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Asian Development Outlook 2003 : III. Competitiveness in Developing Asia
Catch-Up Competitiveness: Some Lessons
In this section, three important questions of particular relevance to firms in less developed countries of Asia are considered:
Therefore, catch-up competitiveness is a dynamic concept. Catch up cannot occur if a country does not create new resources or restructure its industries toward more productive, higher value-added products. This is achieved by the country absorbing, adapting, and improving on the technologies that underpin new products, services and processes. Dynamic competitiveness also relies on the infrastructure needed for sustained industrial development. Countries may be compared with their performance in each of these areas, as these will feed into the aggregate "transformational" performance of the economy. In a catch-up context, an economy needs not only to build up the dynamic capabilities that underpin the absorption, adaptation, and generation of new technology. It also needs the institutions and policies required to ensure that a country's industry is sufficiently dynamic and outward looking, so that its firms are able and encouraged to compete successfully in the foreign markets of industrial countries. Failure to compete in these advanced markets usually means falling behind in the technological race. These catch-up conditions require a degree of innovation at the technological, institutional, and policy levels. Mere imitation is insufficient, because the more advanced countries will constantly be moving the technology frontier outward and generating new technologies and product types. In addition, other industrializing countries will be entering, competing, and changing the competitive landscape. This implies that each developing country needs to overcome its own particular disadvantages in terms of resources and its stage of development. But this is not sufficient. It also needs to build up its own distinctive advantages and resources to prevent itself from falling behind, and to go beyond merely keeping up in order to catch up. Indeed, it is unlikely that any developing country ever has achieved, or could achieve, long-run competitiveness, i.e., a well-functioning economy, without a substantial degree of innovation in the policy, institutional, and technological arenas. On this basis, no single set of policies can be prescribed for achieving sustained competitiveness. On the contrary, each country must generate its own distinctive policies based on its individual circumstances. The value of lessons from other countries is for "receptor" countries to consider, then accept, reject, or adapt policy advice to its own particular circumstances. As argued below, some firms new to GVCs will not have the critical success factors or resources demonstrated by the Asian NIEs in the past. In this case, the newcomers may need to somehow substitute these missing success factors with other factors more suited to their own resources. Or they may be able to generate entirely new success factors that are only at the embryonic stage at the present time. All these approaches require a degree of creative activity. Slavish imitation is highly unlikely to bring about development and long-run national competitiveness. Catch-Up Competitiveness and Stages of DevelopmentThis section turns to a consideration of research on historical phases of technological and industrial development of the NIEs. The focus is on electronics, which can be viewed as a "leading" industrial sector for promoting high-technology industrial development. For each NIE, electronics exports represented a powerful engine of industrial transformation, leading to backward and forward linkages, increasing returns to scale, an ongoing process of large scale re-investment, and the insertion of the NIEs into high-technology GVCs. Considering first the empirical research into exporting firms, the use of a stages model is helpful in showing how the OEM system emerged, evolved, and expanded through time, functioning both as an institutional mechanism for acquiring technology and for accessing export marketing channels (Table 3.15). At the start of their rapid growth period, the NIEs faced daunting latecomer disadvantages, especially in gaining access to foreign markets and technology. In the 1960s, they were largely isolated from the international markets that they needed to export to and from the main international sources of technology, mainly located in the US, Japan, and western Europe. In East Asia, the OEM system enabled firms to export to international markets and to acquire foreign technology. In the 1980s, own design and manufacture (ODM) emerged out of OEM, as noted by Johnstone (1989) in the case of Taipei,China. In the 1990s, some of the leading firms in East Asia began their own-brand manufacture (OBM), competing directly with international suppliers from Japan, the US, and Europe. Under OBM, the latecomer firm carries out all of the stages of production and innovation, including manufacturing, new product designs, and R&D. At this advanced stage, the firm competes as a leader on the international stage with its own products. Table 3.15 offers an outline of the process.  Table 3.16 presents a simple stages model of Southeast Asian development based on various studies of electronics in the region. Although developments occurred within MNCs rather than within local firms under OEM arrangements as in East Asia, the stages of development are remarkably similar.  Singapore was the first developer. The MNC subsidiaries began with assembly operations in the 1960s and gradually assimilated technology. During the 1970s, they progressively gained skills in large-scale process engineering and by the 1980s were carrying out minor product improvements. Recent research shows that there was an increase in R&D during the 1990s as technical capabilities were further enhanced (Wong 1992, 1998). R&D investments accompanied the upgrading of MNC plants to regional headquarter status as more MNCs began to use Singapore as a business and technical support hub for the region.19 Turning to the other countries of Southeast Asia, the MNCs in Malaysia began later (in the 1970s) with assembly, as Table 3.15 shows. The subsidiaries also engaged in technological learning and acquired successively higher levels of technology, but remained somewhat behind Singapore throughout the 1980s and 1990s. In particular, most subsidiaries still lacked significant R&D and new product development capabilities (Ariffin and Bell 1999, Bell et al. 1996, Rasiah 1994). Malaysia, and later Thailand, acquired manufacturing process skills beginning with simple tasks and gradually moving toward more complex activities such as process adaptation and, in some cases, limited R&D activities.20 Indonesia and Viet Nam also experienced export growth via electronics, but have yet to achieve the levels of capability demonstrated by their predecessors.21 The progress of firms in electronics is broadly consistent with research at the industry level across a variety of industrial sectors that reveal similar stages of development in the NIEs (e.g., Dahlman et al. 1985, Westphal et al. 1985, Kim 1997). By upgrading their capabilities, firms learn production skills, then investment know-how and, ultimately, innovation capabilities (Lall 1982). For the economies in East and Southeast Asia, the stages approach is a useful description of past events. The approach is able to summarize broad historical trends, showing how technology and marketing processes are linked together in the industrial development of the NIEs. It is also capable of capturing some of the key features of technological innovation in the context of the catch-up firm and economy. It shows the progressive move from simple to more complex tasks and from basic to more technology-intensive activities. To remain competitive firms learned under OEM arrangements, gaining technology in a gradual step-by-step incremental manner sometimes over periods of two, or even three, decades (Cyhn 2002, Hobday 1995a). Among the NIEs, competitiveness in the catch-up process was not based on R&D or radical new products or processes. Instead, the NIEs caught up with the industrial countries through incremental improvements to existing products and processes, using engineering and technical skills rather than R&D. The stages model reveals the importance of cumulative minor improvements to products and processes and, only much later, the introduction of new variations of products. Under both OEM in East Asia and MNC-led growth in Southeast Asia, enterprises were encouraged to invest in technical and engineering skills to assimilate and improve existing technology (Ng et al. 1986, Osman-Rani et al. 1986, Kng et al. 1986). Case studies of firms (e.g., in Malaysia) show that the subsidiaries had to struggle over many years to acquire technology and that management skills and the competitive drive of local plants were essential for successful technology acquisition.22 In Southeast Asia, as in East Asia, achieving competitiveness was neither automatic nor painless. The studies demonstrate that there were long periods of trial-and-error experimentation, and extensive training of local operators, technicians, and engineers. There was also a great deal of management ingenuity in the more successful cases of technology development within MNC subsidiaries. In this respect, Hobday (1995b) concluded that:
Kim (1997) described Hyundai's efforts to produce a car after it had purchased the foreign equipment, hired expatriate consultants and signed licensing agreements with foreign firms as follows:
And in the case of Samsung:
The nature of catch-up competitiveness in the NIEs contrasts sharply with the traditional definition of technological innovation, namely the production of new (or improved) products, based on R&D. Instead, what occurred was behind-the-frontier innovation, including improvements to products, the changing of processes to become more efficient and flexible, improvements in "design for manufacture," and the introduction of new types of product based on imitating the designs of leading firms. Furthermore, the stages model captures the fact that innovation occurs, not just in technological terms but also, and very importantly, in institutional terms. The technological change which took place in East Asia in electronics probably could not have occurred with such rapidity without the OEM and, later, ODM systems. Similarly, the increase of MNC-led growth was also a critical development. MNC investment on such a large scale was new to Southeast Asia and allowed parent companies to transfer foreign technology to local subsidiaries. These were then able to systematically learn the technological arts of electronics production. MNC subsidiaries provided a route into international markets and enabled continuous, routine technological learning to occur within local plants. The "master-pupil" relationship described by Cyhn (2002) in case studies of East Asian OEM mirrors the relationships that developed between parent and subsidiary plants in Southeast Asia. The exploitation of MNC investment began in Singapore (Goh 1996) and was imitated by other countries wishing to export to OECD countries. Although FDI occurred prior to 1960s, the electronics industry brought with it a huge expansion of FDI in Southeast Asia, leading to the development of several industrial clusters. For example, the computer disk-drive cluster in Thailand is the largest of its kind in the world. Similarly, in Penang, Malaysia, the semiconductor assembly and testing cluster is the largest exporter of semiconductors worldwide. As a method for describing past developments, the stages approach is clearly quite useful, though it has a number of shortcomings. First, as with most historical summaries, there is a danger of over-generalization. The stages model only helps explain the evolution of low-cost, relatively simple electronics components and products. It is less useful in explaining more highly priced and more complex goods where the NIEs remain substantially weaker. Second, the stages model conceals significant technological differences between exporters. For example, major Korean firms such as Samsung began investing in R&D very early on, and, in some product areas (e.g., microwave ovens) as early as the 1960s (Magaziner and Patinkin 1989). This was long before they progressed to OBM. Other firms (e.g., Acer of Taipei,China) "jumped in" at later stages, benefiting from the infrastructure developed previously. Third, even at today's fairly advanced stage of catch up, many East Asian firms conduct a mixture of OEM, ODM, and OBM. It is not correct to imply that all firms have progressed to OBM. Indeed, even the most advanced producers such as Samsung of Korea still produce large quantities of output under basic OEM arrangements (e.g., in consumer electronics and microwave ovens) with Japanese and US firms. Innovations in Policy and Variety in Industrial StructuresIn addition to the difficulties in making generalizations, if used in isolation, the stages approach can obscure the wide variety of government policies and industrial structures used to achieve competitiveness. One cannot assume, because of some similarities in the stages of development, that the government policies adopted, or the critical success factors for growth, were similar, let alone the same, across NIEs. On the contrary, policy and institutional innovation occurred in very different ways in the NIEs and the stages model must be seen within this broader context of development.Figure 3.4 illustrates some of the variety in policy and industrial structure within the electronics industry for Hong Kong, China; Korea; and Taipei,China (East Asia) on the one hand, and Malaysia, Singapore, and Thailand (Southeast Asia) on the other. The degree of direct policy intervention is on the vertical axis, while the degree of openness of each economy to FDI and imports is on the horizontal axis. The figure indicates a high degree of direct government intervention in the early stages of development of electronics (i.e., in the 1960s and 1970s) for Korea but shows a much lower degree of direct intervention in Taipei,China and a more or less laisser faire approach in Hong Kong, China. In Korea, for example, the Government directly supported the large chaebol with favorable finance, subsidies, and other privileges (Amsden 1989). Indeed, some authors suggest the Government helped create the chaebol (Jones and Sakong 1980).  In contrast to the "big firm" approach of Korea and Singapore, much of Taipei,China's early electronics manufacture relied on small and medium enterprises, linked to international markets through traders (Chou 1992). Many of these manufacturers operated in a more or less "underground" manner. Only later on, for example in scale-intensive semiconductors, did the Taipei,China authorities become more directly involved in supporting electronics producers (e.g., in Hsinchu and other industrial parks and with institutions such as the Information Technology Research Institute in semiconductors; see Matthews and Cho 2000). The horizontal axis of Figure 3.4 indicates that both Korea and Taipei,China were fairly closed to FDI for much of the 1960s, 1970s, and 1980s. By contrast, Hong Kong, China; and Singapore received far higher volumes of FDI, despite their smaller economies. For example, taking the two largest investors, Japan and the US, in 1980-1988, total FDI amounted to US$14.3 billion in the four NIEs. Hong Kong, China received the largest amount of FDI (US$6.3 billion), Singapore US$3.6 billion, Korea received only US$2.3 billion, and Taipei,China US$2.1 billion (James 1990, p.15). Hong Kong, China and Singapore encouraged FDI whereas Korea and Taipei,China restricted and controlled FDI, protecting local industries from foreign competition and encouraging domestic firms to supplant foreign ones wherever possible.23 Figure 3.4 also hints at important differences in the orientation of industrial policy. While Hong Kong, China and Singapore pursued conventional export-led policies, Korea and Taipei,China combined these policies with import substitution, controlling or banning imports to protect local firms and using government procurement to stimulate local enterprise. Korea was very restrictive, resisting imports of most consumer goods, including electronics and automobiles and many raw materials. Similarly, the Taipei,China authorities often negotiated the terms of the FDI and tied MNCs to local content rules and export targets. Figure 3.4 also points to important differences in company size and ownership in achieving competitiveness (Khader 2002, Tables 2 & 3). While Hong Kong, China and Taipei,China depended to a large extent on small (and a few large) locally owned family businesses, the Korean Government supported the chaebol. Korean policies resulted in a highly concentrated industrial structure, with the chaebol dominating electronics and many other industries. By contrast, in Hong Kong, China and Taipei,China, small firms proliferated and grew, resulting in a highly dispersed industrial structure.24 Government policies and company strategies were closely interconnected. In Taipei,China small and medium enterprises tended to rely on speed and flexibility, while the Korean chaebol focused on high-volume, process-intensive electronics manufacture. In the early stages, firms from Hong Kong, China and Taipei,China specialized in fast-changing market niches, whereas Korean companies emphasized scale and vertical integration. In terms of ownership, Korea and Taipei,China relied mostly on locally owned firms, while Singapore depended almost entirely on foreign MNCs. Again in contrast, Hong Kong, China relied on a mixture of local and foreign firms to lead electronics exports. Insights for Other CountriesGiven the wide variety of paths that the NIEs' have followed in catching up with the more advanced countries in terms of competitiveness, it is very difficult to draw any general conclusion. Each country must develop its own policies, based on its own resources and given its particular level of development. The stages of development are endogenously determined and not simply and automatically passed through. This qualification applies both to early developers who followed existing new paths and to latecomers. The latter respond, adapt, and act on the new conditions facing them as a result of new technology and market conditions created by earlier developers. Countries wishing to improve competitiveness need to focus on and develop their own distinctive capabilities and resources. At a general level, experience in the NIEs suggests that innovation is at the heart of the process of economic development and catch-up competitiveness. Attempts to imitate earlier developers and follow established development paths and policies are not, and in most cases probably cannot be, sufficient to produce catch-up development. The NIEs revealed a wide variety of development paths, not only in terms of government policy and industry structure, but also in patterns of industrial ownership, firm size, and the mechanisms for acquiring technology. The evidence shows that the NIEs undertook a great deal of experimentation and innovation in the technological, institutional, and policy arenas. Achieving long-run competitiveness depends on the combined capabilities and resources of all of the main economic actors (firms, government, and institutions) in their efforts to generate and execute strategies for sustainable economic development. To catch up, rather than merely keep up with the leaders (and to prevent falling behind), this "dynamic" capability must be sufficient both to assimilate and to improve on technologies created by the leading nations over a long period of time. Technological innovation is an essential part of catching up because it is crucial to the creation of internationally tradable products that are competitive in terms of cost and quality with those of more advanced nations. As has been noted, this kind of behind-the-frontier innovation, widely demonstrated in the NIEs, is not necessarily based on R&D but instead is concerned with continuous incremental improvements to existing production processes and products. Although these activities may lead eventually on to specific types of indigenous R&D-based innovations (e.g., for new product designs) that result from indigenous R&D expenditure, catch-up competitiveness is very different from the leadership competitiveness carried out by firms in industrial countries. The latter depends on substantial long-term R&D with respect to new materials, processes, and products that these firms undertake over long periods of time. The evidence also reveals considerable innovation in institutions and policies in the NIEs as they developed. This occurred because each NIE had to ensure that its industry was sufficiently dynamic and outward looking. The experience of the NIEs strongly suggests that the mere imitation of the paths followed by the leading countries would have been unsuccessful because the latter group constantly move the competitive frontier forward by generating new technologies and new markets.
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