelectronics. Valuable as this particular perspective of technologically-based long waves is, it is not free from difficulties, of which three stand out in importance.4 The first arises out of the conception of technology which they use, particularly in their earlier formulations. Their preoccupation lay with machinery, as can be seen from the list of the heartland technologies which they identified. Steam engines, textile machinery, steel, railroads, the internal combustion engine, chemicals and microelectronics—all in the realm of embodied technology. There seemed to be little space in their schema for ‘soft’ or ‘disembodied’ technology. It is true that if pressed they could point to the social implications of the heartland technologies which they had identified. But this is a far cry from endogenising organisational technology into their model of expansion, recession and depression. This is true for organisational technologies both at the micro level— as on the shop-floor—and in the wider sphere of social interaction. A second and related problem in these formulations of the long-wave is a pervasive technological determinism. Given that social relations are in some way affected by the events which they are recording, their relationship to embodied technological change is generally considered by the long-wave theorists to be unicausal. Changes in embodied technology are considered to induce changes in social relations. (In this perspective of technological determinism they were rather close to the earlier views of Marx: The handmill gives you society with the feudal lord; the steam-mill, the society with the individual capitalist’.5) The third difficulty with these long-wave theorists concerns the origins of the new heartland technologies. There was of course a long debate about whether they were induced by the extreme competitive pressures of the downswing or the rich surpluses of the upswing. There was also an interesting recounting of the change in Schumpeter’s own views in which he began with a view of technical

8 THE THIRD INDUSTRIAL REVOLUTION

change which was exogenous to the system of accumulation—that is the firm— but as he recognised the increasing complexity of modem technology, this function was endogenised in his analytical model. But despite these important observations they tend to have a slightly mystical, deus ex machina quality. Why do they last 50 years? Do the heartland technologies necessarily exhaust the possibilities for new products? Are ‘competitive pressures’ a sufficient explanation for their emergence? In a recent refinement of this discussion of technology and long waves, Perez [1985] goes some way to meeting these problems in the initial formulations of her colleagues at Sussex. At the same time she builds a bridge towards the concept of flexible specialisation which I will consider below. The major complement which Perez offers is a recognition of the importance of social relations—which she terms the ‘socio-institutional context’—in the transition between the waves. For Perez, each of the waves represents a ‘techno-economic paradigm’, incorporating a form of institutional and infrastructural development which enables the dominant embodied technology to be utilised efficiently. Longwave recessions for Perez arise when there is a mismatch between the socioinstitutional and techno-economic spheres. The new heartland technologies do not always produce the appropriate socio-institutional framework and their diffusion may indeed be held back by the social structures of the past. But this approach is still deficient in the specification of the ‘socio-institutional’ framework. Passing reference is made to ‘a new model for the management and organisation of the firm’6 and ‘the forms of organisation of workers and major interest groups, together with the legal framework within which they operate’,7 but this is not spelled out in detail. Moreover, whilst it is acknowledged that the forces of production do not necessarily cause changes in the relations of production, there is no hint that changes in the forces of production may themselves be induced by initial changes in the relations of production. It is for this reason that it is useful to focus on the emerging literature on flexible specialisation, since in contrast to the theorisation of technology and long waves, it takes the social organisation of production as its starting point. From Mass Production to Flexible Specialisation Once the concept of technology is opened out to include both social and physical technology, the possibility arises that the observed eras of historical progress may primarily be conditioned by the social equivalents of heartland technologies. In such a schema embodied technologies may be given a minor, subordinate role. This is the underlying theme of Piore and Sable’s recent explanation offered for the global economic crisis, seen as reflecting the transition from an era of mass production to one of flexible specialisation. Piore and Sabel focus in their analysis on the ‘limits of the model of industrial development that is founded on mass production: the use of special-purpose

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 9

(product specific) machines and of semiskilled workers to produce standardized products’ [Piore and Sabel, 1984:4]. Although this schema takes some account of embodied technology—as does their specification of the potential for flexible specialisation represented by the new electronics-based automation technologies—their primary focus lies in the realm of social relations. Their first concern is with what may be called the ideology of production. This sees best-practice as involving the mass production of standardised commodities and focuses the competitive edge on cost reduction rather than product competition. This view permeates manufacturing horizons. For example, despite the fact that it is well known that around two-thirds of production in the engineering and wood-based industries occurs in small-batches, the dominant perception of manufacturing is one of large-batch production. The consequence is that the ‘techno-logical trajectory’8 which has permeated modern manufacturing industry is one which incorporates an obsessive drive towards standardisation of product and scale-economies in production. Yet, argue Piore and Sabel, there is often no necessary reason why this should be the case. Indeed in the nineteenth century the leading edge of manufacturing stood at the divide between the system of mass production and an alternative of craft-production based upon ‘a combination of craft skill and flexible equipment’.9 The balance at that time fell in favour of mass production and this occurred because it was in the United States—an economy experiencing a shortage of skilled labour—that the new systems were being forged. Now that the paradigm of mass production is running into difficulties—in relation to growth-rates, high levels of unemployment and trade imbalances— Piore and Sabel suggest a ‘Second Industrial Divide’ with the possibility of flexible specialisation being linked to the new breed of flexible electronics-based automation technologies. Here, as can readily be seen, the discussion starts with social factors, involving a struggle between the political power of the craft-based industries and those premised on mass production. The second element of social relations considered by Piore and Sabel concerns a wider specification of what Perez loosely referred to as the socio-institutional structure. A distinction is drawn between the development of the corporation (with its attempts to stabilise the market and to organise labour relations) and the emerging functions of the state (with its attempts to develop an appropriate regulatory mechanism which would facilitate the continued expansion of the mass production system).10 The fundamental problem which both the state and the corporation have to contend with is that the growing scale-economies of the mass production paradigm require a stable environment to ensure the conditions under which heavy expenditures on inflexible capital equipment can be written off. In this schema the mass production paradigm runs into crisis because the external world is just too uncertain to allow for these scale-economies to be realised. This situation arises for a combination of reasons which are both

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endogenous and exogenous to Piore and Sabel’s model. The endogenous causes relate to the saturation of the available global markets for standardised products by the end of the 1960s; this was coincident with the rise of productive capacity in the NICs. There was also a growing strain on raw material supplies. Exogenously, there was a series of conjunctural factors which deepened the crisis—these included the growth of social unrest,11 the uncertainties induced by flexible exchange rates, the two oil shocks of 1973 and 1979 and the growth of global debt exacerbated by high interest rates. All these factors created an uncertain world. Yet the mass production paradigm required in the first instance a stable environment in which large-scale and inflexible investments could be written off. The result has been a post-1973 slowdown which appears to have largely been immune to the conventional Keynesian demand-management policies which had been tried and tested in previous recessions. Piore and Sabel argue that there are two contrasting paths in the transition to a new stable era of high incomes and full employment. The first is the adoption of a strategy of international Keynesianism. Through coordinated international demand management, this will ensure that large, stable markets will continue to exist for mass-produced homogeneous commodities, thereby allowing for the continued reaping of scale-economies. The alternative is that of flexible specialisation which ‘will be seen in retrospect as a turning-point in the history of mechanisation’.12 It is argued that both in the first divide of the nineteenth century and in the second divide of the 1980s and 1990s, there are two possible paths of transition. Which of these triumphs is not a reflection of the inherent power of particular types of embodied technology to determine social relations, but will be resolved within the realm of social relations. The forces of production which are subsequently developed will thus reflect the balance of power of these different sets of social actors. In comparing the long-wave theorists with the emergent views on flexible specialisation we can see that they have many similarities. In contrast to the dominant neo-classical and Keynesian paradigms, both offer a supply-oriented perspective on crisis. They also both accept that from the mid-1970s the global economy has been at a major transitional point—for the long-wave theorists this is the fifth turning-point in modern industrial history; for Piore and Sabel it is the second. They both also accept—sometimes only implicitly—that a full discussion of the issues means taking into account both the forces and the relations of production. But here their paths begin to diverge since, as we have seen, the long-wave theorists put their primary emphasis on the forces of production and often consign social relations to an adjunct discussion, whereas the flexible specialisation schema places almost all its attention on the social relations of production and see embodied technology as being largely malleable to alternative sets of social organisation. What I aim to do is to characterise the current crisis as representing the movement between the eras of machinofacture and systemofacture. This latter concept is closely related to both the flexible specialisation of Piore and Sabel

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 11

and to Perez’s concerns with techno-economic paradigms and ‘systemation’. (It is also historically analogous to Marx’s recounting of the previous transitions between the eras of handicraft and manufacture and between manufacture and machinofacture.) But my account differs slightly from either of these two in that whilst I share Piore and Sabels’ view that the fundamental motor of current change lies in the realm of social relations, I also put great emphasis on the historical significance of electronics-based automation technologies which is central to the analysis of Perez and Freeman. Moreover, in a previous transition, it was in the domain of embodied technology that the primary forces of change were to be found. Whereas Piore and Sabel are more particularly concerned with the dimensions of the previous era, I will take this as being largely given. Instead my concern will be to map out the evolving nature and dimensions of the new order, which I term systemofacture. Thus, whilst this discussion is similar in many respects to those of Piore and Sabel and Perez, it should also be seen as complementary, adding flesh to many of the bones which they lay bare. From Manufacture to Machinofacture The introduction of machinery became increasingly prevalent in the second half of the nineteenth century. The key innovation here was to remove the implement from the hands of the worker and to place it under the control of the machine. Once this was done the route was open to speeding up the operation of these machines to rates of output which were previously unthinkable. Together with the substitution of synthetic for natural raw materials,13 a new era of industrial organisation was opened up, in this case largely because of changes in the forces of production. But technological innovations on their own do not make for a new industrial order, and although the initial turning-point from manufacture to machinofacture had been stimulated by changes in the forces of production, it was the accretion of changes in the social relations of production which were critical for the subsequent global spread of this new era of industry. Over the next two centuries a series of changes in the organisation of production and work were consolidated, in some cases building upon innovations which were introduced even before the first factories of the manufacturing era. This fabric of social relations at the workplace can be characterised as the Fordist labour process, extending in the two decades after 1960 into the NIDL. It is obvious therefore that this labour process of global Fordism is of considerable importance to subsequent analysis, and for this reason it is helpful to map out its six central features. At its root lies the increasing division of labour, which began to be extended in the proto-industrial enterprises of the era of handicrafts and whose significance was remarked upon by Adam Smith in the eighteenth century. The next step in the evolution of the Fordist labour process was the extension of the so-called Babbage principle in the mid-nineteenth century.

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Babbage had shown that if the various manufacturing tasks could be redefined so as to separate out those which are unskilled (that is, that some of the work could be deskilled), then it would not only be possible to employ lower-waged labour, but also to exercise greater control over the labour process by sacking (or threatening to sack) recalcitrant workers. The third step was described by Marx and Ure who observed that skilled labour was inherently uneven in character so that the natural tendency was to try and mechanise these sub-processes. The fourth stage is associated with F.W.Taylor in the late nineteenth century. Amongst other things, Taylor (who was an inventor and one of the founder members of the American Institute of Mechanical Engineers) developed systematic procedures for the detailed control over work. There were four major principles in Taylor’s schema. Management had to absorb and codify the traditional skills of workers and to reduce these to rules; ‘all possible brain work should be removed from the shop and centred in the planning and laying out department’;14 the increasing division of labour should lead to the separation of ‘direct’ from ‘indirect’ tasks such as machine set-up, preparation, maintenance and repair; and, finally, management should specify the tasks of workers in general. All this was to be done through the development of eight functional layers of management. Then in the first part of the twentieth century, Henry Ford added to this evolving labour process a fifth stage, that of the mass production system in which these principles were fine-tuned within the realm of moving production lines, special-purpose machine tools and standardised products. The organising principle was a supply-driven one and the emphasis was placed on the continued operation of production lines; to this end, inventories of work-in-progress were required just in case anything was to go wrong. Finally, in the most recent period—after 1960—this Fordist labour process (representing an accretion of 400 years of work and factory organisation) was extended at the margin on a global basis, giving rise to the New International Division of Labour. In this the principles of task fragmentation and the employment of low-wage unskilled labour resulted in ‘world-factories’ in developing countries, often employing women (who are, together with children, probably the cheapest source of labour in the world). The world was transformed during this era of machinofacturing production, not only in individual countries (and regions of countries) but also in the internationalisation of production. It was an era which had begun with the most significant changes occurring in the realm of embodied technology, but as the centuries progressed it was the organisation of the labour process and the internationalisation of the whole cycle of production which provided the primary momentum for continued accumulation. Yet, this momentum not only faltered from the late 1960s, but became increasingly uneven in nature. Increasing difficulty was experienced on the shop-floor—the growth of labour disputes, poor quality production and other elements of dissatisfaction and inefficiency are widely chronicled.15 To put it starkly, the Fordist labour process

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had itself run out of steam. Moreover, the long-term concentration on specialised single-purpose machinery (especially following the innovations in Henry Ford’s moving production line) made the machinofacturing system increasingly inflexible and unwieldy. The struggle for a resolution of these difficulties has now begun to provide the outline of a new industrial era, with the emphasis on systemic features. From Machinofacture to Systemofacture (a) The labour process in the era of systemofacture. Identifying the systemofacturing labour process is not an easy task. In the first place there is of course no single homogeneous labour process in any era of production. Differences occur over time, between countries, between sectors, between firms and even between different plants in the same firm’s operations in a single country. Nevertheless the ‘inter-era variation’ is considerably greater than the ‘intra-era variation’ and it is therefore possible to describe an ‘ideal type’, as I did in the case of the Fordist labour process in machinofacturing. The labour process which I will be describing is that which has developed over the past two-to-three decades in the Japanese automobile and electronics industries.16 Naturally it has particular characteristics associated with both the country and the sector involved, but it must be borne in mind that the same objections to generalisation could have been made in discussing the system introduced by Henry Ford in the early twentieth century. What is significant is that the automobile industry remains the largest single industrial sector and has consistently pioneered organisational and embodied technologies which have subsequently spread to other sectors. In discussing this new labour process I will confine myself to a schematic presentation of its broad principles—for more detail see Hoffman and Kaplinsky [1988]. It is difficult to know where to begin or what to call this new labour process since it presents itself as an organic system, each of whose pillars rest on the other elements of the same system. Some refer to it as Just-in-Time (or JIT) production17 since one of its distinctive characteristics is the minimisation of inventory levels as components are delivered on a just-in-time basis. Another organising principle is its flexibility, and this is the element which is highlighted by Piore and Sabel’s concept of flexible specialisation. Arising from the small and fragmented nature of the Japanese market in the 1950s and 1960s—which contrasted sharply with the mass market available in the United States in the early twentieth century—the Japanese automobile firms were forced to adopt a more flexible attitude to automobile production. So instead of being able to take advantage of a supply-driven system in which the firm could concentrate on maximising the flow of homogeneous automobiles out of the factory which would be snapped up by an eagerly waiting public, the basis of production changed to a demand-driven one. Initially this was forced on the producers as a way of coping with a heterogeneous pattern of consumption, but

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as the system of production became fine-tuned to cope with variation in output, so this became a competitive-end in itself. Thus market-heterogeneity was actively encouraged by the automobile suppliers and the system has increasingly come to be characterised as one in which, by comparison with Fordism, the emphasis in competition has changed from price-competition to productinnovation. The automobile sector is one of a major group of industries which can be characterised as the discrete-products industries. These branches of industry are characterised by a flow of output of individual products, each distinct from the other. (This contrasts with the dimensional industries—such as textiles and chemicals—where output occurs in a stream which is measurable in volume or weight.) In the discrete-product sectors, a change in the specification of output necessarily involves the resetting of machinery and this is one of the major factors accounting for scale economies in production. If the resetting of machinery takes time—‘downtime’ as it is usually called—then the introduction of flexible product schedules can be a costly innovation. Therefore one of the primary consequences of the introduction of a demand-driven system of production is the introduction of flexibility in work-patterns. This necessitates moving away from the historic trend towards the increasing division of labour since it is characteristic of the flexible labour process that the same labourers who are involved in operating the machines will also be responsible for changing the settings of machines and for routine functions of maintenance and repair. It also becomes imperative for workers to command a range of skills so that they can perform this multitasking work. Moreover, from this it necessarily follows that the new labour process is also a multi-skilling one, reversing the historic tendency towards the deskilling of work. Indeed it is a characteristic of this system that workers do not get paid according to what they do, but in relation to what they can do. Because one of the functions of inventories in the Fordist labour-process was to ensure that the production line was kept moving at all costs, once the principle was accepted of interrupting production to ensure flexibility the possibility arose of reducing inventory lines. This has been one of the major thrusts of the Japanese labour process and one which has possibly received the most attention in other countries. It has culminated in the JIT concept in which the final objective is to reduce inventories as close to zero as possible. Yet the primary function of inventories in the Fordist system was to protect against any possibility of disrupting production—inventories were a buffer just in case anything went wrong. So if a move was to be made to zero-inventories, it became imperative that enhanced quality-control procedures be introduced. Nothing can be allowed to go wrong since there were no inventories to back-up the system. Thus zero-defect policies were introduced as well as a complete reorganisation of the way in which components were delivered. The previously haphazard procedure of piling an approximate number of components in a large container gave way to a much more careful packing system in specifically-

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 15

designed palletised containers, and together with the imperative of greater quality assurance, this led to a significant change in the relationship between assemblers and component suppliers. The emphasis on quality assurance meant that quality control could no longer be left to a specialised group of workers at the end of the line, or dealt with in rectification bays, since the absence of buffer-inventories meant that the whole line could be crippled before the quality control department could determine the source of the problem. (Complex products such as automobiles are also expensive items to rectify.) Quality control thus necessarily had to become the concern of every worker. But this conflicted with the Taylorist schema in which all control over production was to be taken away from the line-worker and in some important respects control over production had to be given back to the detailed worker. Indeed in some assembly plants each worker was given a switch to close down the line if he or she noticed that anything was wrong—they were not only given the possibility of stopping the line, but were actually expected to do so. This principle of giving a measure of control back to the worker could only function in the context of a positive working environment. So partly for this reason and partly because quality itself was an important objective, qualitycircles and other exhortatory activities—which in Japan often included the singing of company songs and exercising before work—were introduced. But these groups and activities served another important service. The switch from price-based competition to product-led innovation had changed the role of the R & D departments which now had to become more concerned with fundamental innovations.18 Thus, much of the responsibility for incremental technical change was given to the shop-floor worker and this was furthered through a scheme of suggestions for improvements, most of which were remunerated. Such an important schema could not be left to chance, however, and management characteristically set targets of suggestions which had to be submitted by the workforce. Many parts of this new labour process are widely known outside of Japan. A great number of firms have come to adopt JIT strategies, to adopt quality circles (QCs) or to introduce suggestion schemes. But what most firms have failed to do is appreciate the systemic and interrelated nature of these various elements of the Japanese system. In one sense we could have begun to describe this new labour process through any one of its various components—beginning for example with QCs or with JIT or with the move to multi-tasking or multi-skilling. In each case it would have been necessary to describe almost all of the phenomena described above since all the elements relate functionally to one another and to the operation of this systemic labour process as a whole. I have described so far the nature of the new labour process on the shop floor. There are also concomitants of these developments in other spheres of relations between labour and management. This includes the phenomenom of lifetime employment (applying generally to those workers in the core assembly and

16 THE THIRD INDUSTRIAL REVOLUTION

component firms, making-up between one-quarter and one-third of the labour force) and the nature and function of trade unions. The old craft-unions which characterised many of the Fordist systems and which reflected the trend towards the increasing division of labour are widely considered to be no longer appropriate. Enterprise-, firm- or sector-wide unions are probably essential if multi-tasking and multi-skilling work is to be introduced. Second, the old system of confrontation in work can no longer apply where cooperation and the two-way flow of information are essential. Third, flexibility in work has wider dimensions than that of multi-tasking. It also requires greater flexibility of hours and management if a successful transition is to be made from a supply- to a demand-driven system. And, finally, the development of a more multi-skilled workforce requires a fundamentally different attitude by capital towards labour which has to be seen more as a resource than a cost. It also militates towards stability amongst core workers and, some would argue, inherently involves segmented labour markets in which non-core workers are increasingly marginalised. (b) The application of the new heartland technology to products and processes: the diffusion of microelectronics and the importance of systems in production. We have seen that long-wave theories argue that these long periods of boom and recession are associated with the emergence of revolutionary heartland technologies. In the early phase of its introduction, the new technology is primarily utilised for new products—demand expands, jobs are created and a virtuous circle of innovation and employment results. But after a while the technology comes to be used to rationalise production. Labour is displaced and the system declines first into recession, and subsequently into depression. The most recent of these long-waves, it has been argued, has been in large part fuelled by the development and diffusion of microelectronics technology. In the early years this technology found its major use in a series of new products, including consumer durables, telecommunications, information processing and military equipment. But the technology has increasingly come to be applied in capital goods where it offers a number of important competitive advantages. It reduces the lead-time in product development, saves on materials utilisation, often saves in capital costs, sometimes makes possible what was previously impossible, saves on the use of material inputs and also of course substitutes for labour. A wide range of studies show the significant competitive advantages arising from the incorporation of electronics in product and process and why it is that the electronics sector continues its rapid growth-rate when others are in decline. Thus it is appropriate to conclude that electronics is the key embodied technology at this point of transition between machino-facture and systemofacture. There is no need, therefore, to repeat the results which emerge from the works on the economic benefits arising from the utilisation of these new electronics-based automation technologies. But what is often missed in these analyses is the systemic characteristics of the new technologies.

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 17

Within the era of machinofacture, we can determine three vintages of automation. In the earliest the primary concern lay with the mechanisation19 of transformation—improved ways of cutting, bending, punching and other ways of transforming materials. Next, with the major innovations occurring around the turn of this century, was the automation of transfer, with the moving production line being the most significant innovation. The third phase of automation within machinofacture was that of control, beginning many years ago with mechanical cams, being boosted in the 1920s by the introduction of electrical relay switches and culminating in the utilisation of electronically controlled equipment in the 1970s and 1980s. Whilst this threefold classification of automation serves well as a taxonomy for understanding automation during machinofacture, it is too limited a concept for the new era. The problem is that its conception of production begins and ends with the process of transformation on the factory floor. But what of the indirect processes in production such as managerial organisation and research and development? And what of the increasing importance of flows of information on the shop-floor? In fact there are three spheres of production in the modem firm. The first of these is design, where the nature of the firm’s output is defined and new production processes are explored. The actual transformation of designs into physical product occurs in a second sphere of production in which the raw materials and intermediate inputs are stored, processed into final products and ultimately delivered to the consumer. These two spheres of production—design and machinofacture—which are the kernel of an enterprise’s activities could not operate effectively without some form of coordination and this comprises the third sphere of production. Within each of these three spheres of production there are a variety of separate activities. For example, within the design sphere, design itself is usually an activity distinct from drawing, copying and tracing; within the machinofacturing sphere there are important differences between handling, forming, assembling, control, storage and distribution; and within the coordination sphere, information has to be gathered, processed, stored and transmitted. Whilst some activities are common to all enterprises—for example, handling in the machinofacturing sphere —there will inevitably be a variation in the number and type of other activities. Once it is recognised that there are these three spheres of production, each with its particular sets of activities, it is possible to categorise three different types of automation. The first of these is intra-activity automation, that is, automation which occurs within a particular activity.20 The determining characteristic of this type of automation is that it is limited to a particular activity and that it is consequently isolated from other activities within or beyond the particular sphere of production. The second type of automation is intra-sphere automation, which refers to technologies which have links with other activities within the same sphere. Indeed, the origins of the term ‘automation’ in the Ford assembly plant of the 1920s illustrated this type of automation well: the new

18 THE THIRD INDUSTRIAL REVOLUTION

transfer line mechanised the flow of materials between different activities such as lathes, drilling and boring machines. The third and final type is inter-sphere automation which is the most complete form of automation and involves coordination between activities within each of the different spheres. There are a wide variety of potential inter-sphere combinations. These may be of a relatively limited and simple nature, for example, the use of design parameters to automatically set machine settings; or they may be wide-ranging and complex as in the linking of changes in the specification of production to parameters generated in redesign, and thus in continual adjustments made in machine settings. The major technical factor accounting for the development of these systemic qualities in production is the emergence of a pervasive binary logic in electronic control devices. Binary systems operate on the basis of either/or logic in which counting and logical systems can be decomposed into a variety of states, each of which can be answered with binary logic. Thus a common way of processing ideas or information can be utilised in a wide variety of activities, across all spheres of production within the enterprise, as well as with external firms and institutions. Since digital logic can easily be transmitted via the interrupted flow of electricity (or light, as is proposed for the future generation of computers), there is a ready interconnection between processing and transmitting information (‘informatics’) that provides the key facilitating technology for intra-sphere and inter-sphere automation discussed above. Microelectronics in intra-activity automation has tended to be associated with the optimisation of control and the storage of information. Indeed, between 1960 and the late 1970s this was the major area of the technology’s diffusion. In the machinofacturing sphere there has been a maturation of numerical control, beginning with simple machine tools and currently extending to assembly robots; in the design sphere, microelectronics systems began with batch-oriented mainframe design computers and progressed to interactive computer-aided design (CAD) and computer-aided draughting systems; in the sphere of coordination, applications began with computers being used for stock-and-wage control, and then extended to word-processing and, most recently, to electronic printing. Towards the latter years of the machinofacturing era in the mid 1970s the first fledgling attempts were made at the qualitative changes arising from the introduction of microelectronics systems to intra-sphere automation. Intra-sphere automation is currently the major objective of most of the major machinery suppliers providing equipment for each of three spheres of production. In the design sphere, computer-aided-design and drafting systems are widely available. In the machinofacturing sphere, the target is the development of flexible manufacturing systems, and here electronically controlled machines are much easier to reset than their fixed-automation predecessors. And in the sphere of coordination, integrated multi-function workstations are being developed which cover the full range of activities.

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The early application of electronics in intra- and inter-sphere automation was compatible with the era of machinofacture—it merely substituted electronic control devices for electro-mechanical ones. But the introduction of full intersphere automation requires substantial changes in managerial approach, in organisation and in the labour process and can no longer be contained within the realm of machino-facture. (c) The new pattern of interfirm relationships. Henry Ford’s Model T—the great success story which embedded the moving production line in the minds of corporate planners—was introduced in 1913 and its rapid growth in sales was initially founded upon the fundamental change in work-organisation which was described earlier. But after the end of the First World War the continued growth of production and sales of this marque largely arose from the establishment of Ford’s giant, integrated River Rouge complex covering the whole process of production from steel to the assembly of the final automobiles. This system of integrated production was soon copied by General Motors (GM) but after a gigantic write-down of inventory (involving $83 million) in th recession of 1920–22, GM moved to a very different form of organisation. This was based on a multidivisional structure organised to produce different autos, each having its own functional departments. Economies of scale were realised through the specialisation of component production, and each component affiliate was responsible for meeting the requirements of the different product divisions. Over the years a number of specialised component firms developed to supplement the in-house production of components by affiliates of each of the major auto assemblers. The significant characteristic of purchases by the assemblers from both their affiliates and from independent firms was that the development and production of component designs occurred in isolation from final auto design. Both sets of component producers were held at arms-length. Contracts for individual items were renegotiated at regular intervals and under tough conditions. In general they were put out informally to competitive tender by a number of component firms who, if successful, supplied the components for a fixed term of two to three years before a new contract was tendered. Moreover, particularly in the 1960s and 1970s when industrial action came to be more of a problem, most automobile assemblers preferred dual-sourcing arrangements. Thus, to the extent that components were sourced from independent suppliers, the relationship between them and the assemblers was largely adversarial. By contrast the Japanese developed a very different form of relationship between the component suppliers and the assemblers. In some senses there were superficial similarities with the GM system, especially as most of the component suppliers were linked-in to particular assemblers. The banks played an important role in this, being involved in (and often initiating) a series of complex interrelationships between particular assemblers and their component suppliers in which cross-holdings of minority equity shares played an important role. However, the detailed relationships between the assemblers and component firms in Japan is of a radically different nature.

20 THE THIRD INDUSTRIAL REVOLUTION

First, the use of JIT inventory systems imposes a number of important requirements. Proximity between suppliers and assemblers is key, otherwise there is little prospect of maintaining tight delivery schedules and low inventories. JIT also requires detailed collaboration in the scheduling of production. Moreover, the need for zero-defect components and precisely-packed containers not only necessitates a measure of harmony between the firms but also close cooperation when defects are found or when quality standards are not being met. These and other elements of the JIT principle rule out the adversarial relationship between component suppliers and assemblers. Second, a change in this relationship is also being dictated by the nature of technological progress. I referred earlier to the growth of systemic production technologies, but the same systemic trend is also occurring in relation to products. Largely—but not entirely—as a result of the use of digital-logic electronic control systems, it is becoming possible to take advantage of the systemic interdependence between different subsystems in the final product. For example, engine control is now a complex system which draws together information form a variety of previously separate components such as the carburettor and the timing of the spark. The development of these systemic qualities in sub-assemblies of components requires a much closer level of coordination, not only between the assemblers and the component suppliers, but also between different component suppliers. And thirdly, there has been a growing tendency for the technological content of the automobile—and indeed most other products—to increase. This requires specialised R & D, much of which involves a long lag between the conception and the supply of the final component or component sub-system. When a final product consists of many technology-intensive intermediates there is a much greater need for coordination than when the various inputs are relatively simple. So, once again, coordination and integration become important parts of the whole process of production. Taken together these various attributes of the relationship between firms take on a very different function to those which have evolved between the assemblers and the independent component suppliers in the latter days of the machinofacturing era. The net result is that the new system of interrelationships in unlike that of the old order, and has many of the attributes of systemic and organic integration. It is as if automobile assembly comprises some form of organic holism, with a much closer measure of functional interdependence and coordination than in previous systems of organisation. The Systemic Nature of Modern Production The analysis has thus postulated a break in modem industrial history. This can be briefly characterised as the departure from the standardised, scale intensive machinofacturing era to a new more flexible pattern of production, one in which the systemic features are particularly prominent. Systems enter the stage in

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 21

modem production in three major areas—in the form of a systemic labour process, the introduction of computer integrated manufacturing and the development of organic links between suppliers and assemblers. In each of these three areas there are gains to be had from introducing various discrete elements of the package, but the payback arising from an integrated and holistic pattern of innovation significantly exceed the sum of the parts. The issue now is whether the flexible and systemic nature of this production paradigm has implications for the insertion of developing countries into the international division of labour in manufacturing. III. TECHNOLOGICAL CHANGE AND THE INTERNATIONAL DIVISION OF LABOUR If this view of industrial history is credible, then the radical change in the nature of organisation and production which I have been describing may well be associated with substantial changes in the international division of labour. But it is important to lay to rest the view that embodied technological change is the prime mover of change. Although it is clearly very likely, there is no inevitability about this transition from machinofacture to systemofacture; there is no unique correspondence between any particular global division of labour and any of these four areas of industrial production (that is, handicrafts, manufacture, machinofacture and systemofacture); and there is considerable scope for social action, especially at the level of sectoral and national policy formation. These changes are not predetermined in any narrow sense, but result from the particular historical conjuncture within which the transition to systemofacture is occurring. In order to throw light on this it is helpful to focus on three transitional developments in the current crisis—the unevenness of technical progress between countries and regions, the emergence of growing trade imbalances, and the uneven growth of unemployment—which influence the political environment within which systemofacture diffuses. (a) National unevenness in technological progress. Table 1, which is drawn from Maddison’s detailed study of the changing balance of productivity levels between six major IACs and which compares the USA levels with the 15 major non-Communist IACs, is illuminating at a number of levels. In the first place it illustrates the phenomenal relative productivity improvement of the American economy between 1870 and 1950. It also shows how between 1950 and 1973, most of the IACs had begun to catch up with the United States, a phenomenon which was particularly evident in the late 1960s when United States productivity growth began to slow.21 Another important issue emerging from Table 1 is the rapid progress of Japan and the poor performance of the United Kingdom. The Japanese case is somewhat understated since its industrial progress—based on a policy of sectoral-targeting—has been uneven and in particular sectors its progress has been phenomenal.22

22 THE THIRD INDUSTRIAL REVOLUTION

(b) The emergence of growing trade imbalances. One of the consequences of this unevenness of productivity growth—and specifically the relatively poor performance of the United Kingdom and the United States—has been the sharp growth of import penetration and a deterioration in the balance of payments of these two countries. The American balance of payments current account deficit has grown dramatically over the past decade, dwarfing the balance of payments difficulties of all other IACs, and even of many of the large debtor LDCs. Indeed from being the largest net creditor in 1983, the United States had become the most debt-ridden by 1985. (c) The re-emergence of unemployment. The third dimension of the latter years of machinofacture is the changing structure of employment, particularly since 1973. It is here that important similarities and differences are to be found with the previous most recent crisis in the global economy. In the depression of the 1930s there was a collapse not just of employment but also of output. By contrast, in the most recent period output has held up whilst employment has fallen. For many of the IACs the rate of unemployment currently exceeds that of the high point of the 1930s depression. The Determinants of Location in the Transition to Systemofacture. The central argument of this article is that this transition between production paradigms is likely to be associated with a change in international TABLE 1 PRODUCTIVITY LEVELS PER PERSON HOUR

Source: Drawn from Maddison [1982] and cited in Glyn et al. [1986].

specialisation. In drawing this conclusion the discussion is influenced by two sets of developments which appear to affect the location of production. These may be referred to as the politics of location (which is affected by the unevenness of productivity growth, the growth of trade imbalances and the reemergence of unemployment) and the economics of location. (a) Changes in the politics of location: growing problems of market access. Market access has been an important aspect of global industrial growth. This was especially so in the period of rapid international integration after 1950, a process which was facilitated by a GATT-induced system of tariff-reductions. When tradefrictions did arise—as in the 1950s between Japan and the USA in garments and textiles—the only legitimate recourse was the introduction of non-tariff barriers

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 23

such as quotas and orderly marketing agreements. But with the exception of the multi-fibre agreement—which extended quotas from Japan to the Third World— non-tariff barriers were not a major phenomenom in the IACs, at least until the mid 1970s. At that stage the Japanese strategy of sectoral targeting in industrial development was reflected in significant penetration in individual markets. This was highly visible and had an easily-identifiable response—quota barriers. Thus began a series of Orderly Marketing Agreements and Voluntary Export restraints in which first the Japanese and then the Europeans the South Koreans and Taiwanese found their access to the American market restricted. At the same time the EEC countries began to take action, sometimes as in the case of automobiles on an individual country basis, but more often through Community action. The Japanese had long had non-tariff barriers, making it difficult to export to that market. The number of products covered in the agreements increased rapidly, particularly in the 1980s when it became obvious to many that the problem of unemployment would not be easily solved. Soon a wide range of sectors were covered by such non-tariff barriers including shoes, garments, textiles, steel, autos, colour TVs, video tape recorders, machine tools, agricultural products, photocopying machines, typewriters, printers, microwave ovens and semiconductors. The new orientation in trade-regime is probably most visible in the USA. At the beginning of 1986 the US International Trade Commission had around 50 requests for protectionist barriers, and these had doubled by the beginning of 1987. Protectionism is now firmly on the political agenda, within individual countries and between regional groupings. This re-emergence of protectionism is key to my projected view of international specialisation in the era of systemofacture. I have shown (and will discuss further below) how the new era involves a very different pattern of location between assemblers and suppliers, with geographical proximity and systemic interdependence becoming crucial to competitiveness. But, on their own, these technological developments say nothing about the international distribution of economic activity since there is no reason why these clusters of production should not be located in Japan or even the LDCs, exporting output to the IACs. My reason for suggesting that—at least in the short- to medium-run— they will be located in the IACs follows from the changing politics of location, that is, the reemergence of protectionism. This is forcing the assembly stage of production to the final market, and in so doing, also leads to the relocation of the subsidiary component-manufacturing stages of the cycle of production. The emergence of protectionism is clearly apparent in the automobile sector. Are we then to expect that similar protectionist phenomena will appear uniformly across all sectors? Probably not. But if this is so, is it possible to anticipate in which sectors the new protectionism will surface? Of course this is by no means easy, partly because there are so many factors which go into the determination of

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specific protectionist measures. These inevitably lead not only to sectoral variations, but also to national ones. Nevertheless, despite all these caveats, it is likely that the extent to which protectionism reappears across sectors will be significantly affected by three major factors. The first of these concerns those industries which are considered to be of strategic importance. This may be because they are so large (as in the case of the automobile industry) that many governments feel that international location cannot be left to market forces. Their intervention may either take the form of direct quotas (as utilised in the automobile sector by the United States, Italy and France) or through a type of quasi-protection involving the subsidisation of local firms.23 Another type of strategic industry is that which is considered to be at the leading edge of technology. The most readily apparent set of sectors here are those associated with the production and utilisation of electronics. This is not confined to Japan, the Republic of Korea and Brazil (all of whom have a trackrecord of supporting emerging technologies) but now also includes Western Europe and the United States who are moving to both protect and subsidise these leading sectors. In the United States anti-dumping actions have been taken against the Japanese producers to inhibit them from their well-practised predatory-pricing strategies. But in 1987 earlier US attempts to subsidise the industry were consolidated with a $1 billion state-subsidised Sematech initiative designed to assist United States semiconductor firms back to the leading edge of technology. The second factor determining the sectoral incidence of protectionism is likely to affect precisely the opposite sort of industries to the capital- and technologyintensive strategic sectors discussed above. It relates to the traditional labourintensive industries in the IACs which, partly because of their labour-intensity, have come to be threatened by imports sourced from countries with lower wages. The most notable examples are the textiles, garments and shoe industries, but it also includes the basic steel industry and much of the capital-goods sector where traditional technology has often been labour-intensive. The particular susceptibility of these industries to protectionist pressure follows directly from three factors. Their labour-intensity means that import-penetration has a highly visible consequence, all the more so during periods of high unemployment; many of these industries are regionally concentrated, so that the local stresses which result from labour-displacement are easily translated into political pressure, much more so than the diffuse general increase in consumer welfare which arises from the availability of low-cost imports; and much of the countervailing employment-creation in new industries tends to occur in other regions, partly because (as we have seen) the innovating firms prefer to establish production in regions which are relatively free from trade unions and work practices developed in the machinofacturing era. The final factor affecting the sectoral incidence of protectionism relates to the presence of TNCs in the chain of international production. Where international firms are particularly involved in foreign production and trade, they are relatively

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 25

more likely to withstand the protectionist pressures exerted on their domestic governments. Thus, in the case of the automobile and electronic sectors, most of the largest United States producers have come to rely almost exclusively on foreign supplies for some components; and in many cases production has been subcontracted to foreign-based producers rather than to the foreign subsidiaries of these TNCs.24 Protection has only belatedly appeared in these sectors. However, where domestically-owned TNCs are not involved in the chain of production there are fewer and less-powerful vested interests opposing the clamour for protection. This is particularly evident in the shoe and garments sectors where although some domestically-owned firms have organised a global chain of production, many of the imports into the IACs come from indigenously-owned Republic of Korea, Hong Kong, Taiwanese and Chinese producers. Trying to make sense of this sectorally-uneven incidence of protectionism it is thus possible to conclude that the pressures are most likely to be felt in sectors which (by virtue either of their size or technological content) are considered strategic, in sectors which involve labour-intensive production and in sectors where few domestic firms have international operations. In some cases these three categories overlap and reinforce each other (as in garments and shoes), whilst in other cases they tend to act independently (for example, locally-owned electronics TNCs who source some of their components from abroad). But it should not be thought that these factors will alone determine the incidence of protection. They are merely contributory to the relative timing of protection which, as a general phenomenon, is most likely to be affected by the rate of unemployment and the extent and persistence of the trade deficit. (b) Changes in the economics of location: the uneven sectoral incidence of technological progress. The transition from machinofacture to systemofacture is probably most evident in the case of automobiles and electronics, although many of the central tenets of the new order are diffusing rapidly in other sectors. It is therefore important to determine whether there are any principles which can be identified to anticipate the direction and speed of diffusion of systemofacture to other industrial sectors. In addition to market access (the politics of location) a second factor affecting the sectoral incidence of transition is that of the economics of location. This is affected by a number of factors, including economies of scale in production. Their growth has led to the insertion of LDCs into the international division of labour as production platforms for world markets. The second technological factor affecting the sectoral incidence of systemofacture relates to the degree of inter- and intra-industry links in the chain of production since the advent of JIT production places demands of proximity if inventories are to be reduced. Changes in Economies of Scale The interaction between the homogeneity of markets and the type of industry provides the basis for scale economies, and thus for the existence of the ‘world

26 THE THIRD INDUSTRIAL REVOLUTION

factories’ of machinofacture and the TNC. But the concept of ‘scale economies’ is not quite as simple as it often seems, and it is helpful to distinguish three major dimensions of scale—of product, of plant and of firm. It is only really the first two of these which affect the incorporation of LDCs into the global division of labour in manufacturing.25 The first, and most obvious factor determining scale is the perspective of management. As Piore and Sabel document, the mass production paradigm— with its machinofacturing focus on the production of price-sensitive standardised products—became dominant in the late nineteenth century, and until recently has underlain the strategic perspective of most corporate managers. They came to believe that mass production would inevitably become standard in all products and sectors, and planned accordingly. This has given an impetus to both product and plant economies of scale. A second factor underlying the growth of scale economies follows from the engineering principles involved in many of the dimensional industries,26 particularly those which involve chemical processes. The necessity to control these chemical processes requires the utilisation of enclosed containers, but the geometry of volume is such that increases in internal capacity do not occur in the same relation as changes in external surface—in fact, the relationship between these changes in surface and volume is around 0.6. Over the years plant engineers have come to develop a rule of thumb that as they double plant capacity, so capital costs have only tended to increase by about two-thirds, and they have come to dub this as the ‘0.6 rule’. Here we can see a clear technological dynamic towards plant economies of scale in the chemical process industries; it also suggests that the very small firms will also be excluded. But these technological factors do not generally extend to product economics of scale, since many of these process plants can produce a number of different products. A third factor providing an impetus to scale economies is specific to the discrete products industries, producing individual units of output. Here the switch from the production of one specification of commodity to another requires the resetting of machinery, commonly known as ‘downtime’. Production has to be stopped and individual machines have to be adjusted to produce different sizes and shapes. Not only does this downtime lead to the loss of output, but the manual resetting of machinery-specifications frequently leads to the initial spoilage of output. Although the extent of this downtime can be significantly affected by the organisation of production, there are nevertheless inherent technological factors which suggest that, all other things being equal, it is best to keep machines running for as long as possible, to ‘dedicate’ them to a particular task. This provides an impetus for both product and plant economics of scale, with the ultimate logic being to specialise production and to transport the final output to distant consumers if the local market is not large enough to ensure the take-up of the whole production of a particular plant and product.

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A fourth factor underlying the growth of scale economies has particular implications for firm-size and relates to the indirect costs of production. These are costs which are not directly incurred in production. Indirect costs (often termed ‘overheads’) arise from activities which lie in the background of actual production and whilst their use does not vary directly with output, if they are not sustained at some general level then the enterprise as a whole will not be able to function competitively. Historically, four sets of indirect costs have stood out in importance. The first is R & D such as that involved in long-run product improvement and development, and this clearly varies in importance between sectors. The second item of indirect costs is management, not so much detailed linemanagement (which is a direct cost of production) but more the overall strategic planning activities of senior management. Third is the function of raw material and component acquisition and the fourth relates to sales and marketing. All of these indirect costs provide the impetus to firm economies of scale, although this is not necessarily the case and alternatives do exist for the spreading of indirect costs of production between firms. The ‘economies of mass resources’ are another factor leading to the growth of firm scale economies. These include a variety of advantages of size which make life easier for the very large firms. A number of examples illustrate their scope— the ability of a large firm to obtain concessionary finance; the provision of guarantees for large tranches of borrowed funds; concessionary prices obtained for inputs as a consequence of the bargaining strength of world-wide sourcing. All these factors—whose import first became evident in the mid-nineteenth century with the development of the ‘national firm’ in the United States—provide a powerful impetus for the domination of large-scale firms in production, but as with the case of indirect costs of production, there are other ways of obtaining access to these economies of massed resources. The final factor underlying the growth of scale economies is the existence of large and homogeneous markets. This was crucial in the development of the mass production paradigm in the United States in the nineteenth century, and it was largely for this reason that the machino-facturing era was forged in North America rather than Western Europe. Clearly, unless the savings arising from dedicated production are so substantial that they dwarf the costs of inventories and transport, then the existence of large and proximate markets is essential for the consumption of standardised output. The consequence of these six sets of factors has been that since the beginning of the machinofacturing era (and probably even before that) there has been a consistent tendency for scale economies to grow along all three of these dimensions of scale—of product, of plant and of firm. Product runs became longer (as in the ‘world car’), plant sizes grew (the ‘world factory’) and the TNC came to dominate production through out the globe.27 Both product and plant scale economies led to the incorporation of some LDCs in the international division of labour—producing ‘world parts’ and ‘world products’ in ‘world factories’ for ‘world markets’. Only in two sets of sectors did these scale economies not

28 THE THIRD INDUSTRIAL REVOLUTION

grow—those in which demand was necessarily heterogeneous (such as capital goods, some building materials and income-inelastic craft-based consumer goods) and those in which the limp materials in production provided severe obstacles to mechanisation (notably garments and leather products). But with the transition to systemofacture, many of these factors underwriting the growth of scale economies have begun to change. In some cases the consequences are to reduce the pressures to scale. Managerial perspectives have begun to alter and markets have become much more discriminating and less satisfied with mass-produced consumption goods. Product innovation and quality have increased in relative importance compared to price, particularly in the IACs and the NICs, and this has undercut the standardised-product mentality of Fordism. Moreover, the reorientation of the labour process has significantly cut the extent of downtime during machinery changes and this has allowed production to become more flexible. And, finally, the introduction of electronically-controlled machinery has cut the guesswork out of much of machinery-setting. Instead of the approximate accuracy of manual-setting, electronic-controls allow for much greater precision and thus much of the wasted production characteristic of product changeover is reduced. But two other determinants of scale remain unaltered—although process industries are becoming more flexible in their output (thus reducing product economies of scale), they continue to rely on large-plants. And the indirect costs of production—especially the R & D component—continue to rise. This has been extensively documented for the automobile assembly and components industries, but occurs across the board and is perhaps one of the most significant features of modern industry. It is a factor more germane to firm-scale economies than to those of product or plant. Figure 1 contrasts these central tendencies in both machinofacture and systemofacture. In machinofacture there was a consistent tendency for scale economies to grow in most industries (excluding some of the capital goods and limp-fabric industries) and across all dimensions of scale, that is in relation to product-runs, and plant- and firm-size. It was this which led most observers to conflate all three dimensions under the simple heading of ‘growing scale economies in production’. However in systemo-facture we are seeing something of a divergence. In the small batch industries which were previously impossible to automate, the new flexible electronics-based machinery is providing the impetus for a growth in plant and firm size. In the previously large-batch discrete products industries both product and plant economies are falling—firm size also tends to be growing. Finally, in the continuous process industries product runs appear to be falling across the board due to greater plant flexibility; in some subsectors (notably steel reduction, steel rolling and power generation) plant size is also falling. But due to the continued acceleration in the knowledge-base in production, firm size continues to grow.

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 29

FIGURE 1 CHANGES IN THE THREE DIMENSIONS OF SCALE IN THE TRANSITION FROM MACHINOFACTURE TO SYSTEMOFACTURE Note: These are ‘ideal types’, representing central tendencies. There will obviously be variations, reflecting sectoral specifities, differences in corporate strategy and some differences between countries.

Of course all of these changes in the basis of scale economics affect the optimal locale of production and hence the extent to which LDCs will find a role in the international division of labour. Briefly, the conclusions are as follows. In large-batch discrete products industries the large ‘world factories’ may no longer be optimal—hence production is more likely to be sited near the point of final consumption. In the small batch and the limp-fabric industries (notably shoes and garments), the new flexible electronics technologies are allowing for automated production in more capital-intensive plants. Low-wage labour-intensive comparative advantage will thus be of reduced significance and small job-shopping capital goods producers will also face a relative disadvantage. Finally, the growth of indirect costs in production continues to lead to firmscaling factors—these might either see a renewed emphasis towards multinationalisation of ownership or the growth in inter-firm collaboration to spread indirect costs in production. But changes in scale economies are not the only factor likely to affect the economics of international location—a second factor affecting the optimum locale of production arises from the desire to reduce inventories. Inventory Reduction and the Complexity of Intra- and InterFirm Linkages The transition from just-in-case to just-in-time inventories—involving a significant reduction in inventories—ideally requires plants to be located in close proximity. In Toyota’s case, this means producing in the same town and delivering at 1–2 hourly intervals. But JIT makes most sense when a great many components are involved in assembly, as in the case of automobiles when upwards of 20,000 discrete components may be involved. When a product is either molded or cast in a single

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or limited number of operations, or when it comprises of a small number of parts, then the advantage of inventory reduction is largely confined to the final product itself. In these cases there is likely to be a less-significant imperative to locate production in proximate enterprises or near to the final market. Thus the greater the degree of complexity in production—‘roundaboutness’ as it is sometimes called—the greater the likelihood that the new locational patterns which we are observing will prevail. IV. THE INTERNATIONAL DIVISION OF LABOUR IN THE FOUR ERAS OF PRODUCTION The transition from handicrafts to manufacture was reflected in the development of the factory system. Machinofacture saw the substitution of human labour by machines, initially working on a stand-alone basis and subsequently in small groups of machines; it also saw the development and refinement of an historically distinct labour process and form of productive organisation. In the most recent period the dominant characteristic of production is the adoption of flexible perspectives and the prevalence of systems and integration—between machines (and groups of machines), between plants and firms, between workers, and between tasks and skills. Earlier in this paper I also considered the factors which help to explain the transition between one era and the next, contrasting the views of the ‘technological determinists’—that is, those who believed that the primary motive factor was the development, diffusion and maturation of a series of heartland embodied technologies—with the views of others who had argued that it was in the realm of social relations that the key dynamic elements were to be found. My own recounting of historical events is that the transition between handicrafts and manufacture was primarily induced by changes in social relations. That between manufacture and machinofacture was initiated by changes in the forces of production and then consolidated by changes in social relations. In the most recent period the primary inducement to change is to be found in the realm of social relations, although the development of a new set of embodied technologies is a key component of the development of the new order. Conceptually, the discussion questioned the economists’ understanding of ‘technology’, suggesting that a focus on embodied technology is far too narrow to capture the essence of contemporary events. The reason why the first decisive step in modem industry—that is, the transition from handicrafts to manufacture—occurred in England was because it was there that the social conditions induced change. Following an alteration in the relationship between land and population and the onset of the enclosure movement, labour had been displaced from agriculture and required proper employment. From the point of view of the capitalist, the putting-out system which had been utilised in the handicrafts era was no longer efficient because it

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 31

was difficult to control labour. Thus arose the first factories in England, setting in motion the systematic application of organisation and technology to production and hence the industrial revolution. The transition from manufacture to machinofacture is also primarily explained by social factors of this sort. The new machine-based technology displaced both skilled and unskilled labour and whilst the first developments occurred in England, it was in the US rather than Europe that the labour force was severely constrained and unschooled in shop-floor militancy. Moreover, it was also there that the large markets which were essential to exploit the underlying scale advantages of this inflexible form of mechanisation were to be found. Hence the machinofacturing system first took root there. Now, in this new era of systemofacture, the social conditions which facilitate the new labour process and inter-plant and inter firm relationships are to be found in the Far East and it is for this reason that the new paradigm is being forged there. This brief discussion helps to explain changes in what might be called the ‘centre of gravity’ in global accumulation. Clearly this has implications for which region of LDCs is likely to grow most rapidly. But in addition to this there is the question of where production will occur for global markets—in machinofacture there was a tendency for this to gravitate nearest the sites of least labour-cost. And it is in this area that my main conclusions belong. We know that the economics of location are changing significantly. Whereas in machinofacture it was economically rational to exploit scale economies in dedicated production lines and to ship the final products to world markets, in systemofacture the flexibility of organisation and technology makes this imperative less intense. Moreover, it is in the logic of JIT that suppliers be clustered around the final assembler and the introduction of labour-saving automation also reduces the incentive to produce in localities of low-wage cost. I have also tried to identify a series of technological principles which help to indicate in which sectors these changes in the economics of location are likely to occur. On their own, though, these changes in the economics of location need not necessarily involve a change in the international division of labour in manufacturing since there is no reason why these clusters of production should not be established in the Republic of Korea, Brazil or China, taking advantage of low wage-costs (despite the reduced importance of labour-costs in production). However, I noted earlier that because of the unevenness of the transition between machinofacture and systemofacture we are witnessing the onset of barriers to market entry which create problems for the maintenance of the NIDL—the ‘politics of location’ are also changing. Some have argued that this will lead to a breakdown in the world economy as we have come to know it and the development of regional trading blocs comprising perhaps the EEC and Africa, the US and Latin America, Japan and Asia and the USSR and Eastern Europe.28 If protectionist barriers become more prominent, then it is likely that final production will be forced to occur near the market. Once this occurs, then the logic of JIT will result in the component suppliers following on.29 Moreover as

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markets become more differentiated it will also pay many producers to locate themselves near the final market, since this will be essential if they are to respond flexibly to changes in market conditions.30 So, I hypothesise, this confluence of the changing economics and politics of location will lead to a significant change in the international division of labour in manufacturing. Much of this remains at the level of conjecture and a number of important questions remain open. How significant are these changes in the economics of location? Will the protectionist pressures in the IACs endure? Will the TNCs continue to focus on the price-competitive mass production of standardised products at the point of least cost, or will they introduce flexible and highlyautomated technologies near to the final markets and concentrate on product innovation in differentiated markets? Will there continue to be differences in the approach of US and Japanese TNCs with the former being much readier to use export platforms in LDCs than their Japanese counterparts? Are we merely witnessing short-run changes reflecting the uneven pattern of transition between the eras of machinofacture and systemofacture? Although these (and other important) questions can be worked through at a general level, it is only through the examination of particular sectors that we can determine whether these conjectures are accurate of fanciful. Whilst the evolving structure of the global automobile industry would seem to confirm the picture sketched out above, we do not have a clear view of the structure emerging in other sectors. Without further detailed sectoral studies the level of confidence given to these hypotheses must therefore be limited. NOTES 1. The survey article by Buttel et al. [1985] is particularly prescient in this respect. 2. See Freeman, Clark and Soete [1982] for a summary of their views, as well as those of Kondratieff and Schumpeter. 3. These more recent views are to be found in Freeman [1984]. 4. I consider here only those which are relevant to my wider and immediate concern with the nature of the current crisis and its international dimensions. Thus the debate about whether invention occurs in the downswing or the upswing is not considered (see Freeman, Clark and Soete [1982], and nor is the debate concerning the very existence of the long-wave cycles themselves [Rosenberg and Frischtak, 1984]. 5. Marx [1874; repr. 1947] pp.109–10. 6. Ibid., p.444. 7. Ibid., p.446. 8. See Nelson and Winter [1977] and Dosi [1982]. 9. Piore and Sabel [1984:5]. 10. For a discussion of the various characteristics of these regulatory devices—a perspective which has come to be known as the ‘regulationist school’—see Aglietta [1979] and Lipietz [1987].

‘TECHNOLOGICAL REVOLUTION’ IN MANUFACTURING 33

11. In fact, one measure of social unrest was strife on the shop-floor arising out of the nature of the Fordish labour process. This is best seen as an endogenous factor. 12. Ibid., p.352. 13. Landes [1969] regards these three features as being the critical components of the industrial revolution. 14. Taylor [1903:98–9]. 15. See, for example, Crouch and Pizzone [1978]. 16. The inter/intra-era differences are important here. Cusumano [1985] points out how much more rapidly and thoroughly Toyota has moved to the new labour process than Nissan. Yet the work-practices currently utilised at Nissan are considerably closer to those of Toyota than to that developed and utilised in the American and Western European automobile firms. 17. See, for example, Schonberger [1982]. 18. In the classically Fordish firms in the United States the R & D departments had concentrated on minor incremental changes in product and process. 19. the literature on automation tends to concur with the definition of Einzig that ‘its loose use practically as a synonym for advanced mechanisation may shock the engineer, but serves the purpose of the economist’ [Einzig, 1957:2]. 20. This is often referred to as ‘island automation’. 21. See Freeman, Clark and Soete [1982] and Bowles, Gordon and Weisskopf [1983] for a discussion of the periodisation of the US slowdown. 22. See Lipietz [1987: Table 7] for details of sectoral productivity-variations between Japan and other countries. 23. As the French and United Kingdom governments have done for Renault and Rover Group, both of which may have fallen to the onslaught of imports had the state not provided regular injections of cash, through both loans and equity. 24. In 1987, 36 per cent of personal computers sold in the United States were sourced from abroad (many selling under United States brandnames), up from 1.3 per cent in 1982. In the same period the proportion of foreign-assembled computer terminals rose from 24 to 46 per cent, and that of inexpensive telephone equipment rose from 33 to 65 per cent (Financial Times, 20 May 1987). 25. However, in so far as some types of TNCs are more likely to utilise LDC production sites than others—as occurs in the auto and electronics industries where US firms are more likely to source from LDCs than Japanese firms—the nature of firm structure also affects the international division of labour. 26. Dimensional industries can be distinguished from the discrete products industries in the following way. Dimensional products can be measured in units of weight and volume and there is no clear boundary between one unit of output and another (for example, material, cement, chemicals, sugar). Whilst almost all process industries have dimensional output, not all dimensional products involve chemical processes. In discrete products, each product has an individual identity (for example, radios, shirts, shoes). 27. 350 TNCs account for over one-quarter the global GDP. 28. Eatwell [1985] and Thurow [1985]. 29. The number of Japanese auto component manufacturers in the US doubled from 150 to 300 between 1984 and 1988. 30. This phenomenon is becoming an important issue in the garments industry. Here the long and generally inflexible supply lines arising from production in the Third

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World are inducing some IAC firms to relocate production near the final markets. Together with the sharpening of protectionism, it is also forcing some of the developing country firms to establish highly automated and flexible plants in the IACs.

REFERENCES Aglietta, M., 1979, ‘The Theory of Capitalist Regulation’, New Left Review. Bowles, S.S., Gordon, D.M. and T.E.Weisskopf, 1983, Beyond the Wasteland: A Democratic Alternative to Economic Decline, New York: Doubleday Press. Buttel, F.H., Kennedy, M. and J.Kloppenberg, 1985, ‘From Green Revolution to Biorevolution: Some Observations on the Changing Technological Bases of Economic Transformation in the Third World’, Economic Development and Cultural Change, pp. 31–55. Crouch, C. and A.Pizzone (eds.), 1978, The Resurgence of Class Conflict in Western Europe since 1968, London: Macmillan. Cusumano, M.A., 1985, The Japanese Automobile Industry: Technology and Management at Nissan and Toyota,Cambridge, MA: Harvard University Press. Eatwell, J., 1985, ‘Recognising Economic Reality’, The Listener, 5th Jan,. Einzig, J., 1957, The Economic Consequences of Automation, London: Secker & Warburg. Freeman, C., 1984, ‘Prometheus Unbound’, Futures, No.15, pp.494–507. Freeman, C., Clark, J. and L.Soete, 1982, Unemployment and Technical Innovation: A Study of Long Waves and Economic Development,London: Frances Pinter. Frobel F., Heinrichs, J. and O.Kreye, 1980, The New International Division of Labour. Cambridge: Cambridge University Press. Glyn, A., Hughes, A., Lipietz, A. and A.Singh, 1986, ‘The Rise and Fall of the Golden Age: An Historical Analysis of Postwar Capitalism in the Developed Market Economies’, Cambridge (mimeo). Hoffman, K. and R.Kaplinsky, 1988, Driving Force: The Global Restructuring of Tech nology, Labor, and Investment in the Automobile and Components Industries, Boulder, CO: Westview Press. Kaplinsky, R., 1984, Automation: The Technology and Society, Harlow: Longmans. Kaplinsky, R., 1985, ‘Electronics-Based Automation Technologies and the Onset of Systemofacture: Some Implications for Third World Industrialisation’, World Development, Vol. 13, No. 3, pp. 423–40. Kaplinsky, R., 1988, ‘Restructuring the Capitalist Labour Process: Some Lessons from the Car Industry’, Cambridge Journal of Economics, Vol. 12, No. 4, pp. 451–70. Landes, D.S., 1969, The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present, Cambridge: Cambridge University Press. Lipietz, A., 1987, Mirages and Miracles: The Crisis of Global Fordism, London: Verso Press. Maddison, A., 1982, Phases of Capitalist Development, Oxford: Oxford University Press. Marx, K., 1947, The Poverty of Philosophy, London: Lawrence & Wishart. Nelson, R. and S.Winter, 1977, ‘In Search of a Useful Theory of Innovation’, Research Policy, Vol. 6, No. l, pp. 36–76.

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Perez, C., 1985, ‘Microelectronics, Long Wages and Structural Change: New Perspectives for Developing Countries’, World Development, Vol. 13, No. 3, pp. 441–63. Perez, C, 1986, ‘The New Technologies: An Integrated View’, Brighton: Science Policy Research Unit, University of Sussex (mimeo). Piore, M.J. and C.F.Sabel, 1984, The Second Industrial Divide: Possibilities for Prosperity, New York: Basic Books. Rosenberg, N. and C.Frischtak, 1984. ‘Technological Innovation and Long Waves’, Cambridge Journal of Economics, Vol.8, No. 1, pp.7–24. Schonberger, R.J., 1982, Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity, New York: The Free Press. Taylor, F.W., 1903, Shop Management, Reprinted in Taylor, F.W., 1947, Scientific Management, New York: Harper & Brothers. Thurow, L., 1985, ‘America, Europe and Japan’, The Economist, 9 Nov,.

36

Strategies for Developing Information Industries Ashoka Mody*

I. INTRODUCTION Brazil, South Korea, Taiwan, India, and Singapore have in common a relatively developed industrial base, a large stock of educated manpower, and a commitment to R & D. They have also actively promoted their information industries. Because of their high level of industrial literacy, I shall refer to them as newly industrialising countries (NICs). However, country strategies and policies have varied in important respects and the results have varied accordingly. Three factors appear to contribute to rapid growth: appropriate product choice, effectiveness of institutions that absorb and use technology, and coordination of multiple policy instruments. Although this article is mainly concerned with the specific internal technological capabilities and strategies, it is necessary here to consider briefly the nature of the external environment faced by these five countries. As ‘latecomers’, all have had some access to technology developed in the industrialised countries. There is evidence that the speed of technology diffusion has increased in the past two decades [Mansfield, 1984]. Three factors have contributed to the faster diffusion. First, the technology of information transmission and distribution has improved. Second, the capability to absorb foreign technology has improved. Third, in seeking markets, international firms have been willing to transfer technology to developing countries. Also, increased international competition has forced producers to seek low cost production sites. In some instances, the transplanted firm has provided exposure to new technologies and has helped to train domestic manpower.

* The World Bank. For helpful comments and suggestions, the author is grateful to Elinor Berg, Francis Colaco, Carl Dahlman, Kenneth Flamm and Bjorn Wellenius. Views expressed in this article are those of the author and should not be attributed to the World Bank.

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On the other hand, the information industries have costly physical and human investment requirements, and evidence indicates that these requirements are increasing. International competition, which leads to a greater availability of technology, also creates the need to learn quickly and price aggressively. Even firms in developed countries have often been unable to cope with these pressures and have sought government support in various ways. The NICs have similarly tried to overcome entry barriers by enlisting government participation and by appropriate institutional choice. A recurring concern (in the NICs and in the industrialised countries) has been whether high-technology industries vary sufficiently from traditional industries to warrant special attention and policies? A complementary issue is whether the traditional concepts of national comparative advantage are relevant for analysing high technology industries? The following section outlines some current concerns with the notion of comparative advantage in the information industry. The conclusion is that theory does not provide simple prescriptions for the development of information industries. Conventional trade theory tells us that appropriate product choice (reflecting the country’s factor endowments) is important for successful growth. And, for the most part, that is borne out by the achievements of the different countries. However, more complex considerations arise from the multifaceted nature of the information industries: their ability, under certain circumstances, to ‘lead’ the growth of other sectors, the uncertainty characterising their evolution and the relatively rapid pace of technological change. These characteristics call for the need to develop supporting infrastructure and input supplies in parallel to the ‘leading’ sector; they point to the need both for appropriate timing of market entry and for anticipation of the need for capabilities. The complexity is resolved by using multiple policy instruments. The most successful country in my sample, Korea, has used both trade and industrial policy instruments to promote the development of the electronics industry. However, from the less successful countries we also learn that the appropriate intervention is a non-trivial task. II. INDUSTRY CHARACTERISTICS AND COMPARATIVE ADVANTAGE I consider below the implications of linkages between sectors of production, the role of uncertainty, and the interaction of uncertainty with economies of scale and the product cycle. I shall also consider the role institutions play in realising a country’s comparative advantage. But first, I recapitulate briefly the classical view of trade.

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A. Classical Comparative Advantage According to the classical view, all firms (and countries) have complete knowledge of available technologies and operate with only the most efficient techniques. The location of production determines the range of feasible products and technologies. At each location, a firm faces a set of factor (or resource) prices, which reflect the underlying factor availabilities. Given the factor prices, the firm is hypothesized as choosing products that have a significant requirement of the cheaper factor inputs. Trade takes place between different locations because the differential resource advantages lead to the production of different products. While this is essentially a static theory (and as such does not say anything about industry evolution), it can be rendered partially dynamic, as in the ‘stages of growth’ approach [Balassa, 1981]. According to this approach, the pattern of sectoral specialization in a country evolves with its educational and capital stock; the changes in these stocks are treated as exogenous or independent of the development of the industrial sectors being considered. B. Linkages An alternative view emphasises the linkages between sectors. A widely used concept of linkages refers to the degree to which sectors of production buy and sell from each other. The technological coefficients that determine the extent of buying and selling are assumed fixed. If a particular sector buys a large amount of intermediate inputs, it is considered to have large ‘backward’ linkages; if a sector induces the development of downstream industries, it is considered to have significant ‘forward’ linkages. The most important characteristic of information industries, however, is that they change the technological (or input-output) coefficients that link different sectors [Sauvant, 1986:7, Cohen and Zysman, 1987:106 and Nelson, 1984]. Nelson has proposed the concept of ‘leading’ industries which is germane to the information industries: Although the fraction of national value added, employment or capital stock contained in these industries has been quite small throughout the postwar era, these industries have shaped the new products that have emerged and the productivity growth that has been achieved in many other industries [Nelson, 1984:74]. Furthermore, Nelson [1984:8–10] has argued that a leading industry is characterised by a strong degree of ‘connectedness’. The technologies and components that make up the product or service of the ‘leading’ industry are closely linked. The importance of connectedness may be even greater when the

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commonality between technologies and components extends across the leading industries. Unless these underlying technologies and components are available in parallel, the leading industries will not be effective in their transformative role. Thus two types of linkages relevant to the information industries have been identified. The group of leading industries is linked to the rest of the economy through its role in creating new products and increasing productivity. In addition, within the group of leading industries there are technological linkages between components and technologies. It is the latter linkages that are important in understanding the evolution of development of information industries. Unlike the classical comparative advantage view, the linkages view suggests that high technology industries should be developed as part of a broad thrust. Nelson has stated that there is considerable evidence of international flows so that national boundaries are not very meaningful in the development of leading industries. On the other hand, Cohen and Zysman have argued that linkages vary in degree. ‘Tight’ linkages require physical proximity. They point out that a large fraction of service sector output is an input to manufacturing and that such services can only exist close to the manufacturing establishment [Cohen and Zysman, 1987:17–24]. The importance of agglomeration economies, such as seen in the Silicon Valley, also offers support for this hypothesis. It should be noted that a ‘leading’ industry need not be ‘high-tech’ (in the sense of requiring a heavy expenditure on research and development). Korea and Taiwan have used consumer electronics (particularly televisions) as ‘leading’ products. The television industry has helped the growth of electronics components and has also helped the development of other electronics systems (personal computers, microwave ovens and video cassette recorders). All these sectors, in turn, have spawned the growth of an industry to produce capital goods. The development of these subsectors could be interpreted as reflecting the comparative advantage of these countries. However, it is likely that had they grown in isolation, rather than as a cluster, they would have taken significantly longer to become internationally competitive. The role of the government in this example was essentially to protect and promote the development of the television industry. The growth of the cluster was relatively spontaneous and free of special government incentives or promotion. More recently, as technologically advanced clusters are being built in these two countries, government intervention has become more detailed. Whereas at an earlier stage most technology was acquired through reverse engineering of imported products, there is now a greater need to develop technology domestically, requiring government subsidies or research institutions. C. Uncertainty A key feature of the information industries has been the uncertainty regarding their evolution [Nelson 1984]. The uncertainties are both market-based and

DEVELOPING INFORMATION INDUSTRIES 41

FIGURE 1 RISK AND OPPORTUNITY IN PLANNING FOR INFORMATION INDUSTRIES Source: Government of Singapore [1985].

technological. Instead of negating the idea of classical comparative advantage, an alternative may be to adopt a portfolio approach. Such an approach can be followed by national planning agencies or large corporations. An explicit portfolio approach has been adopted by Singapore (see Figure 1). Industries below the diagonal (industries A, B and C) are characterised by moderate to high opportunity and low to moderate risk; these are considered the most appropriate for Singapore to target or promote. The industries in the top (left-hand) triangle are considered inappropriate and those within the broad diagonal are are marginal. By itself, uncertainty leads to less focus in choice of industrial sectors than would follow from an adherence to the classical theory of comparative advantage. However, the need for focus becomes important when scale economies or other forms of cumulative causation are combined with uncertainty. 1. Uncertainty and cumulative causation. Information industries are generally characterised by economies of scale in production and other forms of cumulative advantage. For example, drawing on their research, Teubal et al. [1986: 1401] have concluded: Each generation of product class contributed to subsequent generations of products through the accumulation of a wide variety of intangibles and capabilities; design capabilities derived from R & D; knowledge of

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markets derived from the actual sale of products; a line-of-products effect and generalized firm reputation. When the uncertainty is combined with economies of scale, significant learning requirements, or other forms of cumulative causation, an initial accidental advantage can turn into a cumulative competitive edge. In an uncertain environment, firms may gain a competitive advantage because of foresight or luck. Trade between countries would then depend to a smaller extent on the resources of the country and to a greater extent on fortuitous factors. In other words, international trade would reflect ‘arbitrary or temporary advantages resulting from economies of scale or shifting leads in close technological races’, leading to an ‘essentially random division of labor among countries…’ [Krugman, 1986:7–8]. Selectivity or focus in sectoral development may thus be relevant under circumstances quite different from those assumed by classical comparative advantage theory. While uncertainty suggests the need for diversifying the product range; cumulative causation suggests focus. 2. Product cycle and uncertainty. The above considerations point to the importance of choosing the appropriate time to enter a market. Product cycle theory suggests that when a technology is introduced, the location of production will be close to the location of research and development. As the technology matures, production activity will be transferred to locations with low input prices (provided that the necessary infrastructure is available). In the traditional product cycle theory, new goods are introduced in an industrial country; over time, the technology becomes widely available and competition increases, forcing production to move to low-cost locations. The length of the product cycle is now becoming progressively shorter. As a result the timing of entry has become even more critical than before. The combination of short cycles and uncertainty creates the need to anticipate the firm’s competitive advantage or the country’s comparative advantage. A good example of the need to anticipate is provided by Korea’s decision to produce dynamic random access memories (DRAMs). Since wafer processing is a capitalintensive activity, and there is little evidence that Korea possesses a static comparative advantage in wafer processing, the rationale for the Korean thrust must be sought in dynamic considerations. But the simple product cycle theory does not apply; Korean efforts in semiconductors are directed toward frontier products and not toward mature products. In 1984 Korean producers began to develop 64K DRAMs (containing 64,000 bits, or units of memory, on one chip); in late 1985, they began production of 256K DRAMs and now are producing sample quantities of 1M DRAMs (which contain 1 million bits of memory). Given competition in DRAMs, they have also shifted to other semiconductor products using similar technologies. It seems clear, therefore, that the Koreans are moving into semiconductor processing not for reasons of static comparative advantage, nor for reasons

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suggested by a simple product cycle theory. These efforts represent an attempt to anticipate their industry’s comparative advantage. Since the process of establishing semiconductor facilities, coming down the learning curve and establishing a critical mass of engineers takes time, it is important to start early. D. Product Cycle in the Service Sector Recent research suggests that the product cycle may operate quite differently in the services sector. Drawing on research on local government and the insurance and accounting industries, Barras [1986] has concluded that the product cycle in the services sector operates in the reverse direction. The process of cost rationalising occurs first, followed by a period of quality improvement and finally by new product introduction. The implications of this analysis are not very encouraging for new entrants. The first phase typically involves high capital investment and labour displacement. The second phase is associated with a move from central computer systems to distributed processing (and local area networks). While this shift does not displace labour, it is usually accompanied by economies in the provision of services and hence encourages ‘the emergence of financial and business service conglomerates offering a much wider range of different services than hitherto’ [Barras, 1986:167]. The third and final stage is emerging and ‘can only be a matter of speculation at present’, but it will require a well-developed telecommunications network as essential infrastructure. Barras has derived no conclusions for the international division of labour. But there is a definite implication that barriers to entry are high at each stage and so the transfer of production of information intensive services to developing countries may be more difficult than the transfer of goods production. E. Appropriate Institutions to Realise Comparative Advantage The ability to anticipate and to execute requires capital, human skills, and a sound organization. Michael Porter [1986:26] has noted that ‘how’ an activity is performed is at least as important as ‘where’ it is performed. The product cycle theory assumes that the level of technological knowledge is not the same in all countries. Porter goes further and insists that the levels of capability differ between firms and individuals, and even small differences could have significant effects on patterns of trade. Thus to the list of ‘where’ and ‘how’ we need to add a ‘who’. How something is done often depends on who does it. That brings in the critical role of institutions. Even if a country has a comparative advantage in a particular area or can correctly anticipate it, the country will not realise its advantage unless the resources are mobilised by appropriate institutions. According to one view, institutions reflect and respond to changes in the factor endowments of an economy. When the endowments change, the relative

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factor prices also change and thereby ‘induce’ institutional changes (see Ruttan [1978]). An alternative view is that institutions reflect market ‘imperfections’. Institutions arise, among other reasons, when markets do not perform the functions necessary for efficient production. An institution is a mechanism for bypassing the market [Spence, 1975:164; and Mody, 1987]. Information and capital market inadequacies have triggered institutional development in the NICs. Governments have promoted firms that have the potential to overcome market imperfections. Small countries like Singapore, are almost entirely dependent on multinationals. Taiwan has encouraged investment by foreign companies, but has also made a conscious effort to promote domestic firms. Brazil’s computer and telecommunication industries have historically been dominated by multinationals; as the Brazilian market has grown and as indigenous capabilities have developed, this has been unacceptable to some groups, leading to a series of policy measures designed to increase local participation. Korea and India have made the strongest efforts to retain domestic control over production; Korea has promoted the growth of private sector conglomerates, while India has relied on public sector firms. Each country has established specialised credit and research institutions to support the operation of these firms. While it is not possible to provide a complete assessment of institutional choice, some examples of successful institutional development are discussed in the following sections. III. EVOLUTION OF INFORMATION INDUSTRIES IN THE NICS The following discussion covers the experience of some of the NICs with regard to product sequencing and market choice. It also looks at the capabilities achieved in terms of manufacturing and design efficiency. A. Schematic of the Information Industries Many information products have a low technology content, while some products embody extremely high research input. Table 1 classifies the industry into four sectors in terms of technology and scale levels: the scale of investment is the minimum required for efficient production. It is possible that by making appropriate technology choices the investment could be lowered for low wage countries; however, the difference is unlikely to be large because the scope for substitution between inputs is not high. The distinction between manufacturing and design in considering the technology levels is important because barriers to entry are prima facie lower in the design-intensive sector. Countries such as India, Singapore, Taiwan, and the

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Philippines are hoping to become major players in the market for international design services (particularly software). There is at least some evidence of success in this regard. On the other hand, reputation, credibility, and the ability to keep pace with changing technologies create significant entry barriers. I shall examine these conflicting forces in the context of emerging medium-size firms. TABLE 1 TECHNOLOGICAL STRUCTURE OF THE INFORMATION INDUSTRY

B. Product Choice and Sequencing The main thrust in the NICs has been toward manufacturing capability. The approaches followed have, however, been quite different. Electronics production in Taiwan and Korea was initiated in the late 1950s by Japanese and US firms seeking sites for low-cost production of components. The bulk of these components embodied elementary technology. Domestic entrepreneurs were soon attracted to this activity and a large number of small firms sprouted up. Today this is a major sector in both Korea’s and Taiwan’s electronics industries. The component firms were unable to grow or diversify into other products, but they served at least two useful purposes. First, they induced the development of a capital goods industry to produce the machinery required for the assembly of components. Second, as the domestic consumer electronics sector developed, there was a ready and cost-competitive supply of components available. The ready availability of good quality and low-cost components have given Korean and Taiwanese producers a competitive edge as they move into industrial electronics and office automation products. The consumer electronics sector in Korea and Taiwan has been the main engine of growth. Goldstar and Samsung, the Korean conglomerates, and Tatung and Sampo, the large Taiwanese firms, became involved in this sector in the late 1950s and 1960s. The product choice within the consumer sector was determined essentially by demand trends in the United States. The choice was conditioned by the perceived degree of Japanese competition. The Japanese have attempted to

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continuously differentiate their products and hence generate markets that are relatively price-inelastic; the Korean and Taiwanese response has been to go into the price-elastic (mass) market left behind by the Japanese. In the 1980s, however, Korean and Taiwanese firms began to try to close the gap vis-à- vis the Japanese. They have sought to differentiate their products and enter markets for more advanced products. Thus, Korea and Taiwan followed a sequential approach to product selection for about two decades. By the early 1980s, they had a strong component base, trained manpower, and large firms with experience in consumer goods manufacturing and marketing. The Koreans, and, to a lesser extent, the Taiwanese, are trying to use these advantages to increase their competitive strength in high-technology industries. This may be considered a big-push approach in that business and government officials are engaged in promoting products and technologies across the technology spectrum described in Table 2. At the other extreme, India has had no sequencing strategy. For the last two decades, the division of production between components, consumer electronics, industrial electronics (including defence), and communications has remained roughly equal. As a result, one of India’s major weaknesses has been a very poor component base. Furthermore, there are only weak institutional linkages between the different electronics sectors, making coordination extremely difficult. Brazil has had similar problems. The institutional linkages are probably even weaker in Brazil. The consumer electronics sector has grown in isolation from the computer or ‘informatics’ sector and despite similarity in government policy, the communications and ‘informatics’ sectors do not seem to have formed linkages. Thus, India and Brazil have sought to develop all parts of the electronics complex, but without capturing technological linkages between the different sectors and without fostering institutional linkages. The important point is that Korea and Taiwan paid more attention to sequencing and also developed better internal linkages. This occurred at least partly because attention to sequencing allowed Korea and Taiwan to establish manufacturing facilities that exploited technological scale economies; as a result sufficient domestic demand was created for upstream components and subsystems, allowing the upstream industries to produce at economic production scales. In contrast, Brazil and India did not have a sequencing policy; downstream sectors did not develop adequate production scales, and this restricted the development of upstream sectors. C. Factors Influencing Cost Competitiveness Cost-competitiveness has been influenced by a number of interrelated factors: product sequencing, choice of markets (export and domestic), institutional development, and the degree of competition.

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Economies of scale are impeded if there are too many products or too many competitors for the same product. A wide variety of products requires a wide range of components. The Indian electronics industry, for example, has been caught in a trap because its components are produced on a small scale. Component prices have consequently been high, resulting in high prices and low demand for final products. That in turn has reduced the demand for components and limited the growth of the component industry. Brazil, Taiwan, and Korea demonstrate the impact of production scale. In the Brazilian informatics sector, Frischtak [1986:51] has suggested that there has been an excess number of firms: ‘… unrestricted entry of national firms in a market of limited economic size may have been responsible for the large unit costs of data processing equipment’. In Brazil the competition has largely been among domestic firms; in Taiwan there are both foreign and domestic firms. According to Frischtak’s assessment, Brazilian data processing firms have been unable to achieve technological economies of scale; in Taiwan, however, because of the export orientation, at least a few large domestic firms have been able to set up plants that capture technological scale economies. What the Taiwanese firms lack, in comparison with Korean conglomerates, is organisational economies of scale. In purchasing inputs and even more in international marketing, Korean firms have been able to do much better because they sell large volumes of individual products and they sell several products. For example, for a period of time, Taiwanese firms had larger exports of personal computer systems than Korean firms. However, in the past few years, Daewoo and Hyundai have begun marketing very large volumes of personal computers. ‘The Koreans have poured $100 million into new computer plants to improve efficiency and have been quoting prices that the Taiwanese are struggling to match. To keep up, the Taiwanese have cut prices, but the South Koreans can quickly outpace them by switching factories from TV and VCR production to computers if necessary’ [Business Week, 29 Sept. 1986:88–91]. Similarly, Korean firms have begun marketing a number of products in the United States under their own brand names; Taiwanese firms, with minor exceptions, are a long way from that stage. The need for economies of scale conflicts with the need to maintain a competitive environment. An attempt can be made to balance these requirements, as for example, in the Brazilian telecommunications equip ment industry, where four firms have been allowed to participate. It was believed that four firms would be sufficient to provide a high degree of competition without reducing the potential for achieving scale economies. However, it has been difficult to achieve either a significant amount of competition or cost reductions. Ericsson do Brazil controls about half of the Brazilian switching equipment market but produces at a cost 25 percent greater than its parent company in Sweden. At least part of the reason, as in India, is the high cost of components (see Goransson [1984: 19, 30 and 38]. The only country that has been able to achieve the ‘right’ balance is Korea. The Korean electronics consumer and industrial electronics industry has been very

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oligopolistic. Three firms (Samsung, Goldstar and Daewoo) dominate the industry, but the oligopolistic market structure has been accompanied by severe competition. The firms compete in domestic and export markets through price, quality, and marketing strategies. Each company produces entire product lines rather than specialising in a few models, making competition even more intense. A number of fierce battles have been fought in the domestic market for videocassette recorders and personal computers. Thus, while the outlet provided by an export market helps, it is clearly not sufficient, as is suggested by the example of Taiwan. Competitive ability in international markets requires large resources for marketing. Only the Korean firms have reached the size necessary to function as major international competitors. D. Design-Oriented Sector For many electronics products, design can be effectively separated from actual production. At the same time, design opportunities are continuously evolving. A large company may develop a product for a mass market, but because of the availability of a wide variety of components and because of the continuous introduction of new components (especially semiconductors), it becomes possible to vary designs to meet the requirements of a more focused customer group (often referred to as a ‘niche’ market). The NICs have a possible advantage in this area because of the farsighted policies they have followed with regard to technical education. The entrepreneurs among the engineers in these countries have begun to form medium-sized firms. Such firms have sales in the range of $25 to $50 million and they employ a few hundred people. About 25 per cent of the employees are engineers and about ten per cent of sales goes toward R & D. The comparative advantage of these firms is based on design capability rather than manufacturing strength. These medium-sized firms are engaged in a variety of tasks: design of sophisticated computer and telecommunications hardware, systems engineering and writing applications and systems software. Some large national firms and a number of multinational firms have also been attempting to take advantage of the availability of relatively cheap engineers and scientists. In Korea, Samsung Semiconductor and Telecommunications has a few hundred engineers engaged in designing integrated circuits; Goldstar has links with Olivetti and Hitachi for the development of software. Texas Instruments is reported to have set up an integrated circuit design center in Bangalore, India; Citibank has a software development center in Bombay. Tata of India is involved with the US firm, Elexi, in a multinational venture located in Singapore. A few multinationals have set up R & D centers in Singapore on a trial basis. IBM has been involved in collaborative software and design ventures in Taiwan.

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The utilisation of engineering talent in design activities is very appropriate for NICs. For some of them, in fact, that is a better use of resources than hardware production. The technology underlying production of hardware is becoming increasingly capital intensive because of the trend toward automation. This applies not merely to advanced semiconductor devices but also to computer peripherals, such as floppy disk drives and printers, which require a high degree of precision engineering. However, there are some problems with the actual realisation of this potential comparative advantage in design oriented activities. The medium-sized firms face problems of growth. As noted, they rely on niche markets. Over time, however, a niche market changes character: it either disappears or it grows into a mass market. If the latter happens, large firms with superior resources are attracted. The ensuing competition is usually very hard on the smaller firms. Some survive the competition: Multitech (now renamed Acer) of Taiwan has managed to create international production and marketing links. But most are unable to compete against firms with larger resources; the Korean computer industry initially consisted largely of relatively small firms, but with the entry of the giants, the smaller firms have been going through a very difficult phase. There is a general presumption that the potential manpower supply in the NICs is very large. But this may not be correct. The design sector is currently very small (the aggregate annual turnover in India is less than $100 million). If domestic and foreign firms are to enlarge this sector several-fold, the manpower requirements will be very high and it is not obvious that the supply will keep pace. Domestic firms, particularly the smaller ones, face the problem of becoming obsolete. For example, Indian software exports consist largely of ‘porting’ or upgrading and modifying existing software to match changes in hardware. There are some signs that this market is flat and may even dwindle as hardware designers grow increasingly conscious of maintaining compatibility with existing software. Moreover, automated tools for ‘porting’ software are being developed. Similarly, the increasing use of artificial intelligence techniques in applications software is going to strain the manpower resources of the NICs. IV. STRATEGIC POLICIES Policy instruments for the development of information industries can broadly be divided into three categories (see Table 2). While the categorisation of the instruments is necessarily rough, it is striking that Korea has pursued policies in all categories. Brazil and India have relied mainly on infant protection, whereas Taiwan has focused on generating spillovers. The third rationale, which I have chosen to call ‘intimidation of foreign competitors’ has derived some theoretical justification from the recent work of Brander and Spencer [1985], though its

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efficacy has been questioned by many authors (see contributions to Krugman [1986]).

TABLE 2 STRATEGIC GOVERNMENT INTERVENTION

A. Import Protection Protection of the domestic market from imports has been a major policy tool for most NICs. Market reserve has been practised by Brazil, Korea and India. Singapore and Hong Kong are possibly the only two states that have open economies. Even Taiwan has till recently had high tariff rates on some of its major exports such as televisions. Korea has used import protection at successive stages to promote domestic production of consumer electronics, computers and peripheral equipment. Imports of televisions and personal computers, two of its major exports, have been very tightly restricted. Exemptions in the case of computers are allowed if products are destined for use in process control, R & D or other specialised applications, but these exceptions are granted only in the most extenuating circumstances (mostly 1985). Similarly, importation of almost any important telecommunications equipment requires a government license. The Electronic Industries Association of Korea must certify that the product is not currently manufactured in Korea. Only semiconductors have had a low degree of import protection in Korea, possibly because Korean manufacturers felt that they could manage without market protection. For one thing, a market exists within the conglomerates. Further, these large firms have the capacity to sustain losses over significant periods of time and so are less dependent on subsidies in the form of market protection. Of all the NICs, Korea is the only country that has effectively used import protection to gain experience and move down the learning curve. Korean industry has also made effective use of the domestic market during periods when world demand for its products has been weak. In contrast, Brazil and India have

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for long had more stringent import protection policies in place but have been unable to produce internationally competitive products. Thus while market protection can be a useful device for promoting domestic firms, it is clearly not a substitute for making hard choices with regard to products and institutions. B. Foreign Investment Domestic producers are generally unable to compete with the multinational corporations’ reputation, access to technology, and economies of scale in production, finance, and marketing. Governments seeking to foster domestic entrepreneurship are therefore inclined to restrict capital investments by foreign firms. On the other hand, where the gap between domestic and foreign capabilities is very large, the costs of promoting domestic industry can be high. Brazil and Korea have adopted contrasting methods to achieve national capability in electronics. Brazil has placed special emphasis on the computer and communications sectors, whereas Korea has sought to promote the entire electronics industry. In Brazil, the computer and communications sectors have, for the most part, grown independently of each other; and these two sectors, in turn, have had few links to the consumer electronics industry. In Korea, all electronics’ sectors (with the exception of passive components) have grown within the folds of the large conglomerates. In the 1970s and early 1980s, the impetus to develop a Brazilian computer industry came mainly from within the bureaucracy. Many bureaucrats were motivated by their own technological competence and saw an opportunity for Brazil to take advantage of emerging minicomputer and microcomputer technologies. Imports of computers, of technology to make the computers and of foreign investment were all severely restricted. In the 1980s, Bradesco and Itaú, Brazil’s largest banks have made large investments in the informatics industry. The entry of financial capital is changing the thrust of Brazil’s strategy. Restraints on the imports of technology are not in the interests of big financial sector users. The banks have negotiated very attractive technology transfer agreements. The banks have not only greater negotiating strength, they also have an interest in maintaining good relations with multinational corporations and have made a number attempts to promote joint ventures. Similarly, large industrial users and producers are beginning to form joint ventures with foreign firms. Recent examples are: IBM and Gerdau, a steel producer, will provide data processing services (IBM will hold a 30 per cent equity stake); Hewlett Packard and Edisa, a commercial, industrial and banking automation concern will produce mini and super computers. In telecommunications as well, the objective was to encourage the participation of domestic entrepreneurs and increase indigenous technological capability. But the strategy was different. In 1977, multinational firms wanting to

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manufacture in Brazil were required to transfer majority voting rights to Brazilian nationals. (The transfer of voting rights did not imply an equivalent transfer of equity). At the same time, TELEBRAS, the state-owned telecommunications company, created a research and development centre, referred to as CPqD. TELEBRAS also has sought to influence the use of domestic technology through its purchase decisions. Though there are obvious similarities between the telecommunications and informatics policies, the insistence on local technological effort has been weaker in the telecommunications sector. There has been some conflict between the Ministry of Science and Technology, which has promoted domestic technology, and the Ministry of Communications, which has viewed excessive control over imports of technologies and products as an impediment to the expansion of the telecommunications network. A number of developments suggest that Brazil may loosen its restrictions on foreign capital, technologies, and goods. Brazil now permits up to 40 per cent equity participation in joint ventures, up from 30 per cent [Business Latin America, 25 Aug. 1986:264]. Purchases of foreign-made digital switching equipment are up and there is some indication that trade barriers against telecom products will also be relaxed [Electronics Engineering Times, 29 Dec. 1986:1,6]. Korea has also severely restricted investments by foreigners. In Korea, the basis for restriction has been possibly stronger than in Brazil. Those seeking to promote national technology development and the large industrial producers have been coalesced in the Korean conglomerates. Korean conglomerates have been aggressive in demanding limitations on foreign investors. This congruence of interest has also meant that Korea has been more successful in developing national capabilities in areas that it has chosen to focus on. In the computer area, for example, the Korean producers started much later than their Brazilian counterparts. However, Korean firms have been able to deploy much larger resources in the design and production of computers than the smaller Brazilian firms. In the 1980s, Korean firms have begun importing technology through jointventure agreements, mostly with U.S. firms. American industry views an increased presence in Korea as an important marketing strategy. The Korean conglomerates are in a much stronger bargaining position than most developing country firms and can negotiate much better technology transfer deals. C. Technology Policy For the most part, the NICs have not engaged in basic research. The main effort has been to generate an educated labor force with the necessary skills to absorb and modify the technology developed abroad. Though general educational policies are critical to training a base of scientists and engineers, specialised

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institutions have been established to focus on gaining faster access to information technologies. The performance of these institutions has depended on their scale of operation, their degree of commercial orientation and the strengths and weaknesses of domestic firms. A brief list of the principal institutions in Korea, Taiwan, Brazil, India, and Singapore follows. 1. Korea. The Korean Institute of Science and Technology (KAIST), the Korean Institute of Electronics Technology (KIET) and the Korea Telecommunications Research Institute (KETRI) all focus on electronics-related technology. KAIST is responsible for producing the several thousand Ph.D.s and Masters degree holders that the Korean electronics industry needs. KIET and KETRI (which now operate as a single unit called the Electronics and Telecommunications Research Institute (ETRI)), handle product and process development. KIET was set up in 1979 to demonstrate that semiconductors could be produced in Korea. By the early 1980s Korean conglomerates had outgrown KIET’s capabilities by licensing foreign technology and setting up internal R & D departments and ‘technology-watch’ outposts in Silicon Valley. KIET proved to be a catalyst but it could not continue to function as a common semiconductor research center for domestic industry because of strong competition among Korean firms. ETRI’s current activities include a communications protocol for the Integrated Services Digital Network, optical transmission devices, and an earth station for satellite communications [Business Korea, May 1986:18–29]. The Korean government may decide to play a larger role in developing semiconductor technology. The semiconductor firms have gone through a period of learning on their own. There is now a real possibility that they may be able to compete with the world’s leading producers. To achieve that goal, they need to speed up development of certain generic manufacturing and design capabilities. Firms are attempting to do this partly through technology licensing and alliances, but the Government has also agreed to provide low interest loans for about half of a $53 million R & D program. The project aims at producing 4-M DRAMS (using 0.8 micron design rules) by 1990, developing design automation technologies, and promoting support industries for semiconductor manufacturing. The leading Korean firms will collaborate on the research [Electronics, 2 April 1987: 44 and 49]. The basic idea of co-operative development of generic technologies is sound and has been used effectively by Japanese concerns, but the degree of co-operation that will actually materialise is not clear. A number of ongoing projects within individual firms have been bundled together to form the project; for the most part, research is continuing in the private laboratories and the extent or mechanisms of sharing are unclear. The dollar amount of the project is also quite small in relation to R & D expenditures in the private sector. 2. Taiwan. The Electronics Research and Service Organisation (ERSO) is the focus of the Taiwan government’s R & D spending on semiconductor technologies. Facilities have been established at Hshinchu Science City to gain

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technological synergies in the manner of Silicon Valley. ERSO has had a strong commercial focus and operates one of the three silicon foundries in Taiwan. ERSO has had much closer ties with domestic industry than KIET in Korea. Because the Taiwanese firms are much smaller than the Korean firms and have a smaller capacity to undertake independent research, there is more cooperation among the Government and semiconductor firms in Taiwan. For example, a joint venture has been established with the Taiwanese government, N.V. Philips, and a number of private sector domestic companies to manufacture integrated circuits. Of the total investment of $145 million, the Government will provide 48.3 per cent [Wall Street Journal, 25 Feb. 1987: 32]. 3. Brazil. Despite the importance of the computer sector, Brazil has no special institution responsible for research on computer technology. The research has been conducted mainly within the firms and to some extent in universities. Brazilian firms have had a high R & D-to-sales ratios (eight per cent to ten per cent) and they have also employed a large proportion of engineers. The absence of significant public research is probably explained by the fact that mini and microcomputer technologies were considered widely known. CPqD, as noted earlier, carries out research on telecommunications and also coordinates research at universities and in industry. The universities do basic research; CPqD and industry share the tasks of prototype and product development. Brazil has followed a big-push policy in telecommunications. This has involved an acrossthe-board attempt at technological competence. The technology for electromechanical switching has been successful, but transmission systems have been more difficult to master. In the area of digital switching, the Brazilians have developed small exchanges but they have not yet developed large digital switches. 4. India. India has a number of electronics research facilities. In addition, domestic electronics firms have devoted a large percentage of their sales revenues to R & D although to date research efforts have been dispersed and diffused. The small scale of the efforts has entailed very low research productivity. And government research institutions have had few links with commercial markets. The Center for Development of Telematics (CDOT) is an exception to this characterisation. CDOT, which is developing small digital exchanges, has had a strong commercial orientation from the start. It has sought to design products with a common set of components and to work with producers to encourage efficient production components. It is still too early to judge whether this approach will be successful since production is just beginning. 5. Singapore. The Singapore government has focused on manpower development; for manufacturing technology, Singapore relies on the R & D efforts of multinationals. Singapore’s explicit goal is to become a major centre of information technology. Singapore set up three computer training and research institutes in 1981—the Institute of Systems Science (ISS), a partnership between IBM and the National University of Singapore; the Japan-Singapore Institute of Software

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Technology, a joint research project between Singapore and Japan; and the Center for Computer Studies, a partnership between International Computers Limited (ICL) and Ngee Ann Polytechnic [Government of Singapore, 1985]. The emphasis is on developing capability in artificial intelligence techniques, gaining expertise in software production under the UNIX operating environment and increasing software productivity through the use of program generators and other software tools. V. CONCLUSIONS Is the development of a country’s electronics industry accelerated by the decision to produce a wide spectrum of information goods and services, or is a narrower focus, based on some indicator of comparative advantage, better? The links between information technologies and the uncertainties inherent in the evolution of these technologies suggest that a broad involvement is desirable. On the other hand, economies of scale and lumpy investments argue for a specific focus. The experience of Korea suggests that both breadth and focus are desirable. Focus is needed in the early stages to develop simple production and organisational skills. Once such skills have been developed, a broader approach to take advantage of technological complementarities and to hedge against uncertainties is desirable. Of the five countries discussed in this article, India has the least developed manufacturing technology and telecommunications infrastructure. Korea and Taiwan have the most advanced manufacturing skills and infrastructure. Brazil stands in between. All these countries view information industries as the source of significant externalities and have implemented policies to promote them. For India, and to some extent Brazil, however, manufacturing skills in products of low sophistication (passive components, black-and-white televisions) may be a prerequisite for manufacturing more complex products. Even if such skill development is not a prerequisite in a sequential sense, India and Brazil will have to pay significant attention to developing the basic skills. Similarly, telecommunications development must be a high priority. In Korea and Taiwan, where the prerequisites are in place, the difficult question of international competition has to be considered. The high-growth products are also characterised by significant uncertainty, steep learning requirements and short product cycles. To compete internationally, domestic firms need to make large lumpy investments and must be able to sustain losses over periods of time. In this regard, the Korean conglomerates are better positioned than the smaller Taiwanese firms. Given the externalities associated with information industries and the difficulty in competing internationally, governments have used a number of mechanisms to promote domestic firms, including import protection, restriction of foreign investment, promotion of domestic R & D, and developing a telecommunications infrastructure. The role of the government has varied with

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the needs of the industry. It was typically stronger when private institutions were less developed. For example, in the 1970s, the Korean government played a strong role in the development of the electronics industry through import and foreign investment controls. It also established momentum by setting up KIET. In the 1980s, those firms have needed less support. As the smaller Taiwanese firms have attempted to move to sophisticated technologies, the government has been more closely involved in providing research infrastructure and in actual production. It should be noted, however, that recently the Korean government has also taken a renewed interest in the semiconductor industry. Government officials and presumably Korean firms find that they are at a stage at which collaboration could boost the firm’s positions. Thus the strategic role of the Government changes over time in response to the needs of domestic industry. In the evolving international environment, access to markets and technology will be the key issues. With heightened competition, the industrial countries have become more wary about parting with technology. Japanese firms in particular have followed a policy of minimising sales of technology; American firms have been more open in this regard, assuming that the collaboration will generate new markets. At the same time, the US government has put pressure on the NICs (and Japan) to agree to an international intellectual property regime to meet the requirements of the emerging technologies. These developments are at an early stage and their evolution will have an important bearing on international trade and investment. REFERENCES Adler, Immanuel, 1986, ‘Brazil’s Domestic Computer Strategy’, International Organisation, Vol. 40, No. 3, pp. 673–707. Balassa, Bela, 1981, The Newly Industrializing Countries in the World Economy, New York: Pergamon Press. Barras, Richard, 1986, ‘Towards a Theory of Innovation in Services’, Research Policy, 15, pp. 161–73. Brander, James and Barbara Spencer, 1985, ‘Export Subsidies and International Market Share Rivalry’, Journal of International Economics, 18, pp. 83–100. Business Korea, 1986, May,. Business Latin America, 1986, 29 Dec,. Business Week, 1986, 29 Sept,. Cohen, Stephen S. and John Zysman, 1987, ‘Manufacturing Matters: the Myth of the PostIndustrial Economy’, New York: Basic Books. Electronics , 1987, 2 April,. Electronic Engineering Times, 1986, 29 Dec,. Evans, Peter, 1985a, ‘Varieties of Nationalism: the Politics of the Brazilian Computer Industry’, in Antonio Botelho and Peter Smith (eds.), The Computer Question in Brazil: High Technology in a Developing Society, Center for International Studies, MIT.

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Evans, Peter, 1985b, ‘State, Capital and the Transformation of Dependence: the Brazilian Computer Case, Center for Comparative Study of Development’, Brown University. Fransman, Martin, 1986, ‘International Competitiveness, Technical Change and the State: The Machine Tool Industry in Taiwan and Japan’, World Development, Vol. 14, No. 12, pp. 1375–96. Frischtak, Claudio, 1986, ‘Brazil’, in Francis W.Rushing and Carole Ganz Brown (eds.), National Policies for Developing High Technology Industries: International Com parisons, Boulder, CO and London: Westview Press. Goransson, Bo, 1984, ‘Enhancing National Technological Capability: the Case of Telecommunications in Brazil, Technology and Development’, Discussion Paper No.158, Research Policy Institute, Lund, April,. Government of Singapore, 1985, ‘National IT Plan: A Strategic Framework’, Singapore. Kim, P.S., 1985, ‘CMP Industry Sector Analysis: Telecommunications’, US Embassy, Seoul. Krugman, Paul, 1986, ‘Introduction: New Thinking About Trade Policy’, in Paul Krugman (ed.), Strategic Trade Policy an dthe New International Economics, Cambridge, MA: MIT Press. Mansfield, Edwin, 1984, ‘R&D and Innovation: Some Empirical Findings’, in Zvi Griliches (ed.), R&D, Patents and Productivity, Chicago, IL: University of Chicago Press. Mody, Ashoka, 1985, ‘Korea’s Computer Strategy’, Harvard Business School Case Study. Mody Ashoka, 1986, ‘Recent Evolution of Microelectronics in Korea and Taiwan: An Institutional Approach to Comparative Advantage’, Discussion Paper No.36, Center for Asian Development Studies, Boston University. Mody, Ashoka, 1987, ‘Growth of Firms Under Uncertainty: Three Essays’, Ph.D. Dissertation, Boston University, 1987,. Nelson, Richard, 1984, High Technology Policies: A Five-Nation Comparison, Washington and London: American Enterprise Institute for Public Policy Research. Porter, Michael, 1986, ‘Changing Patterns of International Competition’, California Management Review, Vol. 28, No. 2, Winter, pp. 9–40. Ramamurthi, Ravi, 1985, ‘Brazil’s Comkputer Strategy’, Harvard Business School Case Study. Ruttan, Vernon, ‘Induced Institutional Change’, in Hans P.Binswanger, Vernon V.Rutan and Others, Induced Innovation: Technology, Institutions and Development, Baltimore, MD: John Hopkins University Press. Sarathy, Ravi, 1985, ‘High Technology Exports from Newly Industrializing Countries: The Brazilian Commuter Aircraft Industry’, California Management Review, Vol. 27, No. 2, Winter, pp. 60–84. Sauvant, Karl, 1986, International Transactions in Services: The Politics of Transborder Data Flows, Boulder CO and London: Westview Press. Spence, Michael, 1975, ‘The Economics of Internal Organization: An Introduction’, Bell Journal of Economics, 6, pp. 163–72. Teubal, Morris, Nadev Halevi and D.Tsiddon, 1986, ‘Learning and the Rise of Israel’s Exports of Sophisticated Products, World Development, Vol. 14, No. 12, pp. 1397–410. Wade, Robert, 1986, ‘Guiding the Market: Taiwan’s Industrial Policies in Comparative Perspective’, Sept., mimeo. Wall Street Journal, 1987, 25 Feb,.

58

Radical Technological Changes and The New `Order' in the World Economy Constantine V.Vaitsos*

INTRODUCTION In the aftermath of the Second World War, the then dominant powers established the main rules by which they attempted to govern, for several decades thereafter, the international economic system. They also constructed and largely controlled many of the major institutions which promoted compliance with the new norms. Through a series of multilateral agreements, specific rules and institutions were created. They covered (a) major sections of the world trade in goods (that is the GATT, where, relative to other policy areas, a more diversified basis of institutional decision-making has been maintained), (b) currency parity matters and international financial management (that is, Bretton Wood rules and the founding of the IMF, with a dominant presence of the US) and (c) certain areas of development finance and development policies (that is, the World Bank and other multilateral financial institutions). In contrast, the treatment of foreign direct investment and transnational business activities, labour migration, technology transactions, trade and investment in services were largely not addressed at a multilateral level. Instead, national policies were being followed and, in certain cases, bilateral agreements were reached. In specific areas, as in patents, copyrights and trademarks, the underlying policy principles were based on international rules which emanated mainly from the last century (for example, from the Paris Convention of 1883 and the Berne Convention of 1886). The origin of the multilateral rules which, for three or four decades in the postwar period, shaped the framework of accepted international economic conduct, largely stemmed from three determining areas of policy concern. They were the following:

*Athens University. An earlier version of this article was published in the Review, Journal of the Fernand Braudel Center. The original research was undertaken in the context of UNCTAD’s advisory work on the multilateral negotiations in the Uruguay Round.

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(i) The economic crisis of the 1930s had led to serious concern for the significantly adverse effects induced on the performance of the world economy by protectionist policies and trade wars among major trading partners. Thus, a freer trade environment was sought in world markets. Despite this shift towards trade liberalisation, highly protectionist policies continued to be followed by the industrialised countries in a wide spectrum of important areas. These included technologically important product groups (mainly through public sector procurement practices), industries confronting structural competitive problems (for example, textiles, steel and shipbuilding industries) and the whole area of agriculture production. (ii) The world-wide assertion of US political and economic power after the war was translated into specific multilateral economic agreements. Key expressions of this assertion were evidenced in the role of the US dollar as an international reserve currency and in the break-up of colonial preferential economic zones. (iii) The wave of political independence and nation-building were then about to commence in the poorer regions of the world economy. This evolution called for new international policy instruments directed to ‘guide and assist’ the new development prospects. The resulting multilateral institutional arrangements were largely agreed upon without any participation from most of the still non-independent developing regions. Some of these arrangements deepened their presence and significance in the functioning of the world economy (for example in certain areas of international trade and in the World Bank activities). Others created significant political and socio-economic frictions (like the IMF) while still others faced major dilutions and alterations in their operational relevance (for example, the exchange rate regime). From the middle and end of the 1980s a historic new phase has commenced with the negotiation of a whole new series of international norms. These include not only bilateral or regional agreements (like various US-Japanese and other economic accords or initiatives within the EEC) but also major multilateral initiatives in the Uruguay Round. In these multilateral negotiations, developing countries are now participating quite actively. Yet, an important dichotomy characterises the respective bargaining positions. On the one hand there is a set of ‘new issues’ which reflect policy concerns traceable to radical technological changes applied in production and exchange relations. In this case the industrialised countries pursue specific national development and protectionist policies—to be referred to in the pages which follow—while trying to settle bilaterally various confrontations which arise among themselves. At the same time, though, more or less consolidated pressure is being exercised on developing countries to open-up their markets in the respective trade and investment transactions which include ‘downstream’ applications of the new technologies. Also, new norms are sought to offer

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privileged market access through proposed intellectual property instruments. In all of these areas the initiative rests with the technology leaders while the rest are often in a defensive bargaining position. On the other hand, there are a number of ‘older’ concerns in the functioning of the world economy, which refer to protectionist policies applied to more ‘traditional’ products often using more mature technological inputs. They include outright trade restrictions or ‘voluntary’ exports restraints, the use of trade ‘reprisals’ involving investment, trade and other economic or even non-economic disputes, diverse countervailing duties to raise the price of imports, etc. The reasons as to why the 1980s generated such major multilateral initiatives include, to a large extent, a number of technology related considerations which transcend the overall functioning of the world economy: (i) Certain fundamental and structural changes have been thrust upon the world productive base, as a direct corollary of radical technological innovations. These have rendered obsolete and insufficient to cope with the new economic realities many of the existing bilateral and multilateral institutional arrangements which in the past governed international factor flows, trade and investment relations. (ii) The catching-up process through the international diffusion of more mature technologies has promoted a multipolar world economic system. It has also induced a crowding-out effect through activity redeployment in these more mature technology industries. The concomitant slower overall growth in aggregate production and trade, has rendered the resulting competitive pressures more painful to absorb, socially and economically. (iii) The US administration has felt the need, particularly during the present decade, to reassert the country’s economic power relative to other industrialised countries in the light of its lower long-term average productivity growth rates. This has posed serious competitive threats to US economic and other interests world-wide. In many of the above mentioned concerns, the underlying tensions presently involve mainly ‘North-North’ rather than ‘North-South’ conflicts. Also, several significant differences exist among developing countries as to the extent and nature of thier participation in the new technological era. On the whole, and as happened in previous periods characterised by radical technological innovations, fundamental changes are taking place in the economic scope and productive horizon of societies. In turn, such changes restructure the international division of labour and the overall functioning of the world economy.

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THE NEW INTERNATIONAL ECONOMIC RELATIONS The new international economics rests on the following tripod: – an ideology and new forms of selective yet quite active liberalism in international economics designed to enhance access to foreign markets. (Such policies are pursued by governments of diverse political philosophies.) – a strong component of protectionism and multiple government inter ventions, particularly (a) during the initial phases in developing new technologies, new products and new industries as well as (b) in order to handle structural economic disequilibria and strutural transformations at the sectoral and macroeconomic levels. (Again this strengthening of the role of the State transcends the ideological and political preferences of specific parties in power.) – an evolving new international institutional structure to assure compliance with the new rules of behaviour. (This structure includes, as others had in the past, specific mechanisms for the use of force and unilateral or more broadly legalised penalties and sanctions for non-compliance. The main purpose is to control the process of world development as the latter unfolds from the contemporary technological revolution.) In the first case of the tripod, access to third markets is pursued by those who control and set the pace of the evolution in novel productive know-how. Furthermore and in view of the nature of the technology, strictly private and national economic considerations are intricately interrelated with strategic, political, cultural and other major policy areas (for example, defence priorities, communications policies, issues on citizens’ privacy, educational and health matters, etc.). Following the technological revolution of the last century, access to foreign markets was justified and promoted on the basis of the not so obvious yet straight forward economic reasoning of comparative advantage. It was by no means a coincidence or a historic accident that such a central piece in the whole conceptual framework of international economics was developed in the country which then held technological leadership, namely in Great Britain by Ricardo. Despite its powerful implications, a fundamental issue was left outside of the whole scope of reasoning of comparative advantage, namely the nature of specialisation. Thus, who developed, who controlled and who used new productive know-how was a matter which was not even raised. Instead, the focus of attention was drawn to the mutuality of interests through the mechanisms of international exchange. The concept of comparative advantage has transcended, though, the technical and strictly economic sphere of concern. It has acquired a powerful ideological role and has been used to rationalise almost any type of international division of

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labour. Politicians, journalists and other professionals use this term with universal and accepted ease, without ever asking what it actually means. In previous periods of radical innovation, access to certain third markets, so as to exploit the economies of scale of existing technical advancements, did not require a theoretical rationalisation. Instead, it was imposed through the rule of colonialism so as to secure benefits for the new industries of the metropolitan centres. In the contemporary period of profound technological change, the mechanisms and conditions—and hence, the technical arguments—tend to be more complex, diversified and subtle. The resulting major economic changes involve, as it will be argued below, a number of integrated complex production and exchange relations. Some of them concern the strong linkages and overlapping relationships between the relevant subsectors for industrial-service-technological development. Such an economic setting reduces traditional sectoral differentiations, so that we encounter a simultaneous process of industrialisation of services (for example, massive hardware use in telecommunications, banking, transportation, health services, etc.) and a significant ‘tertiarisation’ of manufacturing and other activities (for example, software and other producer services and added value inputs in the production of goods). Concomitantly, we encounter an equally strong linkage or even joint and undifferentiated roles undertaken in government-business conduct and performance. Finally, contemporary radical innovations create particularly strong and joint requirements for specific human skills and information resources as well as for the use of ‘intelligent’ capital which embodies and uses the new know-how. The complexities of this new scenario are more easily rationalised and understood, particularly as far as public opinion is concerned, under the straightforward banner of liberalising markets and access to them. The political and policy message of this theme rests not on its medium (which can be technically and analytically quite complex) but on its simplicity. Also, the use of raw power by governments and the corporate technological leaders is extensive, even if it operates through institutional means unknown to previous technological revolutions. Contrary to the ideological and policy commitment to the liberalisation of markets on an international scale, the second base of the tripod referred to above concerns the multiple new and more active roles of governments and of the state sector in general. Among other key objectives and in order to limit ‘counterproductive competitive forces’, both the initial leader (US) as well as the successful first, second and later comers (Japan, some of the EEC countries, South Korea, Brazil, etc.) have used strong and effective government mechanisms of protectionism so as to promote national development. Such protectionist policies generally involve a complete array of mainly nontariff barriers. They cover extensive ‘buy-national’ practices (particularly in public procurement and in the activities of national natural monopolies in the

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telecommunications/space/energy/defence areas).1 They also include (a) direct subsidisation of technology, product and plant development, (b) diverse forms of financial assistance and risk capital cover for the commercial exploitation of new technologies, equipment and products, (c) industrial targeting involving integrated government-business commitments, (d) government-sponsored research and industrial infrastructure as well as export subsidies, (e) explicit or implicit comprehensive prohibition of foreign enterprise participation, etc. In the face of such a battery of large scale government interventions and protectionist policies by the state sector of mainly the industrialised countries, the importsubstituting policies of developing economies in more traditional industrial and service activities, appear as quite timid and limited efforts to promote local productive development. Finally, a far-reaching international and national institutional legal restructuring is presently taking place. Its function is to accommodate the profound economic transformations thrust upon us by the technological changes. The use of power, the inadequacy of many existing and outdated legal and institutional arrangements as well as the relative position of particular countries in a changing international division of labour, have commanded novel initiatives in the context of managing the new international economics. A pioneering case, expressing in a more or less coherent and consistent fashion the vested interests and initiatives of the technology leaders, is the 1984 Trade and Tariff Act of the US.2 The above cited considerations and initiatives appear and are imposed on the international economic system at a rapid pace. Although this pace certainly lags behind the rate of change in major new technological and accompanying economic evolutions, they are, nevertheless, constructing very fast a new institutional system of rules and norms of economic behaviour world-wide. KEY POLICY AND INSTITUTIONAL INITIATIVES The implications of contemporary technological changes for international economic relations will be examined with respect to three sets of interrelated policy and institutional issues. The latter involve (a) the proprietary or other control of the means and actors of production (for example, foreign direct investments and the activities of transnational enterprises), (b) the flow of goods, services and knowledge across national boundaries (for example, various expressions and content of trade relations), and (c) the proprietary and other control of information and knowledge more generally (for example, the evolving initiatives in intellectual/industrial property matters).

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I. Foreign Investment and International Trade Issues In order to adequately analyse the implications of major technological changes for the issues referred to in this section, one needs to commence by understanding certain crucial differences between two distinct categories of sectoral activities. The first concerns those manufacturing and service subsectors in whose productive operations the new technologies are developed and are directly translated into specific economic activities and products. They constitute the ‘upstream’ sub-sectoral operations of the new technologies. Although they might not directly account for a dominant share in national production, they consitute the ‘leading industries’,3 in the sense that they significantly influence the productivity and output growth rate of a number of other industries. They also include the ‘transformative technologies’4 which affect the content and organisational characteristics of many other economic activities. Then, there is the category of the diverse end-users in the multiple ‘ downstream’ production activities. The latter’s operations are in various degrees affected by the introduction of upstream outputs in their own input composition. Finally, both at the firm but mainly at the national and international levels, the two categories can and often do overlap in complex input/output relations. In this case a more synthetic and eclectic mode of analysis is required. Let us set the stage by pointing out some rough statistical indicators so as to focus on certain key characteristics of the diverse elements involved. Despite important conceptual and empirical shortcomings in the use of the specific proxy variable employed, we will commence by using as a differentiating parameter the relative R & D intensity of various industrial subsectoral activities in the OECD area.5 If one uses as a criterion the ratio of R & D expeditures relative to output values, then manufacturing operations in the OECD member countries cluster around three major categories of subsectoral groupings: The first involves a high R & D intensity with an average corresponding ratio of about ten per cent at the beginning of the 1980s. This group includes such activities as aerospace (where R & D output averages above 22.7 per cent), computer and office machines (17.5 per cent), electronics and components (10.4 per cent), down to scientific instruments and electrical machinery (4–5 per cent). The second category, of medium relative R & D intensity, portrays a corresponding ratio which, in most cases, ranges between one and two percentage points. Here we find subsectors such as the automotive industry, chemicals, non-electrical machinery, rubber, plastics, non-ferrous metals, etc. Finally, the category with low relative R & D intensity, exemplified by smaller than one percentage point R & D output ratios, includes such diverse subsectoral activities as textiles, footwear and leather, shipbuilding, petroleum refineries, ferrous metals, food and beverages, tobacco, etc.

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What is the evolving economic ‘cartography’ of the above mentioned three groupings? During the last decade and a half, the high R & D intensity category accounted for more than 50 per cent of total private and public OECD expenditures in industrial R & D while it only produced slightly more than ten per cent of total manufacturing output. In contrast, the low intensity category accounted for about 57 per cent of total output, with the medium intensity one representing slightly less than one third. Total industrial R & D resources in the OECD area were split between 32 per cent for the medium intensity category and 17 per cent for the low one. The dynamic conduct, though, of foreign trade, direct investments and related factor and non-factor flows are quite distinct. As far as international trade performance is concerned, the highest growth rates and overall longer-term dynamism rest with the high relative R & D intensity grouping. In the first half of the 1980s the corresponding subsectors accounted for about 20 per cent of OECD industrial exports (for the US it was more than 30 per cent), having started from less than 14 per cent in 1975. Also, through intersectoral technology transfers, such high R & D groups are affecting the competitiveness and performance of most of the other subsectoral activities which are the productive end-users of the new technologies. At the same time, though, the high R & D intensity subsectors register relatively low overall foreign direct investment operations for reasons which will become clear further below. In contrast the bulk of foreign direct investments take place (a) in the medium R & D intensity category (with more mature technological inputs) as well as (b) in areas of the service sector. The latter has been, as an end-user, one of the primary international business beneficiaries of modern technologies. Finally, the low R & D intensity industrial subsectors are losing ground on all fronts of international transactions, although they still account for the largest share in the total domestic OECD manufacturing output. The above classification is depicted in the summary presentation of Figure 1 below. We, thus, have a complex canvas of multiple sectoral situations and dynamics. Corporate and particularly national economic policies and behaviour appear quite schizophrenic and full of inherent contradictions, yet, there is a definite, though complex, logic in the functioning of the whole system. The latter is in the process of being imposed on the international economy by the technological leaders. They, in turn, face conflicting interests among themselves and economic risks in view of their own antagonistic objectives. On the whole, it is a very lively stage on which all major economic and political actors are present and performing on the basis of separate ‘scripts’ belonging to the same overall ‘play’, highly structured by changes in the state of the art of productive knowhow. 1. The technological ‘upstream’ productive activities. The economic space for the development and direct application of the new technologies—their working place—is, in an overwhelming manner, geographically circumvented.

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FIGURE 1

Institutional initiatives are presently underway to restrict the dilution of such a geographic concentration of knowledge- and information-intensive productive activities. Also, the corresponding economic space is governed by a quite explicit reasoning in constructing the relevant national and corporate policy patterns of the technology leaders. The reasoning referred to above draws from the concepts of development economics as applied to relatively advanced societies and recast in the context of modern technological breakthroughs. At the operax tive level, development policies attach a central importance to the requirements of ‘learning by doing’ and ‘learning by learning’ (that is through making and correcting one’s own mistakes). Also, the overall development process is strongly assisted through the strengthening of interlinkages and interconnectedness between knowledge creation, knowledge application and productive activities. At a more general level and especially in view of the fact that modem technologies have significantly shortened product life cycles, both enterprises and national economies need to fundamentally alter their developmental behaviour. This becomes necessary if they are to succeed in the restructuring process of the international division of labour or even, in several cases, if they are to survive in world competition. The change in behaviour originates from the demands imposed on economic actors, whereby they need to anticipate what

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their ‘comparative advantage’ will be. Such advantages are not already given but man-made. The success of this type of reorientation in strategic economic policy formulation appears to depend, in turn, on the development of a number of crucial institutional and knowledge-intensive capabilities. Certain of these capabilities are not substitutable nor are they always tradeable. They involve the capacity to master and use technologies and to master changes in technology. They also include the ability to develop and accumulate over time productive capabilities. Within the framework of the particular major technological changes concerned, the requirements for creating such technical, institutional and market specific advantages and capabilities bring into the forefront a number of crucial and interrelated forces. All of them contrast fundamentally with the neo-liberal approaches, followed in the case of ‘downstream’ activities. In the development of technologically ‘upstream’ economic activities, though, the forces referred to above include: (a) a major and determining role undertaken by government intervention in the functioning of markets, with comprehensive explicit and implicit protectionist policies, use of public funds and overall activities for infrastructural and institutional building, both nationally and internationally; (b) internal corporate resource and capabilities development so as to advance, master and exploit the business opportunities offered by the new technologies in reshaping the international division of labour; and (c) a long-term strategy which requires various forms of government-business cooperation and planning mechanisms as well as an evaluation of market outcomes (both volumes and prices) based on such a time horizon. As far as international economics are concerned and the resulting geographic distribution of technologically upstream productive activities, a key and common conclusion is drawn from the above. A main aim pursued consists in obtaining, within specific national and corporate economic spaces, control over the productive areas through which the diffusion of technical change takes place. The concentration of these activities is thus a central concern. The latter runs counter to the needs and corresponding capabilities of other enterprises and countries to leap-frog technologically and productively, particularly within an environment of short product cycles. As a consequence of this captivity of upstream productive activities two main implications take place: first, economic actors attempt to internalise the benefits of the whole developmental process through what was referred to earlier as learning by doing and learning by learning, as well as, the multiple externalities involved in the economics of concentration and connectedness of specific technological and economic activities inherent in the novel know-how. Second,

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they try to limit the opportunities of other firms and countries to leap-frog technologically or even to develop through their own learning processes. The corporate and national captivity of production is greatly assisted by two major factors. First, and above all, it is sustained by government procurement, subsidies as well as regulatory and other interventionist policies. All relevant sectoral studies by official or non-of ficial institutions and researchers reach a common conclusion: the scale, nature and distribution of government support to high technology industries is a determinant factor in the growth and competitiveness of the enterprises involved.6 For example, the order of magnitude of the annual US government’s prime contracts for high technology products and services is not lagging very far behind the total volume of high technology exports by all OECD countries to the rest of the world (about $55 billion in 1983). In specific subsectoral activities, like the space industry or the technological development of telecommunications, the growing militarisation of expenditures enables specific governments to play an ever-increasing role without much interference from other institutional international commitments (like the GATT) in the domestic development of their industry.7 The link between the domestic market and the role of the government has served as a major springboard for overall technological and industrial development in large and smaller advanced economies. For example, the Swedish Board for Space Activities, under the auspices of the Ministry of Industry, has defined as the principal objective of that country’s space programme the encouragement of the overall development and diffusion of advanced technology within the whole industry of that economy. Certain countries are particularly blessed with large internal markets which are actively employed for their domestic technological and indus trial development. The diverse producer-end user relations (both intra-business and governmentbusiness) are employed even in the absence of public ownership. Key roles are exercised by ‘natural monopoly’ situations (as in the telecommunications sector), strategic national concerns (particularly in the military industry) government-sponsored R & D and other subsidies for private enterprises, government regulations and standards, etc. This is true both for the US and the Japanese case as well as for the larger Western European countries. It is indicative (of the size and concentration factors involved in these activities) that one company, Hughes Aircraft, which has captured about 30 per cent of the US civilian satellite sales market, has a turnover that markedly exceeds France’s entire space budget. For the technology leaders, the name of the game is the size of the domestic market and its captivity for national technological/industrial development. The above bring us to the second major force which requires and, at the same time, generates production captivity of key upstream operations within the domain of specific corporate and national entities. Despite the continuing challenges from novel ideas and dynamic business situations, or precisely

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because of them, the emerging industrial structures encourage increasingly stringent barriers to entry. Scale requirements are now becoming a significant barrier. The experiences of the 1960s and early 1970s, (when the combination of often individual or small team innovative work and venture capital led to some highly profitable business endeavours in both microelectronics and biotechnology) are presently overwhelmed by new developments in the corresponding markets. Their place is taken by massive capital requirements, complex interdisciplinary work and well established organisational structures so as to effectively relate to end-users, governments and major competitors.8 As was commented in relation to the recent $1.65 billion merger between Advanced Micro Devices and Monolithic Memories which created the fourth-largest microchip maker in the US: ‘…the event exemplifies the recognition of a new era in our industry, when size and financial muscle are on an equal footing with entrepreneurship and innovation as the basis for substained profitable growth’.9 The emerging combination (a) of scale requirements for diverse and interdependent investment undertakings for the development, launching and commercial exploitation of new products coupled with (b) rapid technological change which shortens significantly the corresponding product cycles, create severe pressures for quick capital amortisation periods. This generates a significant premium for barriers to entry to avoid the emergence of newcomers, nationally and particularly internationally. Thus, vertical integration and market concentration, closely controlled subcontracting operations and captivity or restrictions imposed upon the dissemination of knowledge become strategic corporate objectives. They are also central in government concerns and policies, particularly since significant sums of public resources are actively involved in funding the whole process of new productive knowledge generation as well as its application in industry. In a situation where the state of the industry is becoming, in many respects, as important as the state of the art, international economics take a definite and particular form of expressing the behaviour of the major economic actors involved. As far as international trade is concerned, market segmentation, predominantly through multiple and highly effective non-tariff barriers, determines the overall patterns of exchange among the technological leaders. Their main objective centres on the protection of domestic productive activities though the maintenance of low import to consumption or import to use ratios.10 For the rest of the world, though, there are strong pressures to open up their markets for foreign goods and services. When the competition in such technologically less developed areas (including Western Europe for certain high technology products) becomes counter-productive for exporters, then the technological leaders, both at the corporate as well as the government level, do not hesitate to enter into international collusion arrangements or other agreements. Also, threats

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and sanctions on dumping and related unfair or restrictive business practices are becoming a familiar and repeated phenomenon among technology leaders. The same underlying logic rules the area of foreign direct investments in high technology products, thus creating a sharp distinction with respect to the rest of the industrial and service activities. In relatively more mature sectoral productive operations, international technological linkages are primarily structured around foreign investment strategies. They largely involve firms which plan production, marketing and related activities in other countries. Concomitantly, they internalise the multiple trade relations of goods and services, technology flows and other transactions between affiliated firms. In the context, though, of technologically upstream sub-sectoral activities the situation is quite different. The main concern for corporate and national production captivity, the corporate strategic risks involved in effective technology diffusion and the emergence of newcomers as well as the whole protectionist attitude for internal development purposes, transform the content of international business. The closest comparable case to upstream new high technology activities, which belongs to along standing industrial subsector, is the case of the machine tool industry. The latter subsector represents another focal point of technologically upstream activities which corresponding technology leaders seek to keep captive. In this case ‘…until very recently, direct international investment and the acquisition of local firms by foreign firms have been of only minor importance’.11 Instead, licensing and other intercompany agreements are predominant and they concern mainly technology and design transfers, marketing arrangements and know-how agreements for largely independent production and assembly. Similarly, in recently advanced technologically ‘upstream’ activities, major producers largely concentrate in their home country not only the R & D operations, as it happens in less research-intensive sectors, but in addition the main production itself. Abroad, they prefer to promote basically commercial type of links and branches. Foreign direct investments, whatever they take place, are very often motivated by commercial objectives of market penetration. The overall attitude is generally one of maintaining independence but with co-operation, especially among firms of comparable technological level. There are tightening relations between suppliers and customers while there are growing examples of R & D co-operation. International business is, thus, seen under a different framework and largely concerned with complex trade-offs between the needs of third market penetration through export activities and the limits to be imposed on diverse diffusion processes. Production captivity is a key goal in such operations. Again, the main objective is to benefit from the learning processes of technological and production activities. At the same time, a number of policy initiatives are undertaken so as to reduce the extent of know-how diffusion and the emergence of new comers.

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Outward and production oriented foreign direct investments in relatively high technology activities do take place, though, in three major cases. As already noted, by far the most important concern is the attainment of foreign market penetration (for example, foreign-owned subsidiaries or joint ventures established abroad so as to qualify as national producers and, thus, have access to public procurement as in the telecommunications sector). Of much lesser significance has been a second type of outward foreign direct investments promoting the subcontracting of certain labour-intensive activities which are related to upstream operations. These were pursued mainly at the beginning of 1970s by US transnationals: they sought low-cost labour advantages in SouthEast Asia and certain Western Hemisphere developing countries in competition with the more automation biased strategy of Japanese firms. Finally, certain Western European foreign, investment undertakings in the US pursued a technological leap-frogging objective. They sought to acquire already established and know-how-intensive enterprises in order to quicken their own catching-up process in the new technological fields. As far as policies towards inward direct investments, there are two contrasting strategies. Among the successful first latecomers, in the extreme case of Japan there was a complete prohibition of such investments during long periods of time in major microelectronics and informatics-related industrial and service activities. Furthermore, Japan applied strict controls on technology agreements and related imports so as to protect its productive infrastructure during the take-off period. Technology was being obtained from abroad only through strict government controlled licensing agreements. Also, second source agreements, in which regulatory and other administrative or contractual control mechanisms were exercised by MITI and related government agencies, were explicitly designed so as to affect both the licensee and licensor for operations in Japan. As soon as the Japanese ‘infant industries’ became major world competitors, these totally restrictive policies were only partially relaxed, quite often under strong political and economic pressures from abroad. In addition to protectionist policies aimed at domestic technological/ production development, the emerging policies focus also on national market share considerations. This is evident in the recent major conflict between the UK and Japan in handling the unseccessful efforts of Cable and Wireless to enter, through a foreign investment, the Japanese telecommunications market. Some equivalent cases exist in the US (for example, the refusal of the US Secretary of Commerce to allow in the US the acquisition of the French-owned Fairchild Semiconductor Co. by the Japanese Fujitsu on grounds of ‘national security’!). At the other end of the policy spectrum on inward foreign direct investments and involving an as yet relatively less developed region in this area, one finds the case of Western Europe. In this case, liberal policies towards foreign investors stem from overall policy directions pursued in the context of internal market integration. There are, though, specific and technology-related considerations which involve a key trade-off: foreign access to the domestic markets versus

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quick access to certain high technology inputs which the foreign subsidiaries or joint ventures possess. It is highly pertinent to note the seriousness of multiple implications arising from this trade-off. Such investments and related technology acquisitions, without a serious complementary domestic development programme…‘can only be a stopgap and only one factor in helping the reinforcement of international competitiveness’.12 A key conclusion reached on these issues and included in an OECD Secretariat publication, reads like a Latin American dependencia position: ‘Excessive and continued dependence on technology transfers from American and Japanese firms may lower long-term competitiveness in…[the related high technology products in Western Europe]’.13 2. Technological ‘downstream’ productive activities. Downstream activities differ fundamentally from the previously analysed issues in two important areas: First and principally in terms of objectives, the inter national division of labour pursued by the technology leaders requires an active presence in third markets. The extension of their economic space at an international level enables them to reap higher returns from the new know-how applications. This involves both volume considerations and the consequent benefits from scale economies, as well as issues which concern the management and the determination of the terms of trade in the world economy. To achieve the required third market penetration through downsteam activities, the physical presence of subsidiaries and other foreign controlled enterprises becomes, in certain sectors, a major requirement. Assuring the ‘right of establishment’ in other countries and also favourable business operating conditions for downstream activities emerge as key institutional objectives for the products of the new technologies. In view, though of (a) the characteristics of major sections of the endusers (for example, government agencies and public corporations with specific procurement practices) as well as (b) the sectoral characteristics of the productive activities in which the new technologies are applied (especially in the services sector), the physical presence of an enterprise is not sufficient to assure access to third markets. Equally important is the assurance of comparable ‘national treatment’ of foreign goods, services, personnel and related inputs. Thus, the attempt to open up third country markets goes beyond traditional trade and capital movement barriers, and addresses issues of decision-making by enterprises. Furthermore, in view of the overall regulatory and policy nature of certain nontariff barriers in the relevant subsectors, access to foreign markets implies bringing influence to bear on third government decision-making. From all the above, there emerge powerful reasons for comprehensive pressures to be applied on the world economic community by the technology leaders so as to assure the necessary institutional adjustments in laws, policies, decision-making procedures and practices. All of them are directed to creating the opportunities and mechanisms for third country market penetration.

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This logic is explicitly evident in the US (and subsequently in the Japanese) proposals for the new round of multilateral GATT negotiations. They have also conditioned the comprehensive bilateral agreements already signed between individual industrial countries and a number of Ides, the special arrangements made between Japan and the US as well as the whole philosophy of major new national legislative and policy initiatives in the OECD area. The latter practices have, in turn, affected the policies applied in structural adjustment programs in Ides by the main multilateral financial institutions, like the World Bank. The second major differentiation from the case of upstream activities discussed in the previous sections, concerns the recognition that downstream operations are not limited to some specific subsectoral areas. Instead, in view of the pervasiveness of the new technologies on a very wide spectrum of the productive system, they tend to affect a large and diversified number of downstream activities. Thus, the relevant implications address the whole range of traditional foreign investment and international trade relations in goods and services. The economic flows from new initiatives promoted by the technological changes, intermingle and are dependent on the nature of the stocks of existing and more traditional operations (for example, telematics in banking, informatics in quality and inventory control in textiles, telecommunications in trade and tourism, computer aided designs in machinery production, process technology in the pharmaceutical and food processing industries, etc.). They are also linked with sectoral and certain macroeconomic structural adjustment policies pursued by governments in areas not directly related to the new technologies. In this context and during the decade of the 1980s, the US administration undertook a number of important and interrelated initiatives. Their central objective has been to strengthen the role, the expanding presence, as well as the power—economic and otherwise—of the transnational enterprises in the world economy. This effort has had a series of implications on similar positions assumed by a number of other developed market economies, especially by Japan. At a multilateral level the corresponding policy objectives have been brought forward as concrete proposals during the ongoing GATT negotiations in the Uruguay Round. A number of them are presented under the general heading of Trade-Related-Investment-Measures (TRIMS). These initiatives abstain from any direct reference to particular economic actors, such as transnational enterprises, focusing instead on the role of the private sector in promoting world economic recovery and development. Here an improved investment climate is sought by the liberalisation and deregulation mainly of technologically downsteam activities. The basic orientation of the whole endeavour consists in transferring the locus of planning, decision-making and policy initiatives (domestic and world wide development), to the corporate space of transnational enterprises. In contrast, the policy role of host governments is considered distortive, even if the initiative and actual implementation of productive operations rest with the private sector. Such

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economic perceptions differ sharply from the complementarity and active symbiosis established between state and private initiatives in the technologically upstream operations. The emphasis placed by the US on ‘fair’ trade, as differentiated from ‘free’ trade, demonstrates the US Administration’s concern with two main issues. First, it reflects preoccupations arising from the huge US imbalances in its aggregate economic relations with other industrialised countries. It also reflects concerns arising from the broader implications posed to US and other countries’ interests from the strengthening of a multipolar economic system, including the crowdingout effect in specific product markets induced by some dynamic developed market economies as well as some newly industrialised countries.14 Second, it indicates the determination of the US government to push beyond GATT’s traditional concern for impediments to trade erected at countries’ borders. Instead, it promotes the institutionalisation of de novo international rules on major policy areas, like those involved in some key aspects of the foreign direct ‘investment’ process. The preference for the GATT system as the main institutional medium for the new initiatives on multilateral rules on ‘investment’ matters is due to the presence, within GATT’s framework, of international enforcement mechanisms (for example, mandatory consultations and time schedules for their execution, sanction provisions and procedures for retaliatory measures). Equivalent practices are absent from other multilateral agreements or ‘codes’ on direct investment and technology trade matters. The central intent, especially by the US and Japan, in these multilateral negotiations is to use the TRIMs case as a starting base for the creation of an international investment regime so as to improve the conditions of market penetration in third countries.15 Given the high degree of transnationalisation characterising many modem economic activities, the proposed new international rules have two main aims at the operational level: First, to significantly alter the balance of negotiating power in favour of the transnational enterprises compared to that of host countries, both developed and developing. By limiting, through multilateral rules, the negotiating scope of host governments while leaving untouched the corresponding policy areas of enterprises’ affairs, the latter are strengthened significantly in imposing their own conditions for entry and operations. Thus, the international terms of exchange are tilted in favour of specific business and social actors in the international economy. Second, the establishment of such an investment regime perforates the economic space of the nation state and reinforces the corresponding corporate one. In this respect, not only are screening and monitoring procedures severely reduced in modifying the terms of business operations so as to make them more consistent with and conductive to crucial development objectives, but also the

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overall development role of governments is curtailed through specific international rules. In addition to the TRIMs issue discussed above, another recent major initiative in the context of the GATT multilateral negotiations, concerns the liberalisation of ‘trade in services’. The latter sector represents one of the principal downstream users of major technological changes. It also accounts for upward to 40–45 per cent of the total stock of foreign direct investments by the major foreign investing countries in the world economy. 16 In view of the nature and particularities of services as productive activities, the penetration of foreign markets requires the explicit recognition of issues which are sectoral or subsector specific. The latter refer to several types of protectionist measures which, in various degrees, are applied by both industrialised and developing countries so as to limit the degree of penetration of their domestic market by foreign enterprises in diverse service subsectors. Such measures include:17 (a) establishment requirements (which are crucial, among other activities, in the banking and insurance industries), (b) obstacles related to operating conditions which tend to affect mainly the cost of doing business in a country, (c) obstacles related to access or size of business (quotas, exclusion from public procurement, exclusion from certain business such as accepting savings deposits for foreign banks, etc.), and (d) measures not primarily related to a specific subsector but which can be crucial for the functioning of several of them (for example, foreign exchange controls, personnel related matters, transborder data flows, etc.). The previous considerations explain the holistic nature and far-reaching implications of the strategy of many developed economies during the proposed GATT negotiations for the partially misnamed issue of liberalising ‘trade’ in services. The whole exercise contrasts sharply with the strong reasons for the captive production and protectionism referred to above for upstream activities. In fact, the emerging system is effectively a dual structure of world economics which largely matches the interests of the technology leaders. One of the most pronounced examples of an internationally inequitable treatment,, with major implications on the evolving international division of labour, concerns the new initiatives in intellectual property matters to which we now turn. II. Intellectual Property Protection The whole area of international intellectual property protection has accompanied right from the start the history of previous technological revolutions and was initiated by the then technological leaders in Western Europe. The main

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foundations and governing principles of such a system were established well before the end of the last century by such key institutional arrangements as those of the 1883 Paris Convention (for patents and related industrial property matters) as well as by the 1886 Berne Convention (for copyrights). The technological breakthroughs, though, of the 1970s and the revolutionary impact thereafter in the fields of microelectronics and biotechnology changed radically the environment and corresponding institutional requirements. Computer programmes, plant varieties and biological inventions constitute much more copy-prone products. Consequently, technology leaders place further emphasis on the position that the ability to reproduce constitutes a capital good in itself, which deserves legal protection. This has induced, in turn, efforts for much stronger protection mechanisms. Part of this protection concerns completely new cases—like the layout of semiconductor chips—which calls for novel and sui generis forms of intellectual property coverage. Furthermore, in a number of operational matters with important substantive implications (for example, identifying authorship, infringement, derivative use, private versus commercial use, etc.) existing and long standing provisions were rendered quite inadequate in the light of the radically new technological breakthroughs and their far-reaching economic implications. In the context of such a novel environment, a major breakdown took place in the existing and basic distinction between inventions (covered by patents) and authorship (covered by copyright). With the emergence of functional works in which a writer can write not only for a human audience (that is, a book, a musical composition, etc.) but for a machine (for example, software, data bases, chip masks), the new information-based products no longer fit within the old legal framework.18 New distinctions had to be drawn between works of ark, works of fact and works of function. The latter concerned innovations which constitute the first manmade ‘immaterial machines’. We thus find ourselves today at an historic crossroad with a new set of major initiatives underway in intellectual property matters. In a span of perhaps a few years, these initiatives are likely to drastically redefine international economic relations in old and new activities in this area. The resulting changes will affect corresponding business practices, particularly those of the TNCs, for many future decades lasting well into the next century. The undisputed leadership in these new institutional and policy initiatives rests with the US in a large number of areas which have already influenced national legislations in a number of other developed market economies (like Japan and France) as well as several LDCs (like Brazil and South Korea). The principles of these initiatives are now finding their way in multilateral fora, principally with the new round of GATT negotiations. Within a period of less than five years, the US introduced a barrage of major and, in many respects, fundamentally new national legal and institutional measures in the whole field of intellectual property matters. Some of them

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reverse or conflict with the policies pursued for many decades in the past by the US while others add completely new dimensions and perceptions. Such initiatives include: (a) the 1980 amendment of the 1976 Copyright Act, explicitly granting copyright protection to software;19 (b) 1984 Semiconductor Chip Protection Act, in whose 902 Section a crucial ‘reciprocity clause’ is introduced in contrast to the principle of ‘national treatment’ applied to other US and multilateral instruments; (c) the 1985 International Software Protection Act, which also includes a reciprocity clause. Despite their technical particularities, the above follow the holistic and overall policy framework of the 1984 US Trade and Tariff Act as well as the 1984 National Productivity and Innovation Act. This highly impressive and uniquely integrated policy package of the US constitutes the basis of the current multilateral initiatives. The complexities and diversity of economic implications raised by current radical technological changes will, undoubtedly, involve a maze of technicalities and expertise in the emerging new intellectual property system. Understanding the essential issues, though, is necessary so as to judge the differential appropriateness of the emerging new institutions and business practices. The technological leaders are constructing a fourtiered system in this area. It involves the following broad categories: (a) Given the enhanced value of information and knowledge in all realms of contemporary life, the main intention pursued, through civil and even criminal remedies in certain cases, is to cover the widest possible range of diverse cognitive elements under the net of property rights. Effective judicial and administrative procedures are sought so as to define and control the standards of behaviour of such proprietary use of the relevant information and knowledge elements involved. The major tradeoffs relate to the need for supporting and promoting investments in inventive activities versus the requirements and distributional interests in diffusing novel know-how. The new key areas in granting monopoly privileges through intellectual property rights concern: – expanded copyright provisions for the protection of computer software, data bases and related functional informatics works, – sui generis protection of semiconductor chip layout, affecting the industrial production of a multiple of manufacturing end-user activities, – patent protection in biotechnology processes and products including microorganisms as well as expanded protection in pharmaceuticals and agrochemical processes and products, and

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– trade secret protection by extending property rights in a multiple of other technical and business information areas. (b) A central feature of the evolving system is to extend the civil remedies so as to incorporate elements of the domestic trade laws and border controls. Since a key objective of the technology holders is to institutionally affect and exercise control over the international allocation of major economic activities, the intended protection is sought not only at the ‘source’ (that is, the location of production) but also at the level of international ‘use’ (for example, imports into ‘third’ countries). (c) The third tier in the structure of the new system includes a new panoply of enforcement mechanisms which have been introduced in the US legal structure (through the reciprocity clauses referred to above) and are in the process of being adapted and extended in international instruments through specialised novel mechanisms. The latter involve proposals for assuring compliance through: (i) mandatory consultations, (ii) settlement of dispute procedures (for example, using the GATT mechanism) and (iii) legally sanctioned retaliatory trade restrictions which link access of other products and services to certain markets as a condition for ‘improved standards of behaviour’ of third countries in the new international intellectual property provisions being proposed. (d) The final major tier refers to the new conceptions of relevant antimonopoly and anti-trust practices which are applicable to intellectual property matters. During the 1980s, especially in the US legislation and practices, important changes have taken place towards the significant reduction of conflict areas between anti-trust practices and intellectual property privileges. This shift in policy matters and key anti-monopoly principles is in the direction of strengthening the property rights of technology owners and their terms of use or sale. CONCLUSION Military predominance and economic power enabled the US to largely shape the ‘new international economic order’ which followed the conclusion of the Second World War. That ‘order’ rested on specific rules of economic conduct and institutional functioning which concerned key international finance and world trade of goods issues. For several decades they served the dual purpose of dismantling the older preferential economic zones drawn along colonial lines, and fostering the world-wide presence of US economic interests. From the middle of the 1980s a new set of multilateral initiatives have been undertaken creating new conditions for the functioning of the world economy. In this case the slow down and structural disequilibria caused by maturing technologies of previous vintages and radical technological changes marking the beginning of a new era, jointly represent a main axis around which the novel initiatives are being developed.

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Two important differences exist which distinguish the new conditions from the older ones: First, the new initiatives are thrust on a world economic scene characterised by various degrees of multipolarity in the respective economic activities. In addition to changes in relative bargaining power, the conflicting interests raise a number of differentiations among groups of countries. Thus, not only is there no single country which acts as the driving force as in the early post-war period, but there is also no clear cut and uniform North-South differentiation in all areas of conflicts. Instead, one encounters specific ‘NorthNorth’ conflicts and a number of major ‘North-South’ ones. In the former case an attempt is made to handle them bilaterally (as in the case of high technology accords between the US and Japan) or to exclude them from multilateral and global treatment (as is the case of the EEC on agriculture). In contrast, protectionism and market liberalisation is treated unevenly in ‘North-South’ relations. Very mature industries and core novel technologies are protected in the ‘North’ while various forms of market access are sought in the ‘South’ which faces a different horizon of protectionist preferences. The second differentiation between the old and the new multilateral institutional arrangements concerns the extension of coverage from finance and trade of goods into novel factor market and capital access considerations. Thus, foreign direct investment, trade in technology, producer services, intellectual property and related matters on information management are brought under new multilateral rules of accepted conduct. Furthermore, diverse government policies going beyond tariff barriers are brought under closer multilateral scrutiny. This constitutes a major attempt to intervene in the development patterns which accompany technology diffusion and technological leap-frogging so as to manage and condition the emerging new international division of labour. NOTES 1. See for example, OECD, Trade in High-Technology Product in the Semi-conductor Industry: Industrial Structures and Government Policies’, Secretariat, Paris, May 1944 and OECD, Trade in High-Technology Products: The Space Products Industry’, Secretariat, Paris, March 1985. 2. See M. Rodriguez Mendoza, ‘Latin America and the U.S. Trade and Tariff Act’, Journal of World Trade Law, Vol.20, No.l, Jan./Feb. 3. See R.Nelson, High-technology Policies: A Five Nation Comparison, American Enterprise Institute for Public Policy Research, Washington, DC and London, 1984, pp.74 et seq. 4. See S.S.Cohen and J.Zysman, Manufacturing Matters: The Myth of the PostIndustrial Economy. New York: Basic Books, 1987. 5. Unless otherwise specified, the data for this section originated from OECD, 1985, ‘An Initial Contribution to the Statistical Analysis of Trade Patterns in High

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6.

7.

8.

9. 10.

11. 12. 13. 14.

15.

Technology Products’, Directorate for Science, Technology and Industry, DSTI/ SPR/84.66 and IND/84.60, Paris, 30 Jan. For specific sectoral references see various studies undertaken by the OECD Secretariat in the whole area of high technology products and particularly in the ‘Semiconductor Industry’ (DSTI/SPR/83.104, 9 May 1984), the ‘Space Products Industry’ (DSTI/SPR/83.32, 6 March 1985), the ‘Pharmaceutical Industry’ (DSTI/ SPR/83.101, 15 March 1984) and the ‘Machine Tool Industry’ (DSTI/SPR/83.102, 22 March 1984). The US military space budget was half of that of NASA’s in 1970, yet by the early 1980s it had significantly surpassed it. See OECD, The ‘Space Products Industry’, op. cit., p.9. Also, the US Department of Defense in the main source of R & D funds for the US telecommunications industry. See among others M. Savage, C. Catoe and P. Caughran, ‘Manned Space Station Relevance to Commercial Telecommunications Satellites: A prospectus to year 2000’, AIAA/MASSA Symposium, Arlington, Virginia, July 1983. For example, the minimum investment requirements for waver fabrication in the case of semiconductor production was in the range of $100,000-$500,000 up to the end of the 1960s. By 1978 the corresponding requirements were in the order of $10 million, while total waver-assembly investments exceeded $60 million by 1982. See J.L.Truel ‘L’industrie mondiale des semi-conductors’, Thése de Troisième Cycle, Université de Paris IX. Financial Times, 1 May 1987. For the case of semiconductors and integrated circuits see Integrated Circuit Engineering, Status, 1982 and 1983. Also see UN-CTC, Transnational Corporations in the Semi conductor Industry, New York, 1983. See OECD, 1984, The Machine Tool Industry’, op. cit., p.25. See OECD, 1984, The Semiconductor Industry’, op. cit., p.59. Idem at 61. In fact, the first initiative in the TRIMs area within GATT involved a conflict between the US and Canada. It concerned the latter’s Foreign Investment Review Act (FIRA). See GATT’s ‘Special Panel Report’ L/5504 and BISD/30S/140, Geneva, 7 Feb.1984. The US and Japanese positions focus on three broad trade-related areas of investment measures in which host government actions will be deemed as being inconsistent with international rules: A. Local content requirements (applicable to diverse production and sales arrangements, trade balancing, equity shares, technology commercialisation practices, diverse licensing arrangements,, incentives policy, balance of payments issues, remittances restrictions, etc.) which directly, indirectly or even potentially can limit imported products being sold and used in a country. B. Production and sale requirements which restrict the ability of other countries to export to a host country of specific foreign investment and/or technology undertakings. C. Trade, technology and licensing, diverse production, equity and remittances requirements as well as incentives policies which ‘force’ increased exports form a host country. See Multilateral Trade Negotiations, the Uruguay Round:

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– ‘Submission by the United States’, GATT Secretariat, MTN/GNG/ NG12/W/4, Geneva, 11 June 1987. – ‘Submission by the Japanese Government’, GATT Secretariat, MTN/ GNG/NG/12/ W/7, 23 June 1987. 16. See UN-CTC, ‘Role of Transnational Corporations in Services, Including Transborder Data Flows’, E/C.10/1987/11, New York, 26 Jan.1987. 17. See Peat Marwick, ‘A Typology of Barriers to Trade in Services’, mim., July 1986. 18. See Office of Technology Assessment, Intellectual Property Rights in an Age of Elect ronics and Information, US Congress, Washington, DC, 1985. For an analysis from the point of view of developing countries see Denis Borges Bardosa, The Intellectual Property System’, Brasilia, 1987, paper presented in the 1987 SELA meeting in Caracas on The World Economy and Latin American Development: Problems and Prospects’. 19. For preparatory commentary on this initiative see Kolle, ‘Computer Software Protection: Present Situation and Future Prospects’, Copyright, No.13, 1977.

New Technology and Catching Up C.Freeman*

Despite enormous efforts in many countries since the Second World War and despite the work of numerous international agencies, progress in ‘catching up’ by the Third World countries has been in many respects disappointingly slow. The North-South gap between rich and poor countries remains one of the most intractable and fundamental problems confronting the world community. For many people the wave of new technology which is sweeping through the richer industrialised countries of the OECD area is simply an aggravation of this problem. In their views it will widen the gap and make it even more difficult for the poor countries to cope with their massive problems of indebtedness, trade imbalances, protectionism, commodity prices, capital accumulation, poverty and backwardness. This short article will put a somewhat different view. Whilst accepting that technical change can indeed sometimes exacerbate problems of uneven development, it will argue that some latecomers may actually have advantages over the established industrial powers. Becuase this view is controversial and relatively unfamiliar it will first of all be necessary to summarise a theory of technical innovation and economic growth and then to discuss its relevance to the particular case of information and communication technology (ICT). There is very little disagreement about the importance of technical change for economic development and for trade competition. Virtually all economists, neoclassical, Keynesian, Marxist, Schumpeterian or whatever, accept the point that productivity growth depends very heavily on the introduction and efficient diffusion of new and improved processes and products in the economic system. The pessimism which exists relates not to the potential of technical change to overcome poverty and disease, but to the practical problems of Third World countries in implementing programmes of investment and development in the face of unremitting technological competition from new and more advanced

* Maastricht Economic Research Institute on Technology, University of Limburg, Maastricht, The Netherlands; Science Policy Research Unit, University of Sussex, Brighton, UK.

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technologies in the leading countries, backed up by vast scientific and technical resources. There are indeed strong grounds for pessimism. There are some very powerful reinforcing mechanisms which do tend to work on the principle To him that hath shall be given’. Ever since Posner [1961] drew attention to the importance of ‘Technology Gap’ trade and to the length of ‘Imitation Lags’ evidence has accumulated that dynamic economies of scale, coupled with intensive research and development can create formidable barriers to entry in new rapidly growing industries. Even relatively strong mature industrial countries and very large firms find catching up and keeping up extremely difficult in industries like integrated circuits and computers. Yet even in this case one interesting fact should give pause for reflection. The third country in the world to introduce and export 256k memory chips, after Japan and USA was not an OECD or a COMECON country, but South Korea. Before the 1960s South Korea had only very little industry, and such heavy industry as there was, was concentrated in the North, while both North and South were poor and devastated by the war. South Korea certainly still has very severe political, social, economic and technological problems. But the fact that it could become a leading player in the world electronics industry within 30 years does give some food for thought. Clearly the problem of technological catching up is in no way amenable to shortterm solutions. Even after several decades South Korea still has a long way to go before its leading industries have a firm competitive basis in product innovation capacity. Consequently, a broad historical perspective is essential if we are to understand the complex social processes which Abramovitz [1986] has called ‘Forging Ahead’ and ‘Catching Up’. We have to consider the previous historical evidence of the rise and decline of nations. The first economist to give really systematic attention to the problems of late comers was Fredrich List (1841). It is worth noting first of all that List was so overwhelmed by the technological and economic leadership of Britain in the first industrial revolution that he died believing that Germany would never overtake Britain. At that time (1840s), the British lead was indeed formidable. British firms led in all the key technologies of the day—steam engines, locomotives, machine tools, textile machinery, chemicals, ship-building, iron and steel. Britain accounted for over half of all world exports of most of these commodities. British dominance must have seemed to contemporaries, like List, even more overwhelming than Japanese technological and export leadership in electronics today. Yet half a century later Germany was catching up with Britain in the old technologies and was forging ahead in the new ones based on electric power and organic chemistry. German overtaking was largely based on the prescriptions offered by List, so it is worth looking a little more closely at some of his basic ideas.

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FRIEDRICH LIST AND GERMAN CATCHING UP IN TECHNOLOGY List is known today mainly as the advocate of protection of infant industries. Hardly anyone reads List in the original, so that a central part of his teaching is completely ignored—that is his emphasis on the role of technology in economic progress and in international trade. List actually believed in free trade, but he thought the ideal was only feasible when a number of countries were almost equal in terms of wealth and technology. Britain appeared in the first half of the nineteenth century, much as Japan appears today, as a country which dominated most world markets for manufactured goods. List therefore insisted that Germany had first of all to catch up with Britain in terms of technology. Since, by the irony of history, the roles have now been reversed, it is worth examining the policy conclusions which List drew from his theoretical analysis. They may be summed up as a long-term national technology policy closely linked to industrial and education policy. The fundamental points in List’s spirited defence of national technology strategies were the following: 1. The importance of ‘mental capital’ (‘intellectual capital’ might be a better rendering today than the English translation of that time). There can be no doubt whatever what List was talking about in this passage: The present state of the nations is the result of the accumulation of all discoveries, inventions, improvements, perfections and exertions of all generations which have lived before us: they form the mental capital of the present human race, and every separate nation is productive only in the proportion in which it has known how to appropriate these attainments of former generations, and to increase them by its own acquirements…. 2. The recognition of the importance of the interaction between ‘mental capital’ and ‘material capital’ (or as we might put it today ‘intangible’ and ‘tangible’ investment or ‘hardware’ and ‘software’). List clearly recognised both the importance of new investment embodying the latest technology and the importance of learning by doing from the experience of production with this equipment. 3. The importance of importing foreign (especially British) technology and of attracting investment and the migration of skilled people as a means of acquiring the most recent technology. 4. The importance of skills in the labour force. He argues that Smith did not follow up his clear insight into the importance of ‘productive powers’, skill, knowledge and education, but concentrated only on the role of the division of labour in stimulating the development of those powers. He ridiculed the classical ‘school’ for regarding teachers and doctors as ‘non-productive’,

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and completely underestimating the role of scientists, engineers and designers by reducing all inputs of labour to a common denominator. 5. The importance of the manufacturing sector for economic progress and the need for investment in manufacturing as a means of stimulating the development of the entire economy and especially agriculture, but also including services. 6. The importance of taking a very long-term historical view in developing and applying economic policies. He clearly regarded the development of manufacturing and of the appropriate institutions and ‘mental capital’ to enable manufacturing to flourish as a matter of many decades. He ridiculed J.-B. Saye for his acceptance of the infant industry exception to free trade only in those cases where a branch of industry would become remunerative after a few years. The principal influence in Germany in the latter half of the nineteenth century was not the classical school, as in Britain, but the school of Friedrich List. This was of decisive importance for the evolution of German economic policies, and German approaches to technology. Its first and most important consequence was the early development of an education and training system capable of putting the whole process of acquiring and disseminating world technology on a regular and systematic basis. The second was the development of a national R & D network in industry, in government and in universities. This was decisive in gaining comparative advantage in the new electrical and chemical technologies. The advantages which German industry and the German economy acquired through the development of what is by general consent a first-rate system of educating and training craftsmen, technicians and technologists would be difficult to overestimate. It was recognised, though belatedly, by the British as they began to realise that the ever-increasing effectiveness of German trade competition in the period leading up to the First World War was related to superior technology and quality of products, based on the achievements of the ‘Technische Hochschulen’ and the other institutions involved in the advance of knowledge and its dissemination, such as the ‘Physikalische und Technische Reichsanstalt’ which set the pattern for Government research and standards. This long-term way of thinking was important in government (for example in the finance of research and education) as well as in financial institutions. British industry lagged behind in the development and application of the newer technologies and in the growth of industrial and university R & D. This lag was reflected in the growth of American and German investment in Britain in the newer industries, especially electrical, as well as in Britain’s declining share of exports of manufactures and her chronic imbalance of visible trade. It has only been possible to sketch in the briefest and crudest outline some aspects of the displacement of Britain as the world technology and trade leader. But from what has been said it is clear that in their catching up, Germany (and the United States) relied not simply on tariffs (important though these were), but

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on technology, and that in gaining that technological lead, the development of the education system and of design capability for both products and processes was of central importance for almost all industries, whilst the role of professional R & D also became important. In other words institutional innovations were decisive in catching up and overtaking the established leading country, which suffered from institutional rigidity and inertia. Obviously not only Germany and the United States, but also many other European countries and Canada were able to catch up in the first half of the twentieth century. More recently Japan has also provided a spectacular example of overtaking the United States as well as Europe. What are the prospects then for other developing countries to follow in the wake of Japan? To address this question it is necessary to look on the one hand at the specific features of the new wave of technical change in the world economy, and on the other hand at the type of institutional innovations introduced in Japan. CHANGES IN ‘TECHNO-ECONOMIC PARADIGM’ AND INFORMATION TECHNOLOGY Some changes in technology systems are so far-reaching in their effects that they have a major influence on the behaviour of the entire economy. These are the ‘creative gales of destruction’ which are at the heart of Schumpeter’s [1939] theory of long cycles in economic development. The diffusion of steam power and of electric power are obvious examples of such deep-going transformation. So too, is the combination of innovations associated with the electronic computer. The expression ‘techno-economic paradigm’ implies a process of economic selection from the range of the technically feasible combinations of innovations, and indeed it takes a relatively long time (several decades) for a new paradigm to crystallise and still longer for it to diffuse right through the system. This diffusion involves a complex interplay between technological, economic and political forces in which institutional innovations are extremely important. Dosi [1982] has used the expression ‘change of technological paradigm’ and made comparisions with the analogous approach of Kuhn [1962] to ‘scientific revolutions’ in basic science. In these terms ‘incremental innovation’ along established technological trajectories may be com pared with Kuhn’s ‘normal science’. Several other authors have also used the expression ‘technological paradigm’ to connote broadly similar ideas, whilst Nelson and Winter [1977] have used the concept of ‘generalised natural trajectories’ and Sahal [1985] has developed the idea of generic technologies and ‘avenues of innovation’. Whilst there are similarities in all these concepts, the approach of Carlota Perez [1983, 1985, 1988] is the most original and fruitful and has some important distinguishing features. She argues that the development of a new ‘technoeconomic paradigm’ involves a new ‘best practice’ set of rules and customs for designers, engineers, entrepreneurs and managers, which differ in many

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important respects from the previously prevailing paradigm. Such technological revolutions give rise to a whole series of rapidly changing production functions for both old and new products. Whilst the exact savings in either labour or capital cannot be precisely foreseen, the general economic and technical advantages to be derived from the application of the new technology in product and process design become increasingly apparent and new ‘rules of thumb’ are gradually established. Such changes in paradigm make possible a ‘quantum leap’ in potential productivity, which however is at first realised only in a few leading sectors. In other sectors such gains cannot usually be realised without organisational and social changes of a far-reaching character. Carlota Perez based her theory originally on Schumpeter’s ‘creative waves of destruction’ but she offered a more convincing explanation of long waves in economic development than that originally proposed by Schumpeter [1939] as an explanation of Kondratiev’s long cycles. Schumpeter had suggested that the first Kondratiev cycle (approximately 1770s to 1830s) was based mainly on a cluster of textile innovations in Britain, the second (approximately 1840s to 1890s) mainly on railways, the third (approximately 1890s to 1930s) on electricity, the chemical industry and the internal combustion engine. The idea of a techno-economic ‘meta-paradigm’ affecting best practice technology and company organisation in many or all sectors and taking advantage of particularly cheap inputs in each wave (cotton, in the first Kondratiev cycle, coal in the second, steel in the third, oil in the fourth and ‘chips’ in the fifth) is far more plausible than an explanation based only on discrete major innovations in a few leading industries, important though they undoubtedly are. The new ‘information and communication technology’ paradigm, based on a constellation of industries, which are among the fastest growing in all the leading industrial countries, such as computers, electronics components and telecommunications, has already resulted in a drastic fall in costs and a counterinflationary trend in prices in these sectors as well as vastly improved technical performance. This combination satisfies all the requirements for a Schumpeterian revolution in the economy more generally. This technological revolution is now affecting, although very unevenly, all other sectors, because of its actual or potential economic and technical advantages. In considering this paradigm change, we must take into account not only particular products or processes, but the changes in organisation and structure of both firms and industries, which accompany the introduction of IT. Several commentators, in emphasising the profound transformation which is involved in large firms (such as General Motors), have described the changes as a ‘Cultural Revolution’. The Economist magazine (30 May 1987) in a special supplement on ‘The Factory of the Future’ stated that ‘The Factory’ is being reinvented from scratch. Traditional production lines are being ripped apart to make room for flexible ‘make anything’ machinery. In addition to fundamental changes in factory layout, in the management structure of large firms, and in their procedures and attitudes, there are many

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other parallel effects of the spread of ICT through the economy: the capability which it confers for more rapid changes in product and process design; the much closer integration of design, production and procurement functions within the firm; the reduced significance of economies of scale based on dedicated capitalintensive mass production techniques; the reduction in numbers and weight of mechanical components in many products; the much more integrated networks of component suppliers and assemblers of final products and the related capitalsaving potential; the growth of new ‘producer services’ to supply manufacturing firms with the new software, design, technical information, and consultancy which they increasingly require; and the extremely rapid growth of many small new innovative enterprises to supply these services and new types of hardware and components. If we compare the economic effect of information and communication technology with that of other major changes in technology, then it is clear that only ICT could qualify in the 1990s as a change of ‘techno-economic paradigm’. Even though bio-technology may ultimately have equally or more pervasive effects, the time-lags in research, development, diffusion, investments, education and training for the innumerable potential applications are such that these can hardly occur before the twenty-first century. Bio-technology today is still at the stage of computer technology in the 1950s, when costs of development, investment, and training limit its applications to a few specialised areas, particularly in health care and agriculture. Clearly materials technology and energy technology will always have an important place in any industrialised society and developments in ceramics and composites as well as solar energy are exceptionally important. But all of these technologies are themselves heavily dependent on the use of information technology in research, design, production and applications. Consequently the capacity to use information tech nology effectively is the key strategic problem for both industrialised and developing economies. This does not mean of course that other technologies can be neglected, only that information technology holds the key to them all. The effects of information technology are so universal, affecting every single sector of the economy, that they may be legitimately described as a change of ‘techno-economic paradigm’ providing scope everywhere for renewal of productivity increases through a combination of organisational, social and technical innovations and for a broad range of new and improved products and services. The main problem in such periods of change of paradigm is not so much in the leading edge industries (in this case computers and VLSI—Very Large-Scale Integration) as in the adaptation of the rest of the economy. It is here that the type of structural and institutional inertia identified by Perez [1983] is acute, and that new national policies and new regulatory regimes play a central role in overcoming it. It is in this context of paradigm change that we need to review the process of catching up in Third World countries. The very success of the erstwhile leaders in oil-intensive mass production technology (USA) creates institutional rigidity

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by comparison with overtaking countries such as Japan and some of the newly industrialised countries such as Japan and some of the newly industrialised countries. Whether any of them, or several of them can succeed in catching up over the next few decades will depend to a large extent upon their capacity for institutional innovations, their infra-structual investment in education, science and technology and the type of international economic regime which emerges in the 1990s. It is neither possible nor desirable simply to imitate Japan but some features of Japanese institutional innovations are of world wide significance (as explained by Kaplinsky’s article in this issue). It is already clear too that a number of Asian countries have already been strongly influenced by the Japanese example (for example, South Korea, Taiwan, Singapore). We shall therefore briefly examine some features of the Japanese ‘national system of innovation’ in the final section of this article. THE CASE OF JAPAN When historians describe the intense Japanese efforts to overtake Western Europe and the United States, they usually start with the Meiji Restoration in 1868. Already in the nineteenth century many policies had been adopted to stimulate the growth of manufacturing industry and to import the best available technologies from wherever in the world they might be available. The central point of interest from the standpoint of this analysis is that in the immediate post-war period, after an intense debate, Japan specifically rejected a long-term development strategy based on traditional theory of comparative advantage, which was apparently at that time being advocated by economists in the Bank of Japan and elsewhere. They had argued for a ‘natural’ path of industrial development, based on Japan’s relatively low labour costs and comparative advantage in labour intensive industries such as textiles. One of the central points at issue was whether Japan could hope to compete in the automobile industry and whether special steps should be taken to encourage its growth, but the debate affected industrial and trade policy in its entirety. In the early days, according to G.C. Allen [1981] (one of the few European economists who has consistently attempted to study and learn from Japanese experience), the views of the Bank of Japan had some influence. They blocked loans in 1951 for a large new up-to-date steel works and ‘Sony was obliged to postpone its imports of transistor technology because the officials in charge of foreign exchange licensing were doubtful both about the technology and about Sony’s ability to make use of it’. But on the whole the bureaucrats and their advisers at the Ministry of International Trade and Industry (MITI) prevailed. They repudiated the view that Japan should be content with a future as an underdeveloped country with low productivity and income per head. Again, according to Allen (and many other observers):

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some of these advisers were engineers who had been drawn by the war into the management of public affairs. They were the last people to allow themselves to be guided by the half-light of economic theory. Their instinct was to find a solution for Japan’s post-war difficulties on the supply side, in enhanced technical efficiency and innovations in production. They thought in dynamic terms. Their policies were designed to furnish the drive and to raise the finance for any economy that might be created rather than simply to make the best use of the resources it then possessed. The principal elements of this long-term techno-economic strategy were: 1. The ability to design and re-design entire production processes whether in shipbuilding, colour TV, machine tools, or any other industry. The Japanese have been more successful than any other industrial nation in a systems approach to design, which recognises the integrative, coupling role of innovation management, relating product design and process design to world technology and worldwide markets. The Japanese system sets great store on the involvement of employees in system changes, affecting as they do the entire workforce. The ‘quality circles’ are a social innovation designed to maximise the contribution of the lower levels of the workforce and to assign to lower management levels a responsibility for technical change. We should also note that the Japanese policy of mainly rejecting foreign direct investment as a means of technology transfer, automatically places on the enterprise the full responsibility for assimilating imported technology and is far more likely to lead to total system improvements than the ‘turn-key plant’ mode of import or the foreign subsidiary mode [Freeman, 1987]. 2. The capacity at national, government level to pursue an integration strategy which brings together the best available resources from universities, government research and private or public industry to solve the most important design and development problems, whether these relate to the use of integrated circuits in Colour TV, to 5th Generation Computers, to VLSI, or to other new technologies [Peck and Goto, 1981]. 3. The development of an education and training system which goes beyond the German level in two important respects. First of all, in the absolute numbers of young people acquiring higher levels of education, especially in science and engineering. Japan is now, together with the USA and USSR, among the leading countries in the world in the extent of educational opportunity. Secondly, in the scale and quality of industrial training, which is carried out at enterprise level. One of its features is to encourage all-round capability at lower levels in the workforce so that breakdowns and maintenance are far more rapidly dealt with. Another advantage of this approach is a much smoother assimilation and readier acceptance of new process technology [Gregory, 1985].

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4. These social changes facilitated the emergence of a new model of enterprise management sometimes described as the ‘just-in-time’ system (see, for example, Kaplinsky, this issue, and Altshuler et al., [1985]. But this is much more than simply a better form of stock control or component supply. It is above all a far more flexible and decentralised management system which permits both greater horizontal integration of design, development and production [Baba, 1985; Aoki, 1986] and more rapid response to change. 5. The early recognition that leadership in the new technological trajectories— robotics, information technology and computers—would be decisive for world competition in the 1980s and 1990s in many branches of the economy —and the gearing of R & D strategies, investment strategies, and training strategies to achieve world technological leadership in these areas. This orchestration of strategy was achieved by a combination of central government coordination (mainly by MITI) and Keiretsu (large conglomerate groupings in Japanese industries) initiatives. These characteristics of the Japanese technological and industrial system mean that Japanese competition presents an extremely powerful challenge to the older industrial countries. It is now generally recognised that this is no longer confined to a few industries, such as shipbuilding, steel or television, but extends to almost the entire range of manufacturing and services, including those which are the most technologically advanced. The Japanese plans for the ‘5th generation’ of computers and for microelectronics generally means that their challenge will become even stronger over the next decade. Only if other countries (both developed and underdeveloped) appreciate the strength of that challenge will they be in a position to meet it with any hope success. CONCLUSIONS It is notable that some Asian countries appear to have made more rapid progress in industrialisation and catching up in the 1970s and 1980s than most Latin American or African countries. It is difficult not to connect this with the influence of the Japanese model of catching up. Japanese investment, joint ventures and technology transfer have clearly been important for the electronics industry in South Korea, Taiwan, Singapore, Thailand, Malaya and China. The strong yen has stimulated this wave of investment and reciprocal trade. But former colonial territories of Japan, such as Korea, certainly do not wish to remain dependent upon Japan for capital and technology. They have been making intense efforts to develop their indigenous scientific and technological capability, especially through government initiatives in centralised research and higher education, and now increasingly through enterprise-level R & D. It is particularly striking that several other Asian countries now have a higher annual output of graduate engineers per 100,000 population than Japan. They are thus trying to outdo Japan in this respect, just as Japan outstripped the USA

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[Gregory, 1986], although of course the flow must be distinguished from the stock. South Korea is also setting extremely ambitious targets for Research and Development, which (if realised) would mean that the country would have a higher R & D/GNP ratio than Japan, US A and EEC by the end of the century. Both South Korea and the other Asian NICs still confront formidable obstacles in the next few decades. There are acute social and political tensions. There are huge difficulties in moving from OEM, off shore assembly and component supply to indigenous process and product innovation. The constraints of indebtedness and barriers to the exports of manufactures could easily become more severe. Nevertheless, it may not be entirely fanciful to imagine that, just as a number of European countries followed the British and the German model in their industrialisation in the late nineteenth and early twentieth century, benefiting from flows of trade, skills, investment and tech nology, so too a number of Asian countries could succeed in catching up on the Japanese model in the first half of the twenty-first century, taking advantage of the new techno-economic paradigm. Fears of an inability to catch up or to maintain competitivity are often based on the idea that it is necessary to become a producer of the new key factors and/ or of the new leading products in the world economy. Thus, for example, it is sometimes assumed that a country which does not have a capability in VLSI circuits or in large computers is in danger of falling behind in the present worldwide technology competition. But past experience of changes in techno-economic paradigm suggests that it is not necessary to have a technological and production capability in all the major new products associated with a new techno-economic paradigm in order to catch up or maintain competitiveness. What is necessary is to have the capability to use the new technologies in some industries and to produce a part of the wide range of new products and services appropriate to local conditions, resources and comparative advantages. This will usually require more than the efforts of a single firm to occupy a ‘niche’: the interaction of a group of firms and institutions will be necessary. When electric power was diffusing through the world economy at the end of the nineteenth and in the early part of the twentieth century, only a few countries developed the ability to produce the largest turbogenerators, transformers and switch-gear, and the same is true to this day. But many countries developed the ability to produce smaller electric motors and innumerable products incorporating such motors and other electrical components, and almost all countries established an infrastructual network of electric-power generation and distribution to industrial and domestic users and used electric power in all other industries and services. Similarly with the diffusion of the Fordist oil-intensive assembly-line technology, only a few countries developed a full capability for mass production of cars and internal combustion engines, but many developed a capability for

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assembly and for producing a part of the new range of consumer durables, machine tools, synthetic materials and other products associated with the new paradigm; and all, of course, developed highway networks, airports and airlines. In the 1950s and 1960s the smaller European countries were sharing in the generally high levels of prosperity and full employment enjoyed by most OECD countries. Only the poorest and least developed, such as Greece and Portugal, continued to display some of the characteristics of the Third World in their patterns of growth and trade. Growth rates in the Nordic countries and other small European countries, such as The Netherlands, Belgium, Switzerland and Austria were as high or higher than in the larger European countries. Most of them also developed rather advanced social service systems and greatly expanded their (already strong) education and training systems. The rather satisfactory trade performance of most smaller European countries during this period was not based on protection or trade barriers but on competitive international specialisation. This was achieved despite the scale factors and entry barriers characteristic of some of the most important and rapidly growing industries at this time, such as chemicals, steel and automobiles. Generally speaking, tariffs were lower in the smaller countries and were reduced more quickly. Both large and small countries maintained agricultural protection. In general it is easier for smaller industrialised countries to maintain competitiveness during a period of paradigm change than for Third World countries to catch up with the leaders. As Friedrich List (1841) pointed out long ago, it is not so much the presence of a particular industrial sector, but rather a general technological capability which is decisive in achieving and maintaining competitiveness. In other words, it is the national system of innovation which is decisive, not the particular range of products. Universities, research institutions, technological infrastructure, industrial training systems, information systems, design centres and other scientific and technical institutions provide the essential foundation which alone make possible the adaptation to structural change in the economy associated with changes in techno-economic paradigm. In the case of the Third World these points can be illustrated by the exceptional catching-up efforts of Brazil and South Korea and in the case of small countries by the case of Finland. Brazil has made a major investment in the improvement of the telecommunication infrastructure as well as devoting very large resources to the improvement of the science and technology infrastructure. Korean firms have also been able to achieve many of the production and marketing economies of scale enjoyed by the larger industrialised countries by carefully selected strategic investment. The main cost advantages enjoyed by enterprises in the technological leading countries relate, however, to externalities, to the availability of infrastructure and to learning by interacting. As Perez and Soete [1988] have shown, there is no way in which an indigenous enterprise (or a subsidiary of an MNC) can overcome the huge disadvantage in comparative unit costs if basic infrastructure and skilled personnel are lacking, as in most developing countries. Policies directed towards

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the national system of innovation are therefore the essential foundation for a catching-up strategy in development. All of this does not mean that scale barriers to entry are unimportant either in the Fordist paradigm or the new paradigm. They are obviously very important in the development, design, production and marketing of new generations of VLSI circuits, as well as in the larger types of computer, telephone exchange and FMS (Flexible Manufacturing Systems). The argument that part of the ‘learning by interacting’ which is so vital for technical progress, takes place between VLSI suppliers and equipment-makers has some validity, and the same point is also valid for telecommunications equipment. This does confer some advantages on large countries and large integrated firms, such as the Japanese or Korean electronic firms. However, these advantages may be overcome or circumvented in two ways by developing countries even if they cannot follow Korea in VLSI. Where such enterprises are lacking, a combination of small and medium-sized enterprises operating across a range of specialised niche markets may be sufficient compensation as long as they have good communication networks and access to interactive learning. The new paradigm generates such opportunities especially in relation to instruments, software, Application Specific Integrated Circuits (ASICs), and local area networks for telecommunications. In all of these fields specialised local knowledge of application requirements is a major comparative advantage, provided it is adequately linked to technological capability. The national system of innovation is decisive in making this link. The presence of skilled and experienced people with the necessary connections to the world scientific and technical infrastructure and a sine qua non for overcoming barriers to entry. This applies a fortiori to Third World countries. Korea, Brazil and China are all examples of countries which have developed an education system and scientific and technical infrastructures which should enable them to catch up with the industrial leaders over the next half-century. Whether or not they actually do so will depend partly on the specific technological and industrial strategies which they promote, as well as on social and political changes within those countries and the international community. It depends very much also on whether the international ‘regime of regulation’ permits sustained growth of the world economy and on the resolution of the Third World Debt crisis. REFERENCES Abramowitz, M., 1986, ‘Catching up, Forging Ahead and Falling Behind’, Journal of Economic History , Vol. 46, No. 2, pp. 385–406 . Allen G.C., 1981, ‘Industrial Policy and Innovation in Japan, in Carter, C. (ed), Industrial Policy and Innovation , London: Heinemann, pp. 68–87 . Altshuler, A., Anderson, M., Jones, D., Roos, D., and J.Womack, 1985, The Future of the Automobile; The Report of MIT’s International Automobile Program , Cambridge, MA MIT Press.

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Aoki, M., 1986, ‘Horizontal vs Vertical Information Structure of the Firm’, American Economic Review , Vol. 76, No. 5, pp. 971–83 . Baba, Y., 1985, ‘Japanese Colour TV Firms: Decision-making from the 1950s to the 1980s Oligopolistic Corporate Strategy in the Age of Micro-Electronics’, D.Phil. dissertation, University of Sussex. Dosi, G., 1982, ‘Technological Paradigms and Technological Trajectories, Research Policy , Vol. 11, No. 3, pp. 147–62 . Freeman, C., 1987, Technology Policy and Economic Performance: Lessons from Japan, London: Pinter. Freeman, C. and C.Perez, 1986, The Diffusion of Technical Innovation and Changes of Techno-Economic Paradigms’. Paper presented to the Conference on Diffusion of Innovation at Venice, DAEST, March, . Gregory, G., 1985, Japanese Electronics Technology: Enterprise and Innovation , New York: John Wiley. List, F., 1841, ‘The National System of Political Economy’ (English translation, 1904), London: Longmans. Nelson, R. and S.G.Winter, 1977, ‘In Search of Useful Theory of Innovation, Research Policy , Vol. 6, No. l, pp. 36–75 . Pavitt, K., 1984, ‘Technology Transfer Among the Industrially Advanced Countries: An Overview’, in N.Rosenberg, and C.Frischtak, (eds.), International Technology Transfer: Concepts, Measures and Comparisons , New York: Praeger, pp. 3–23 . Peck, M.J. and A.Goto, 1951, ‘Technology and Economic Growth: The Case of Japan’, Research Policy , Vol. 10, pp. 222–43 . Perez, C., 1983, ‘Structural Change and the Assimilation of New Technologies in the Economic and Society System’, Futures , Vol. 15, No. 4, Oct,., pp. 357–75 . Perez, C., 1985, ‘Micro-electronics, Long Waves and World Structural Change: New Perspectives of Developing Countries’, World Development , Vol. 13, No. 3, pp. 441–63. Perez, C., 1988, ‘New Technologies and Development’, in C.Freeman and B-A.Lundvall (eds.), Small Countries Facing the Technological Revolution , London: Pinter, Ch.4. Perez, C. and L.L.G.Soete, 1988, ‘Catching up in Technology’, in G.Dosi, C.Freeman, R. Nelson, L.Soete, and G.Silverberg (eds.), Technical Change and Economic Theory , London: Pinter. Posner, M., 1961, ‘International Trade and Technical Change’, Oxford Economic Papers Vol. 13, pp. 323–41 . Sahal, D., 1985, ‘Technological Guideposts and Innovation Avenues’, Research Policy , Vol. 14, No. 2, pp. 61–82 . Schumpeter, J.A., 1939, Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process , 2 vols., New York: McGraw Hill. Soete, L.L.G., 1981, ‘A General Test of Technological Gap Trade Theory’, Weltwirtschaft- liches Archiv , Vol. 117, No. 4, pp. 638–66 .

Latecomers’ Problems Ronald Dore*

Chris Freeman spoke of technology paradigms. There are also history paradigms, or, if you like, weltanschauung paradigms—basic, and in the final analysis irrational, assumptions about the evolution of societies. Some people are ‘swingers’; some are ‘trendies’. Some people, that is to say, tend to see history as a pattern of ebb and flow, of cyclical repetition—the Vico, the Toynbee stance. Some people think in terms of long-term secular trends. In the nineteenth century, the sociologists who wrote about social evolution—trendies to a man—were confident that the trends they discerned were trends of progress. The fact that we are not so confidently optimistic about progress today, does not seem to me a reason for rejecting the notion that there are long-term trends in history which are unilineal and unidirectional. I, at least, must confess to being, in this sense a trendy. And perhaps, while I am about the business of confessing, I should admit to being something of a technological determinist as well. That is to say that most of the underlying long run social and economic trends which I discern seem to me to be the consequence of the one undeniably unidirectional trend of the last three centuries (or even the last ten, especially if one puts China in the picture), namely the steady accumulation of scientific knowledge and technical know-how. By contrast, Chris Freeman, I think, is—by conviction or by instinct—a swinger. He has written elsewhere most persuasively about long cycles and their relation to the revolutionary impact of generic technologies. I am not quite persuaded that the underlying laws of capitalism can remain so little changed for so long. If we do eventually see our present unemployment in the industrial countries disappearing in the way that the chronic unemployment of the 1920s and 1930s disappeared—and for plausibly technological reasons, not because of war or a change in world economic structures—then I might be convinced. But meanwhile, I cling to my feeling that what we are seeing in the world today, is not a one-off, once-in-fifty-years kind of technological revolution. The reason why ‘technology’ is on everybody’s lips (and even The Economist has to have a technology correspondent, as Chris Freeman remarked)—is because of a steady

* Japan-Europe Industry Centre, Imperial College of Science and Technology, London.

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acceleration in the rate of accumulation of scientific and technological knowledge. That acceleration starts from the point at which science research becomes institutionalised in universities and the R & D function in the major corporations of the industrialised world. It later gains momentum as competing nation-states move heavily into the subsidisation of R & D, at first for military purposes and later for mercantilist promotion of the competitive advantage of their national champion firms. And its proxy measures are to be found in statistics of research expenditure, numbers of scientific researchers, numbers of registered patents, etc. This is not to deny the validity either of Chris Freeman’s distinction between incremental and revolutionary innovations, nor the distinction between those of narrow and those of very wide application. It is only to suggest that all kinds of innovations—radical and incremental, specific and generic—are occurring now with greater frequency than in earlier decades, and that the frequency of occurrence—the pace of change in general—shows a secular tendency to increase. LATE DEVELOPERS But the important point for our topic is not so much flow as stock; not so much this present acceleration as the sheer range and bulk of the already accumulated body of scientific and technological knowledge used in producing the goods— and services—which enter into international trade, and which, if mastered, gives countries the standards of living of what are currently considered the ‘advanced’ countries. At least—to qualify that statement—for countries like India which already have absorbed a large part of the technology of the ‘frontier’ societies it may well be the rate at which the technology gap between them and those frontier societies is growing which is important. For less industrialised societies, however —the traditional agrarian societies of Africa, for instance—the crucial thing is the width which that gap has reached already. When I first became aware of the literature on development in the early sixties there was still a widespread conception around that development via industrialisation was a largely endogenous process. Rostow’s Stages of Economic Growth carried the assumption that, irrespective of the point in history at which it happened, all countries which, once poor, grew rich would do so in broadly the same manner—with definable take-off points, leading sectors, ages of mass consumption. etc. The idea that late development, catch-up development, was a very different process was still rather new. ‘Technology transfer’ was still not a buzz-word. In a sense the proponents of development alternatives and some proponents of appropriate technologies preserve that assumption of endogeneity. But their underlying assumptions—the idea that ‘the words “technology transfer” should be stricken from the vocabulary of development’ as the Monrovia Declaration of the OAU once put it—are hardly persuasive. As an

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Indian friend once caricatured it: ‘it’s all about the search for a genuine Hindu cement technology’. There really is no doubt that for the late-starter, the development process has to be a learning process rather than a discovering or an inventing process. The pioneers of this learning process—apart from a few lone early examples like Peter the Great working in the shipyards of Western Europe—were, of course, the Japanese. They have for so long so far devoted the cream of their intellectual resources to technological reconnaissance abroad, to the absorption of foreign technologies, the imitation of acknowledged superiors, that they have acquired and learned to live with a reputation as ‘mere imitators’—a reputation which persists in spite of the evidence to the contrary now that they have in so many fields started pushing at the frontiers. But, compared with the formidable task which faces the later latedevelopers, the Japanese had it easy. There is a vast difference between what a Japanese had to absorb in the 1880s to bridge the technological gap and become an efficient master of the textile technology then imported from the West, and what his counterpart textile engineer in Bolivia or Ghana had to absorb in the 1960s to reach world-competitive levels in the operation of his modem turnkey textile factory. And so for every branch of modern manufacture. Let it not be forgotten, too, that ‘world-competitive levels’ is a constantly moving target. Reaching those levels is one thing, keeping up with them is another—and one which requires not just learning up to the levels required to maintain the imported machinery in which state-of-the-art technology is embodied, and not just to those required to reproduce that machinery, but also to those required innovatively to improve it. Maintenance mastery, reproduction mastery and improvement mastery are worth distinguishing as the black belt, green belt, etc. stages of increasing technological sophistication. Not many countries get to the third stage in a wide range of industrial sectors. The great Italian steel plant at Taranto, after heavy Japanese involvement in its initial planning in the 1960s, needed another long-stay 60-man mission from Japan in the late 1970s in order to catch up on the developments which had substantially reduced Japanese steel-making costs and improved qualities, while those of the Italian plant had remained little changed. DEVELOPMENT NEEDS INDUSTRIALISATION? But, it might be argued, does development require industrialisation? Surely, the world is moving into a post-industrial age. To assume that every county needs to become a manufacturing country is to mistake ends and means and perpetuate the fallacies of the early ‘growth-stage’ theorists. Why should not countries leapfrog into the post-industrial service society? Unfortunately, it is not so simple. Let us leave aside, for the moment, the possibility of becoming rich through an unusually rich endowment of tradeable natural resources. Post-industrial excellence still poses as enormous a learning task as industrial excellence. If

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Morocco, say, could develop its health services to a level of efficiency which gave them a world reputation, so that rich Saudis and Kuwaitis went to Rabat rather than to Bonn or London for their operations, then Morocco too could happily enjoy a high standard of living with all its manufactures imported. But that is far from entailing an escape from the burden of catch-up learning. Manifestly, to acquire that degree of sophistication in medical skills is as difficult as—more difficult than—to acquire sophistication in the manufacture of refrigerators or shoes. What is certainly true is that no nation needs to take as its aim the development of world-competitive technological expertise in every field of technology in order to count as ‘developed’ or to enjoy a high standard of living. Europe, collectively, might one day hope to become world-competitive in supersonic transport, but its ill-fated half of Concorde was almost certainly Britain’s last national fling. Even Japan has so far hesitated to make any overt bid to challenge American supremacy in aerospace, though doubtless, in the next decade, that will come. The number of fields in which a country tries to get up to world standards must, obviously, depend not only on its endowments but also on its size. If a country with three million people can manage to make it in five industrial sectors (in, say, a 100-sector classification), a country with 30 million might aim for 50—to quantify the point a little over-crudely. AND THE LATE DEVELOPER’S ADVANTAGES It has to be acknowledged, too, that that there is a lot of embodied technology which can be imported and can bring very considerable productivity increases without much learning. Even illiterate farmers can benefit from all the scientific advances embodied in modem hybrid wheat, though even they have to learn new disciplines of timely irrigation and careful fertilisation if they are to get the best out of them. And the country which wants to keep inside its own frontiers as much as possible of the value-added gained from using the new seeds will have to secure an indigenous supply of people who have mastered the material technologies of seed multiplication, as well as the social technologies of efficient distribution and best-practice-diffusing agricultural extension. That said, there are, to repeat, advantages in not having to invent the steam engine all over again. Those advantages would seem to be the reason why the countries which can successfully do the learning grow faster than the pioneers. Germany had higher GNP growth rates over the first half-century of industrialisation than did Britain; Japan than did Germany; Korea than did Japan. IMPLICATIONS OF THE LEARNING TASK But still the formidable nature of the learning task remains the central feature of what ‘catch-up’ is all about. As compared with the task which Japan faced in

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getting up to world-competitive levels, the task facing countries starting in the 1950s, or the 1960s (ignoring, for the moment, the ambiguities of what ‘starting’ means) is not only greater, but different in incidence and kind. 1. First, there is a difference in modes of learning. Chris Freeman has cited the fact that mastering microelectronics is much more a matter of class-room learning than earlier technologies; hence catch-up should be easier. But that applies across all fields of manufacturing. Whereas a lot of technology diffusion between Britain and Germany came from the migration of people with industrial experience—knowledge learned on the job in today’s Third World, the new bottle factory, the new sulphuric acid factory, the new newspaper printing plant typically expects to recruit an engineering graduate with appropriate book knowledge. This may be the only sensible way to find short cuts across the technology gap, and the short cuts may, as Chris Freeman suggests, bring considerable advantages, but there are several other consequences. The need for ‘rapid development of high-level manpower’ leads to a skewed distribution of educational provision. Japan moved from a three years schooling per capita average to six years per capita very largely by increases in elementary schooling—getting the whole population to basic levels. Only after primary schooling was close to universal did the growth in secondary and higher education take off. In India, by contrast, large and expensive Institutes of Technology were constructed when still less than 60 per cent of the population were getting primary education. The shift from three years per capita to 6 years per capita (and a fortiori the shift from an X rupees to a 2X rupees per capita educational budget) had a much higher component of pupil-years in secondary and higher education. To be sure, one should not see the Japan/India difference as wholly a timing difference. There must be a cultural dimension as well. Both Koreas, after all, with a simultaneous expansion of primary and higher education, were closer to the Japanese than to the Indian pattern. But great inequality of educational provision there is bound to be, and that is likely to be reflected in great income inequality, with all the social tensions which this is likely to create. (Think of Brazil and Mexico, and of the consequences for economic development/technology absorption policy as well as for the quality of life.) And the more a country is subject to brain-drain temptations, with the consequent upward pull on the salaries of the well-educated (a factor almost totally absent in Japan’s case until the 1950s) the greater the inequality and the greater, by circular feedback, the probability that social unrest will exacerbate the brain-drain. A further problem: the more inequality of educational provision and inequality of reward in the job structure (not only salaries, but also security, prestige, intrinsic satisfaction of the work itself, etc.)—the more these inequalities of outcomes are combined with equality of opportunity (as they are to a much greater degree in Sri Lanka or Korea than in Brazil or Mexico) the more intense the educational competition and the greater the likelihood of ‘diploma disease’ type of ritualisation of the learning process. The ‘qualified’ engineer may be

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qualified only in examinationtaking and not much use in a factory—may, indeed, have acquired values which make him antipathetic to factory work. Simultaneously, the entrenched power of certifying institutions tends to grow. They gain increasing power to enforce bureaucratic rules, in manufacturing industry as well as in government, which restrict access to certain jobs to graduates of courses which may—in the self-interest of those who provide the courses—have inflated and quite irrelevant content. 2. But the development of class-room learning institutions is only half of the change in modalities of technology transfer. World-competitive productive capacity—whether it be in micro-chips or bicycles or heart surgery—cannot be gained solely in the classroom, nor even (as the Cultural Revolutionists in China thought) by trial and error in the factory after leaving the class-room. Nowadays most of the know-how needed is the proprietary knowledge of large corporations in the advanced countries—not just, or not so much, that licensable knowledge which they have tied up in patents, as the know-how which makes the production process viably cheap and efficient—and which they keep secret. And in many fields there really is no sensible substitute for transferring production technology other than buying it from—or getting it through often costly collaboration with—foreign firms. The world is unlikely ever again, for example, to see a national automobile industry founded except as a result of technical collaboration with a major foreign producer. Fortunate the country which can get fairly quickly from maintenance mastery to reproduction mastery to improvement mastery with a single transplant (Japan, for instance, with General Motors and Ford—but then with much simpler 1920s/1930s technology). Less fortunate the countries—India, Russia—which fail to make it to improvement mastery levels and require new transplants from Fiat or Suzuki every decade or so. And fortunate also the country which can negotiate with multinationals, strike decent bargains with them, and at the same time avoid having them take too much of the value-added from the new ventures for too long, and avoid, also, the threats to the social and political fabric which charges of foreign domination can bring. THE CONDITIONS OF OPTIMISM AND PESSIMISM I have stressed the difficulties of the learning task which faces the developing countries, and the way in which those difficulties grow, rather than diminish, with the passage of time. Which is not, by any means to deny that some latestarters—recent starters—show every sign of being able to rise above all these difficulties, that some of them are well on the way to meeting, as they come up the per-capita income ladder, some of the older industrial countries like Britain on their downward path of secular relative decline—and that there could well be later generations of new NICs which will do likewise.

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As to which those countries may be, a lot of what has been said above implicitly suggests what are the conditions for success. It may be as well to try to spell out some of those conditions more explicitly. I would, among the many candidate factors, choose to pick out three. The first, overwhelmingly important factor is the human endowment. Countries with a lot of bright people, countries like the Pacific ones with a long tradition of literate culture, with village folk traditions which foster curiosity and embody training in discriminating observation and pragmatic reasoning, are much more likely to make it than those without those assets. Secondly, size is very important. The Japanese were able to indigenise knowledge—translate the whole stock of useful knowledge into Japanese and keep it upgraded in that language and thus enormously accelerate the diffusion of knowledge through a wholly vernacular education system (the last lectures in English—those in naval architecture—disappeared from the Tokyo University calendar about 1910). They could do so, partly because they started early when there was not so much knowledge about to be indigenised, and partly because they had a population of more than thirty million people. China, today, is probably big enough to do the same sort of job. But even Indonesia is probably doomed for ever to having to do a lot of its more advanced technical education in a foreign language. And that very much slows things down—and much increases brain-drain losses. (Think of India which is ruled out of the indigenisation process less because of its size than because it does not have a single language into which the world’s knowledge can be translated.) In third place (but without any implication of lesser importance) one can put all those characteristics of the social and political order which lead to national cohesion and stable government—ethnic and cultural homogeneity, mechanisms for political accountability, a sense of being beleaguered by hostile powers, constraints on corruption and the abuse of power, and popular faith in the effectiveness of those constraints. A high rating on this factor is a precondition for so many things—for generating the sense of national commitment, of attachment to home, for instance, which helps to keep down the brain drain, the sense of national pride and confidence which enables officials to negotiate with multinationals and give them necessary concessions without suspicions of corruption. Above all it is a precondition for sensible economic policies. I have been concerned only with technology absorption, but one must never forget that the economic growth which we see as the outward manifestation of that absorption (and, indeed, is a precondition for it) requires other elements too—high savings ratios, for instance, and—at least for Pacific parvenus overtaking the established industrial countries—long hours of hard work (for which hard learning is probably the most effective preparation). And it requires sensible economic policies to ensure that the savings are channelled into high-yielding investments and that the hard work adds as much value as possible.

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As to what constitutes sensible economic policies, of course, the debate continues to rage. Suffice it to say that my version of sensible does not imply a neo-classical faith in the universal efficacy of market forces and free trade, and I do not see how anyone who has taken aboard the implications of what is said above about the enormity of the learning task could have that faith. By ‘sensible’ I mean, for example, sensibly Listian policies which give just the right— progressively changing—balance between infant industry protection and external competitive stimulus. It means also sensible discrimination between those industrial sectors where the attainment of world-competitiveness is the desirable goal—and where one might well sacrifice employment for capital intensive achievement of quality and cost reduction—and other protected sectors where maintaining employment might have higher priority. All of which is only to affirm that it is an assumption of this article that neither technology absorption nor technology creation, neither being world-competitive nor being world leader are, in my book, ends in themselves. They are means to the creation of a decent society. Which is hardly what a society of mass poverty and unemployment could be, for all that it had substantial segments in which world-class engineers produce world-class goods.