Revisiting the developmental state 8: the new challenges of Asia’s latecomer industrialisation

Industrial policy needs to be rethought if it is to remain effective in promoting economic development in a highly globalised world economy

When South Korea, Taiwan, and Singapore were ‘catching up’ through state-led industrialisation in the 1960s and the 1970s, their only benchmark was the first movers in the existing advanced industrialised economies.  However, in the context of today’s intensified global competition, a developmental state’s relentless pursuit of sectoral industrial policy to achieve catch-up can easily face the danger of missing a rapidly moving target.  Catching up with either the ‘wrong’ or an obsolescent first mover may turn out to be only a temporary gratification, with ‘falling behind’ the ‘real’ movers actually becoming the reality.

What’s more, because of drastic and rapid market shifts in response to changing technological regimes, new product innovations and altered consumer preferences, industrial transformation through such state-induced second-mover advantages does not necessarily generate sustained growth, even after such transformation has taken place.  There is no guarantee that the state’s planning agencies and policy implementation bureaux possess the requisite competence to help domestic firms anticipate and respond effectively to rapid shifts and unknowable changes in the global economy.

This dynamic scenario thereby poses a genuinely serious challenge to the practice of conventional industrial policy in the global economy today, especially in the global electronics and marine industries and by comparison with the situation over four decades ago when the three East Asian economies were starting out.

This doesn’t of course mean that industrial policy no longer matters in economic development in East Asia (or, for that matter, in the US or the UK).  But what it does mean is that its relevance and effectiveness depends very much on the policy details and political contexts.  To be clear, empirical evidence in my work – especially my recent book on the subject – has shown that ‘picking the winners’ by the state as a form of sector-specific intervention isn’t much use any longer.  Why?  Because successful industrial transformation is increasingly dependent on the strategic coupling of domestic firms with global production networks (GPNs).

The point here is that, in a world economy dominated by cross-border production networks, this national-global articulation has become the necessary mechanism for development to be kick-started and sustained over time in most economies.  Although, as a consequence, it is now much harder for almost any national economy to develop fully vertically integrated industries that are internationally competitive, there nevertheless remains significant room for a new kind of industrial policy designed to support domestic firms in tapping into the developmental opportunities inherent in most global industries.

There are, however, sectoral specificities to these network-level opportunities.  There is no doubt, for example, that in technological and organisational terms strategic coupling in automobiles can be much more challenging than in apparel or agro-food.  Interestingly, there is also substantial intra-sectoral differentiation.  In the information and communications technology (ICT) industry, articulating into global production networks in consumer electronics is relatively more actionable in functional policy terms than, say, in advanced semiconductors or high-end electronics equipment (e.g. medical devices or computing servers).  In other words, developing industrial policy oriented towards promoting a specialised niche in a particular sector or an intra-sectoral segment still makes good sense for economic development.

In my view, this recognition of new developmental challenges and policy considerations within Asia’s latecomer industrialisation has at least three significant implications for rethinking industrial policy: its intended recipients, policy foci and what I call the politics of choice.

First, the question of the recipients of state-led initiatives becomes much more complicated in this national-global articulation.  When the East Asian economies entered into the new international division of labor, there was no question who should be the beneficiaries of state-led industrialisation.  It was domestic firms and national champions, such as Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea’s Samsung and Hyundai. But, as today’s national firms are less domestic in their outlook and activity because of their strategic coupling with global production networks, it is questionable whether they should be the only beneficiaries of a renewed form of industrial policy.  This greater domestic coupling with global production networks also entails a more extensive presence of foreign firms in the national economy.

In these conditions, instead of highly selective sectoral industry policy targetted at promoting specific firms through investment coordination, policy loans and credit rationing, or trade and investment protectionism, a more catalyst-oriented industrial policy promoting industry-level growth dynamics, such as a cooperative industrial ecosystem and inter-firm and inter-industry linkages, is likely to be more effective.  This kind of industrial policy can better support local firms to leverage in new sources of technologies and market access in GPNs; it can also facilitate the location or further upgrading of value-adding activity by existing or new foreign firms in the national economy.

Second, this call for a more calibrated approach to industrial policy brings us to the possibilities of focusing on niche policies that ‘nudge’ strategic coupling with global production networks.  For, as industrial production becomes ever more fragmented and globalised, state planners and their advisors in newcomer economies will find it even harder to identify exactly the products and technologies that should be developed in their domestic industries.  These days the obstacles to economic development are less about large capital outlays and scale of investment, but more about developing specialised niches within different global industries.

In most global industries that are characterised by vertical specialisation and modularisation (e.g. transport equipment, ICT, agro-food and so on), a niche approach to industrial policy is likely to yield stronger coupling of domestic firms with global production networks than a ‘big spurt’ approach to state-led industrialisation.  This ‘nudging’ approach may not produce grandiose industrial complexes of a size and scale that match South Korea’s chaebol shipyards and automobile plants or Taiwan’s Hsinchu Science-Based Industrial Park, but it does offer a realistic pathway to achieving capitalist development in the Global South.  For example, one effective niche approach has sought to develop favourable policies, such as start-up supports and financial and social incentives for returnees, to engage more systematically with transnational communities of ‘technopreneurs’ and managerial actors.  Tapping into their knowledge and network repertoires allows economic planners and policy makers to develop a more thorough understanding of the GPN-relevance of their existing national capabilities and positions in value-chain segments.

Third, the politics of industrial and sectoral choice is much more confounded by the growing uncertainties inherent in today’s capitalist global economy.  When the three East Asian economies began their industrial transformation in the 1960s and 1970s, highly selective sectoral industrial policy promoting labour-intensive industries and heavy and chemical industries was relatively straightforward to do.  As these industries became more mature, value creation and capture tended to be much greater in new innovation-based industries in both manufacturing and service sectors.  In these dynamic new industries (such as nanotechnology, biomedical, green-tech and digital media), ‘catching up’ is no longer a matter of capital investment led by state-controlled financial institutions and elite industrial development agencies.  The sheer complexity and wide-ranging sets of actors with specialised knowledge, expertise, interests and priorities in these industries make them distinctly unruly when it comes to bureaucratic targetting, even via well-coordinated industrial policy.

In sum, in our challenging world of extraordinary uncertainties, industrial policy is but one political approach to industrial transformation and economic development.  Looking forward, I believe the adaptive post-developmental state should focus on creating broad-based capabilities in new technologies, product and process innovations, and market development, rather than on choosing specific winning firms, industries or sectors.

This article is the eighth in a new SPERI Comment series on revisiting the developmental state. Read all of the articles in the series so far here