ESSAY for Economics of Emerging Economies Lecture

Climbing the industrial ladder is essential for industrialization. How can emerging economies proceed from labour intensive industries to the next rung of the ladder?

Author: Filippo Vescovo mat. n^395125

University of Pavia Accademic Year 2010-11 June 2011

Contents

Introduction............................................................................................................ p.3

Chapter 1 Development, Growth and the role of Manifactury

1.1. The Industrial Stages Model framework............................................ p.5 1.2. The World scenario............................................................................ p.7

Chapter 2 The role of the State in industrializing economies

2.1. Strong support from the people......................................................... p.10 2.2. Low level of corruption..................................................................... p.11 2.3. High skilled "state-managers"............................................................ p.11 2.4. Smart "state-entrepreneurs"............................................................... p.12

Chapter 3 Growing national industries

3.1. The "Infant Industry" argument......................................................... p.13 3.2. Evidences and lessons from successful cases.................................... p.13 3.3. Timing................................................................................................ p.14 3.4. Incentives........................................................................................... p.15 3.5. Failure of infant-protection policies.................................................. p.16

Chapter 4 The role of technology

4.1. The "tech-ladder" and the learning process....................................... p.17 4.2. The first technological jump.............................................................. p.19 4.3. The second jump................................................................................ p.19 4.4. Internal and external resources for the up-grade............................... p.20 4.5. Strategies for the "tech-climb"........................................................... p.21

Chapter 5 A regional perspective: the industrial clusters

The flowchart approach............................................................................ p.23 Conclusions............................................................................................................ p.27 Bibliography........................................................................................................... p.29

Introduction
The industrialization process has been proved to be an inevitable step for the economic development of a society. But having an industrial base is not sufficient to reach the living standards of today's OECD countries. Emerging economies, which present resource-based and labour-intensive productions, should try to improve their manufacturing sector in order to attain higher Value Added (V.A.) activities, and so, sustain their development process. In the real world, however, the spread of this process seems to be very limited, with few concentrated areas, due to dynamics like economies-of-scale, economies of agglomeration, and cumulation of learning capabilities. In this way, a limited number of major centers are likely to inglobe for theirselves this "climb" process, leaving to the remaining countries a marginal role, with little involvement of production and related activities. As we will see during the paper, the process of the "climb" of the industrial ladder has many different issues to be taken into consideration. After a little briefing, where we will introduce the theoretical framework,some of those topics will be discussed: the role of the state, the infant-industry argument, the role of technology and the creation of industrial clusters. These issues are all related to essential dilemmas that emerging countries actually face on their "climb". The scope of this paper is not to solve these global dilemmas, but to give some insights to them, thanks to previous studies and by the observation of real cases. The first chapter is dedicated to the theoretical framework of the industrial development. The questions we will try to answer are: Why industrialization is important for economic development? How does the process take form? Which is the world situation? In the second we will explore which should be the role of the state in this process. Why governments are crucial to the industrial process? Which are the main features of a development-friendly State? The third chapter is focused on strategies for the creation of a national industrial sector. Why to protect infant industries? How did it worked in the past successful cases? Which are the main features of those tactics? The fourth chapter talks about knowledge, learning and technology, crucial assets for the industrial development. How these dynamics work? How they interact with the industrialization process? Which could be the strategies to absorb and create knowledge and capabilites? The fifth and last chapter shift the focus on a regional perspective, and it talks about the industrial clusters. How do they take form? Why they are so important for the industrialization process? 3

1. Development, Growth and the role of Manufacturing

It is widely accepted that the development of an economy is highly related to its industrial base. First Europe, then United States and Japan could develop their economies, and so their living standards, only after having created a manufacturing base.
Industrialization has been fundamental to economic development. Only in circumstances such as extraordinary abundance of land or resources have countries succeeded in developing without industrializing. Not only is industrialization the normal route to development, but as a result of the globalization of industry, the pace of development can be explosive. Twenty years ago, Qiaotou in China was a village. Today, it produces two thirds of the worlds buttons. 1

But industrialization is a very wide and general term: we can classify an industry by sector, intensity of capital, and many other variables. One of them, crucial for the greater context of the economic development, is the classification based on their Value Added. The higher is the Value Added, the deeper would be the impact in the economy, and so the economic development. In today's economy, productions with high Value Added are the ones in which knowledge, capabilities and innovation are the main factors. An example is given by the fashion industry. Nike is famous mainly for its sneakers, which process of production chain involves many activities, located in different countries: while low-V.A. ones (like physical production) are located in the emerging countries, the high-V.A. ones (like marketing) are instead situated in rich OECD countries. This example teaches us that, in order to improve the economic conditions of a country, an up-grade toward higher V.A. activities should be made. This is the essence of the concept of the "industrial ladder climb" that we are going to explain in a more theoretical version.

1.1. The Industrial Stages Model Framework

First theorized by Balassa2, the Industrial stages model states that: A developing country, in an open economy context, industrialises and goes through industrial upgrading, step by step, by capitalising on the learning opportunities made available through its external relation with the more advanced world. According to this evolutionary approach, each nation is on a continuum within one of different "industrial stages", and as it moves forward, it takes on a new series of competitive tasks in the world economy and leaves less sophisticated activities to countries at the lower level of economic development.3
1 Industrial Development Report 2009, UNIDO, p.XVI. 2 BALASSA B., A Stages approach to comparative advantage, World Bank Staff Working Paper, Washington, 1977. 3 UNCTAD Trade and Development Report, 1995.

The process can be presented as following: Table 1 Stages in industrial Growth

Stage S4 S3 Broad category Mature economy Technology and knowledgeintensive industries Broad industries High-tech' and service industries High-tech' and consumer durables Products
High-precision instruments, sophisticated serv., fashion Telecommunications, Biotech', cars, precision instrum. heavy electrical machinery, Micro-electronics

S2

Capital-intensive industrial

Heavy Industries
(intermediate/ producer capital goods)

a) Machine-Intensive
machine tools, industries & & office machinery

b) Raw material- Intensive

Iron & steel, petrochemicals plastcs, metals, artificiail fib res

S1 S1 PreIndustrial

Labour-intensive industries Resource-intensive industries Primary producers (natural-resources intensive)

Light Industries Agro-processing Primary products

textiles, footwear, pottery toys, wood products canning, leather, plywoods minerals, b asic agricolture

source: course material

Pre-industrial is the stage where the economic system does not present relevant manufactury presence: the society is based on the exploitation of natural resources, and so it is not developed, with high poverty rates. Stage one, labour-intensive and resource-intensive is similar to the previous, but with the addition of basic, cheap and manual-skilled activities. The second stage capital-intensive is characterized by more advanced technologies and fewer levels of poverty; the manufactury sector is based on scale economies, for the production of standardised products with mass labour inputs provided by the local population. The technology- and knowledge-intensive stage sees a sharp increase in the level of skills and capabilities of the labour force, and with that also the productions, which switch to higher V.A. and complexity. When this stage is complete, those activities becomes more sophisticated and "advanced", reaching the status of mature economies. This model of industrial development can be used to analyze the economic history of nearly all the world countries. Only few of them could really "skip" one or two stages before getting into the more advanced places, and this is mostly the case of little economic systems and in particular situations.

A paradigmatic example comes from Iran. The country's former monarch, the Shah Mohammad Reza, after a huge increase in the oil prices in 1973 (and so, massive inflows of revenues) stated that Persian economy would have became among the most advanced countries in ten years. He started, so, by importing lots of goods and advanced technology machineries by the Western world. The policy did not work at all: Iran in 70s was between the pre-industrial and the first stage, without skilled employees and infrastructures. As Kapuciski tells us4, Shah spent billions around the world, and from various continents, ships full of goods are directed to Iran. Once they arrive in the (Persian) Gulf, Iran discovers that it does not have ports. There are, but actually they are too little and obsolete to serve big cargos. Hundreds of ships wait for their turn in the Gulf, a pending that in some cases take 6 months. These "parkings" would cost billions to Shah's treasury. Step by step, the goods are unloaded, but then Iran discovers that it does not have warehouse. In the open air, in the middle of the desert, tons of goods wait months, and most of them become waste. The goods should be transported within the country: at this point Iran discovers that the country does not have any transportation vector. Shah so decide to buy two thousands of trucks from Europe, but then he discovers that in Iran there are no drivers. After long debates, the government decides to send its airplane to South Korea and they come back full of drivers. This story does not only teach us that the process should be gradually. It teaches also that the economic development is a complex process that does not depend only on the resources that a country has. It involves also political, social, geo-political and historical issues. The other lesson is that reaching the higher stages is not easy and it can take many decades: East Asia NICs and few others, in this sense, are fascinating exceptions (that we will pass through in the course of the paper).

1.2. The World Scenario

It might be intersting before getting deeper into the dynamics of the industrial ladder development to take a look at the situation of the world economies, and so understand which are the countries that are actually facing the issues we are addressing in this paper. Figure 1 (next page) proposes the map of world nations and the composition of their economies according to the share of their activity by sector.

4 KAPUCISKI R., Shah of Shahs, 1982.

Figure 1 - GDP Composition by sector5

source: CIA, Wikipedia ( http://en.wikipedia.org/wiki/File:Gdp-and-labour-force-by-sector.png )

The chromatic tonality of the sates is given by three components: green (agriculture% of GDP), blue (services) and red (industry). We can identify four groups of nations: Mature economies (Stage 3 and 4), such as North America, EU, Japan and Australia; they present tonalities very close to blue: their economies in fact show an average of service share between 70 and 90%. Industrializing countries (Stage 1 and 2a), such as East Europe, China, Indonesia, Brazil and East Asia, with violet tonalities. Those are countries that present good GDP growth rates and a consistent industrial sector (between 20 and 40% of GDP). Raw-material-intensive economies (Stage 2b), like the ones in Middle-East (rich of oil), North Africa, certain other states of Africa (like Angola and Nigeria), and for a certain extent South America countries. Those economies are characterized by high export rates of raw materials and commodities, while their industrial sector is not much developed. Their tonalities are between violet and red, similar to the previous segment, but this is due to large employment in extraction and mining industries, characterized by low V.A. Agricultural-based economies (Pre-industrial), like many of the African continent, Myanmar, and certain countries of central Asia6: this group is composed by the poorest and most underdeveloped countries. They have tonalities close to green (over 40% of GDP share due to agricultural sector), with basically no traces of manufacturing sector.

5 To see more detailed information country by country, see CIA database: https://www.cia.gov/library/publications/theworld-factbook/fields/2048.html?countryName=World&countryCode=xx&regionCode=oc&#xx

6 India might be included here: despite the expansion of the service and ITC industries, large part of the population is still living in a pre-industrial world, in very poor and weak conditions.

As the scope of this paper is to focus on the dynamics that make economies jump from the first two stages of the ladder to the upper ones, we will discuss the situation of the second and third cluster. Before, I would like to spend just a couple of words on the excluded ones. The first group mature economies represents the objective of the middle groups: having a wealth country, rich in knowledge, employment and good living standards. Unfortunately, just nearly one sixth of the world population actually live in those advanced economies. The fourth cluster, represents instead the exactly contrary state: the bottom of human being, we might state. These countries most of which are located in the African continent are usually in conditions where setting up a manufacturing sector is not yet among priorities, due to some 'traps' that keep them into extremely poor states. Terry O'Brien 7 suggests that "the bottom billion" has first to solve issues of conflict (both internal and external), mismanaged dependency on natural resources, weak governance and "landlocked with bad neighbors".

***

2. The role of the State in industrializing economies

Economists from different schools have different views about what should be the role of the State in the process of economic development. In my point of view, when a country finds itself in the middle stages of industrialization, (competent) governments should "step up" and set specific policies with specific objectives. The various input for the 'industrial climb' do not appear randomly, nor they affect the process of development by themselves: there is a need of a higher authority that helps those factors to fit in the greater picture of the economic development. Like Shaffaedin says 8, "the opportunities should be created, they are not God-given", and most of the time the market alone does not have the necessary tools to create them, especially at the first stages. Consider, as an example, the role of Foreign Direct Invesments (FDIs). In many industrializing countries, foreign investments represent the main hope of development. But FDIs do not come to a nation with the intention to help it "climbing the ladder": these money inflows are seeking good environment to produce efficiently and big markets to sell and make profit. In my opinion, the challenge is to share using a strategic and managerial behavior by the governments as much as possible the value brought by that certain foreign company, and make it part of the "big picture" of economic development. With an active role of the national
7 O'BRIEN T., The Bottom Billion: Why the poorest countries are failing and what can be done about it: Some insights for the Pacific? , in Economic Roundup report of Australian Treasury, 2007, p. 106-110. 8 SHAFFAEDIN M., Is industrial policy relevant in 21st century?, MPRA Paper 6643, University Library of Munich, Germany, 2006, p.36.

institutions, an FDI inflow will have much more chances to become a win-win event both for the company and the country's industrial (and so, wealth's) aspirations. In my personal view, governments of middle industrial stages, should act like managers and entrepreneurs, setting up strategies to develop their industry while looking at the global markets and trends. They should also understand "where the world economy is going" and how to positionate the own country in this picture. They should communicate diligently with other firm managers both the domestic and the foreign ones to understand their problems and so find a way to help them and create positive cooperations. Unfortunately, this condition is very difficult to achieve: un-competent government teams, unstable consensus among populations and corrupt politicians meant for many developing countries decades of "sitting still" in low levels of the ladder. Anyway it did not always go like that, and the East Asia NICs represent in my point of view - a fascinating example of "managerial-entrepreneurial-governments". Korea in the 50s was a poor country which most of population was composed by farmers and basic-goods manufacturers with no presence of any oil or important good source: a stage1-country with no big expectations. Then the geo-political enviroment, and what we might call "the course of history" gave to this country with an important help by Japan the chance to industrialize. Competent, strong, and smart governments during 70s and 80s let Korea take advantage of these conditions, and in 30 years its economy reached the highest stage of industrialization.
The Korean government played a crucial role in the shift of the industrial activities from import substitution toward exportables in 1964. It was done by intervening directly in the "choice" or "priority" activities which were, at that time, textiles and electronics 9.

The NICs experience suggests to us what should be the features of an efficient government that seek industrial climb.

2.1. Strong support from the people

Governments of the East Asian NICs were not the best example of democracy, but we can argue that they at least had the support of the population. When a middle-stage country seeks to be involved in higher V.A. activities, many trade-offs between short-term-benefits and longer-term-investments result, and a government must have the support of the population to implement such policies. At the beginning of the 00s, Germany implemented policies for the control of wages while
9 CHANG H.J., Kicking Away the Ladder, Anthem Press London, London, 2002, p.128.

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all other European countries were increasing them. Thanks to this long-term policy, the country's industrial sector increased its productivity and consolidated its position among export world's leaders, with great performances in terms of competitivity and export.

2.2. Low level of corruption

Governments should design the policies according to their strategy and their objectives, not because of particular interests. A negative example comes from Italy. Giancarlo Cimoli, for many years managed the public railway company Trenitalia, leading it close to bankruptcy through very-inefficient performances. Due to his political influence and networks, instead of being cut off from public positions, government gave him the head office of another public big company Alitalia which eventually ended with the same results.

2.3. High-skilled "State-managers"

According to the definition given by Henry Fayol 10, with the term "manager" we address a figure with certain capabilities: a) planning b) organizing c) leading d) coordinating e) controlling Yes, these are all skills required to the central goverment when we look after 'climbing the ladder'. Planning, for example, is essential. Many of the successful industries that led the newlydeveloped economies on their way to the upper stages of the ladder have been planned before. Even if there are no universal rules, the strategies should be development-oriented, countryspecific and based on the realities of the international markets and its dynamics. For example, the Korean's steel sector was planned and further developed by its government (with the help of Japan) during the 70s and 80s, resulting in one of the key factors of the country's amazing development. With the term organizing addressed to the government, I do not mean that we should look back at communist or socialist experiences, where industry were State-owned and the private
10 FAYOL H., Administration industrielle et gnrale - prvoyance organisation - commandement, coordination contrle, Paris, Dunod, 1966.

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sector had no relevance. Instead, I think about complementarities with private sector, entrepreneurs and foreign companies: finding physical place to set up industrial areas, opening spaces where companies and governments can build synergies and putting incentives in order to develop the main strategies. Leading and co-ordinating as well should not be interpreted as the old collective-State paradigma, instead as an active force which "works for the improvement of the industrial position on the ladder". These features are shared with the concept of "State-entrepreneur", that we will discuss in a moment. Especially at the beginning, when manufacturing is synonim of low V.A. and skills are weak, in my point of view a long-term-view is necessary, and only strong national institutions can give this dimension. In this context, controlling becomes a very important factor. MNEs that come to a country to set up production facilities or extract natural resources should be disciplined. Allowing big companies pay below-poverty-thresold wages to domestic employees (i.e. Nike in Indonesia in early 90s) or letting them ruin the environment means restricting the chance of industrial and economic improvement.

2.4. Smart "State-entrepreneurs"

The role of the State in the industrialization process is not just to allocate resources and coordinate them: there is a pro-activity side that should be developed. Like Chang11 says,
there must be provided a vision of the future, and the state, as a central agent, can play an important role in providing such a vision.

Then, there might be asked, why the task of exploration and exploitation of opportunities (as in the definition of entrepreneur) should be given to the State instead of private firms? Is the State a smarter entity? Actually, governments resulted in many occasions less efficient than the private sector, driving the economic system to mis-allocation and slowing the growth.. Anyway, the main point is that the State is by definition the only agent which represnt the interest of the whole society, and that is why governmental institution are the only actors that can work for the empowerment of the country's strategic position in a systematic way. They have the power and most of the time the authority to find the resources to implement effective policies that otherwise private sector could not provide. For these reason, and for many of the evidences that the history gave us, I believe that governments should play an important role in the economic and industrial development process.
11 CHANG H.J., Globalization, Economic Development and the Role of the State, Zed Books, London, 2003, p.55.

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3. Growing national industries

In the second chapter we talked, in general terms, about the importance of the State in the industrialization process and the necessity of an active role from the government. Now we will see in concrete which policies should be taken by the institutions in order to 'grow' a local industrial sector.

3.1. The "Infant Industry" argument

First theorized by Friedrich List in 1841, the theory of infant industry protection is quite simple. It says that if a country wants to start developing an industry, government must protect from foreign competitiveness and subsidize the "infant" business in its first phases of expansion, until the sector reaches an economies-of-scale dimension. The idea is that while an industry is set up, before reaching efficiency and scale-economies, there is an initial lack of experience, skills and networks. Only within a certain time period, those crucial assets would be built. Otherwise, by exposing the new-born industry to international competitiveness, there would be the possibility that the import of foreign products would "kill" the infant before its development. After a certain period, as the firms develop their production capacity and their competitiveness, the government should introduce or gradually increase the pressure of competition in the market by allowing new entrants to the field. The pressure on enterprises to perform is applied first through the introduction of domestic competition followed by gradual import liberalization12. The infant-industry protection is an issue that have been argued for almost two centuries, but today we can surely state that those policies when well implemented - actually worked. Given this evidence, the problems to focus on is how to put this general strategy into work, and so, reach the industrial development objective.

3.2. Evidences and lessons from successful cases

The history of industrialization of both early-industrializers and latecomers teaches us a couple of important general lessons. Firstly, with the exception pf Hong Kong (Province of China), no country has managed to industrialize without going through the infant-industryprotection phase. In all successful cases government intervention, both functional and selective, in the flow of trade and in the economy in general has played a crucual role. Secondly, acrossthe-board import substitution and prolonged protection have also let to inefficiency and failure. Thirdly, the experience of premature and across-the-board trade liberalization, whether during the colonial era or in more recent decades, has been disappointing 13.
12 SHAFFAEDIN M., Is industrial policy relevant in 21st century?, MPRA Paper 6643, University Library of Munich, Germany, 2006, p.46-47. 13 IBID., p.32.

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A very intersting research in this field has been made by Shaffaedin 14. He observed that all the most successful stories saw the use of a strategic long-term policy that mixed government selective intervention and gradual liberalization. Those countries (mostly East Asia NIEs) experienced rapid expansion of export of manufactured goods, accompanied by fast expansion of industrial supply capacity and upgrading. The common process can be generalized as following: A) infant protection phase, with different kind of government help, and with different intensity (in certain case subsidization, in other tarriffs, attraction of FDIs, etc..); B) gradual and selective economic liberalization (opening to international trade, abolishment of tariffs, cutting off of subsidizes); C) completely open economy (Washington Consensus rules), with a mature and highlycompetitive industry. In this scheme it becomes crucial the way in which protected industries switch into the free-trade scheme (step B). As pointed out by Shaffaedin (see the quote), the liberalization process should be gradual, selective and at the same moment with the right timing. Another issue to take care of would be also the creation of an incentive-system by the government.

3.3. Timing
As regarding time, Brazil has been for many years the paradigma of inefficient "eternal" infant-protecting policies. By prolonging too much the time of protection, many of its industries did not have the right market-incentives to improve their technologies, and so the country's industrial sector could never really 'take-off' as other NICs, which could compete in a global dimension in few decades. It is not easy for a government to understand when is the right time to put pressure and expose the infant industries to international competition. Singapore, for example, decided in the 1972 to raise its wage level in order to give an input to the switch to higher VA activities. The policy failed, mainly thanks to macro-economic turmoil (oil crisis). The industrial restructure program was eventually re-tried in 1979 and this time it worked well. Regarding the "timing" of the "switch", two main evidences came out: 1) It is not easy to find the right time! While it is not easy to understand if a subsidized product could compete in the international markets, institutions must take into account also
14 SHAFFAEDIN M., Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?, UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development, 2005.

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macro-economic volatility (see Singapore). 2) When an industry is selected to be a candidate for the switch from import-substitution to export-orientation (which is not always obvious, not all the industries must necessarily follow this way), competitiveness should be increased when the industry is close to the maturity. In that way, state incentives would be replaced by market incentives.

3.4. Incentives
The provision of protection to a selected industry should not be without conditions and limit. Like Korea's successful story teaches us, national istitutions should fuel the industrial sector with incentives and sanctions according to the performances of the industry. Those performances can vary according to the scope of the specific sector/company, but usually they take the form of exported goods, acquisition of knowledge, efficiency, product quality, production cost and competitiveness. These indicators although they all play important roles in our scheme should be differently weighted during the different phases of the industrial development of a sector/company. For example, in the very first phase, when an industry is just facing the domestic market, both skill- and knowledge-acquirement aspects result more important. In a second phase, instead, export indicators and production performances would gain more relevance15. After having put their industries into work, a large part of East Asia NICs adopted policies of financial subsides in exchange of export-performances. Those strategies fueled the competitiveness, and so the export rates of those countries, providing new resources that eventually have been re-invested for the support of the industrial up-grade. I would give an example of a concrete incentive policy. Let's assume that a government observes that manufacturers of a certain focal industry are producing goods lower in quality and with a higher price than those made abroad. A useful action could be to give substantial prizes and assure future investments to the company that will be able to make the same goods in a way to make them competitive in the international markets.

15 In this sense, it becomes intersting the parallelism with a managerial control practice called "Balance ScoreCard". In this practice, used by MNEs, the core-managers utilizes a scheme for the evaluation of their subsidiaries that adopt a set of performance indicators which provides a comprehensive framework that translate company's vision and strategy into a coherent set of performance measures. A similar (and of course, adapted) approach might be used by governments in the implementation of their industrial policies, with goverment's institutions in place of CEO, and industrial sectors in place of subsidiaries. For a clear explanation of the BSC strategies, see "The Balance Scorecard. Measures that drive Performance" of Kaplan R.S. & Norton D.P. In Harvard Business review, Jan/Feb 1992, p.71-79.

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3.5. Failures of infant-protection policies

Not all the countries that adopted infant-protection policies obtained the success. Since 80s, many Latin America and African countries failed in the "industrial climb" process, facing instead a process of de-industrialization. As observed by Shaffaedin16, these countries embarked a process of structural reform including uniform and across-the board and often premature liberalization. Results were, in the best cases (Mexico and Brazil) an acceleration of manufactured exports, but weak improvements in the technological ladder, and so poor increase of MVA. These experiences tell us that premature and non-selective switch to out-ward orientation (from import substitution) reduced the incentives for investment in the manifacturing sector due to reduction in its profit margin resulting from import liberalization. At the same time, it increased the risks of investment due to increased competition in the domestic market and the lack of sufficient market information and marketing channels for exports. Thanks to this, while resource-based and labour-intensive industries could be installed, very little upgrading took place. ***

4. The role of Technology

So far, we have talked about the role of governement in the process of industrial development and the infant industry protection measures. In this chapter, the focus will be shifted on a more intrinsic aspect, which is the technological development process and its dynamics. When we talk about "climb the industrial ladder", we are also talking about a parallel process that we might call "climb the technological ladder". In fact, as a general rule, we can argue that to jump into higher industrial stages, we need to upgrade the technology used. There is no way by which a country will develop its industrial sector without having access to more sophisticated and innovative technologies. The diffusion of new technologies is not only important to improve the industrial sector and more generally the economic conditions of a country. Data clearly shows us that who owns high-tech industries will have much better performance in terms of export.

16 SHAFFAEDIN M., Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?, UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development, 2005.

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Table 2 World export and Technology, 1985-2000

Annual growth rate 3,75 9,09 6,60 8,85 8,45 13,19 15,40 Distribution 1985 23,1 73,5 19,4 14,2 28,5 11,6 5,3 Distribution 2000 12,4 83,5 15,6 15,6 29,6 22,9 14,0

Products Primary products Manufactures

of which

Resource-based Low Tech Medium Tech High Tech (of which, ICT)
source: Chang (2006)

As can be seen in the Table 2, in the period 1985-2000 high-tech registered the highest growth rates in term of export, and is still achieving higher total export shares. In the other hand, economies based on resource and primary products have seen an increase in the gap with high-tech economies.

4.1. The "tech ladder" and the learning process

According to the level of knowledge, capabilities and technology, we can purpose another stages scheme complementary to the one we presented in the first chapter.

Figure 2 Stages of Economic development and capabilities

We can identify three main stages: factor-driven (corresponding to pre-industrial and stage1 and 2 clusters), efficiency-driven (stage 2 and 3) and innovation-driven (stages 3 and 4). In the factor-driven phase, the level of manufacturing knowledge and technology is relatively low, and mainly linked to the exploitation of resources - both natural and in terms of labour capital - or basic productions;

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In the efficiency-driven phase, technology is mainly linked to scale-economies productions, usually consumer-goods designated to the domestic use and export; here industries do not exactly 'innovate', but they tend to focus on seeking the most efficient way of production, which takes place mainly with imitation or FDIs. Innovation-driven phase, is the moment in which new processes and products are being created, where the borders of the "technological frontiers" become widened. In jumping from one stage to the next, it becomes crucial what we might define the "learning capabilities" of a country. This term indicates the mere capacity of assimilation of knowledge and skills by an economic system (and so, its industry, enterprises, students, people). While a country is climbing the ladder and higher-technology productions are introduced, also those capabilities should improve to assist and fuel the process. The process of capability-building involves so many variables that can not be easily schematized, also due to country specificities. It takes form in many ways: from the investments on the education system to the skills developed abroad by the emigrants, from the abilities learned by the domestic workers on the foreign-owned facilities based in the country to the diffusion of higher technological goods within the country. Learning calls for conscious, purpositive efforts to collect new information, 'try things out', create new skills and operational routines and strike new external relationships17. One of the main features of the learning process is that it is gradual and dynamic. We often hear about third-world countries asking for high-technological transfer. Sometimes these arguments are senseless: if a country does not have any receptivity and assimilating assets (for example, lack of skilled/graduated human capital), technological transfer is not going to happen, even if the MNEs gives to the local actors all the detailed documents of their new technologies. Examples like this show us that generally speaking - the process of the improvement/learning capabilities and the effective development of the industrial technologies go 'hand-in-hand'. Thirty years ago Philippines invested a lot in high education, achieving a relatively high rate of high-level graduated people, compared to the state of its economy. The move did not resulted in a big impact on the development process: Philippines' neighbors that choose more gradual policies are showing much better performances. The process of learning and the nature of the capabilities involved are much different when an economy is switching from resource-based to efficiency-based and when is passing to innovation-driven.
17 LALL S., "Technology and industrial development in an era of globalization", n Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006, p.284

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4.2. The first technological jump: from resource-based to efficiency-driven

In the first jump, learning capabilities are much more linked to technical skills than advanced or more sophisticated knowledge. The focus here should be on the formation of technical and particular manual skills, which are the features requested to the human capital for the typical second-stage activities. Italy here gives us a clear example of such a policy. In the second post-war, the intense process of industrialization was assisted by the creation of public technical schools called ITIS and IPSIA. These institutes formed millions of technicians, mainly in the fields of mechanics, chemical and electronics. These young experts called "periti" eventually migrated to the big industrial poles such as Turin (automobile sector), Mestre (chemical sector) and Milan, resulting one of the crucial input of the post-war industrialization process in Italy. But the skill-forming process takes many forms: vocational training, in-firm training, specialized training outside the firm and informal trainings are only few examples. Basic schooling and literacy may be sufficient to absorb simple industrial technologies, while advanced schooling and tertiary education become important as more complex knowledge is tackled.

4.3. The second jump: from efficiency-driven to innovation-driven

When an economy has reached the second stage, the 'tech-climb' process becomes more complicated, for two reasons: the nature of the knowledge is much more sophisticated, and requires higher foreign MNEs would hardly de-locate their R&D or advanced technology to an capabilities by the receptors; emerging country, threatened by the possible leakage of know-how and the most-of-the-times uncertain framework of IP protection. Furthermore, emerging countries not always present a sufficient mass of human capital with high skills. Regarding this last point, one particular data tells us the main story: 90% of the world R&D-FDIs are located to OECD countries. The remaining 10% is concentrated in few areas: 97% of this is in South East Asia and and certain countries of Latin America. This fact tells us about how hard is, for emerging countries, to attract high-knowledge FDIs, especially for those countries which are located outside of these concentrated areas18.
18 LALL S., "Technology and industrial development in an era of globalization", in Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006, p.282

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As we said, the process of the climb of the 'tech-ladder' is dynamic: the outputs of the second stage becomes the inputs of the higher stages. In the second phase, when an industry is working in order to improve and make its processes more efficient, it is in a certain way making research and so improving its skills and capabilities. In a word, it is increasing its "experiential knowledge", which will be one of the main inputs of the innovation stage.

4.4. The internal and external sources of tech-upgrade

The process of the tech-development has two dimension: an internal-one, that deals with internal-generated knowledge; an imported-one, that has to do with various actors coming from outside.

Said this, the two processes should not be considered indipendent: instead, they are highly inter-connected, and each one feeds the other. For this reason, a country that is seeking the industrial development should not consider just one of the two sides. Finding a 'balance' between the external factors and the internal capabilities should be "the way". In one case, there would be the risk that FDIs come to a country just to exploit its resources and its cheap labour without relevant improvement; in the other, too much emphasis on the internal resources can prevent the state from important knowledge and investment inflow opportunities. The process in fact takes two different forms according to the state of an economic system: for advanced areas it will depend more on endogenous resources, while fundamental channels for developing areas has to do with international transfer of technology and imitation19. In this sense, Korea is a shining example. At the beginning of its industrialization process, in the 60s, the government relied a lot on the Japanese investments as a way to improve the technology: the neighbor brought the many basic skills that at the time were not present in the country. But the government did not sit on laurels: they instead created institutions for the provision of technical teachings, started big public enterprises in order to create conglomerates (cheabols), and most important - setting up active industrial policies in order to absorb the knowledge and 'know-how' brought by the Japanese At the end, the balance between internal-generated and external-imported dynamics can result more tendent on one of the two sides. According to this evidence, Lall 20 recognizes two broad successful strategies for the developing world to promote skills and learning for
19 TAMBERI M., Specialization and Growth Perspectives in the South Mediterranean Area, The European Journal of Comparative Economics, Vol.3, n.2, p.290, 2006. 20 LALL S., Competing with Labour: Skills and Competitiveness in Developing Countries, Geneva, International Labour Office, Issues in Development Discussion Paper 31, 1999.

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competitiveness: to rely mainly on internal-created actors the so called "autonomous" or the FDI-dependent.

4.5. Strategies for the Tech-ladder climb

According to the argument just reported, it can be made a classification of the technologydevelopment policies in relation to their tendence to one of the other approach: on one pole the strategies that rely completely on foreign injections of technology and knowledge (usually in the form of FDIs or cooperations with foreign entities) without the creation of domestic complementary entities, on the other policies that focus on the internal resources and a way to maximize their learning capabilities.

Figure 3 Tech-Development Policies in relation to their dependence on external-imported technology/knowledge21

At on extremity we find the very autonomous strategies: Iran and North Korea heavily relies on internal resources, both because they face great restrictions in international trade/ investments and for political reasons. This situation force them to rely heavily on their own resources. This strategy, that reminds me the principles of autarchy, is very little effective compared to the other strategies: very closed systems resulted in the medium and long-run much slower learning speed than open ones. Moving right, we find more balanced autonomous strategies. They are focused on the acceleration of the learning capacities of the domestic firms instead of building around FDIs. Here, government deeply intervene with industrial policies such as infant-industry protection,
21 This scheme has been inspired by the Paper of Sanjala Lall, Competing with Labour: Skills and Competitiveness in Developing Countries, (1999) and the book by H.J. Chang, Rethinking the Economic Development, (2006).

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by providing direct credit and with the creation of centralized and coordinating institutions. Korea and Taiwan adopted this way on their tech development: at the beginning they were more dependent on FDIs, but then, when in the 70s and 80s they made the last step they switched to a very independent approach. Once they reached the last stage, with many globalcompeting and innovation-creating firms, they decided for the ban of FDIs inflows. The policies we discussed in the third chapter can be considered part of this group. In the middle we find the mixed strategies: they present autonomous policies combined with a relevant interaction of external actors in the learning-process. A classical example is China and its current approach: strong FDIs' opennes combined with strict constraints that brings foreign MNEs to collaborate with indigenous actors. The arrow reminds the switch of the Chinese strategy from a more autonomous' one with the highly emphasis on the massively-subsidized SOEs22 - to a higher degree of FDI-dependence. A relevant part of nowadays' emerging countries especially the big ones can be insered in this group. Going further, we can identify the active FDI-dependent strategies, which is one of the two sub-group of the greater category of the FDI-dependent. While the country is heavily dependent on FDIs, there is still room for industrial policies, but with a lower intensity. The source of technical change remain largely outside, in the hands of trasnational corporations (TNCs); for this rason there is less need to intervene to promote infant industries. Industrial policies here are needed to ensure the development of relevant skills, capabilities and institutions required to ensure that TNCs keep transferring new technologies and functions 23. Singapore is a typical example of active-FDI-dependent strategy: its (winning) strategy saw the creation of an Economic Developmnet Board (EDB), that guided its industrial development process, with active policies in the fields of incentives, industry selection and skill-trainings. The category located at the most right position is occupied by the passive FDI-dependent strategies. In this case, countries focus on attract TNCs in order to aupgrade its tech-ladder without relevant domestic policies. This is the case of Malasya, Thailand and Mexico, where foreign big companies are attracted mainly by the low wages for unskilled or semi-skilled
22 China during the 80s and until the middle of 90s created and subsidized big public enterprises called StateOwned Enterprises (SOEs). After inefficient results and important loss registered by those colossuses, the Chinese president annouced, during the 1997's 15th National Communist Party Congress, the privatization of SOEs. After this important reform, regional conglomerates and FDIs saw relevant increases, and so the Chinese economy performances. 23 LALL S., "Technology and industrial development in an era of globalization", in Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006, p.295.

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labour, good infrastructure and FDI-friendly policies. In this scenario, it becomes crucial for the countries to figure out how to induce TNCs upgrade their activities from simple assembling into more advanced activities with greater local content. While Malasya could successfully make this step, many other such as Bangladesh, Mauritius, Sri Lanka showed very little improvements. Successful industrialization depends on the ability of each country to cope effectively with technical change. Internal and external factors must find a balance and reinforce each other: as we have just seen sometimes it works with a greater focus on the domestic resources and with a direct investment on them, some others TNCs can be a crucial instrument for the technology improvement. ***

5. A regional perspective: the industrial clusters

Until here, we have talked about many aspect of the industrial development: the role of the state, how to grow domestic firms and the strategies for improve the technology. But a question has not been made yet: where does the process of industrialization happen? It might seem a banal question, but actually it is not. While the wider process of economic development is vast and spreads within a country or region, the industrial development takes place mainly in areas called "conglomerates" or "industrial clusters", where firms especially manufacturers concentrate their activities. For example, we often hear about the dynamism of the ICT sector in India, but actually we do not take into consideration that this process takes place in very limited areas of the country. Having said this, then I think that it becomes essential for the context of the industrial ladder's climb to think about specific policies that focus on the process of industrial-clusterbuilding. According to Kuchiki and Tsuji24,
Industrial cluster policy is subtle and complex, requiring not only a traditional combination of targets and policy measures but also related arrangements such as economic refors, deregulation, construction of infrastructure, establishment of legal system, and so on. In addition, any successful economy must now meet global standards; without carrying out the reforms necessary for meeting these standards, no region can attract global resources.

An interesting attempt has been made by the two authors in the explanation and generalization of the "industrial clustering process".
24 KUCHIKI A. & TSUJI M., The flowchart approach to industrial cluster policy, IDE-Jetro Paper, Palgrave McMillian, New York, 2008, p.4.

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The result was a scheme called "The flowchart approach".

Figure 4 Flowchart Approach to Industrial Cluster Policy

The scheme provides that industrial policy can be effective in forming industrial clusters by working in three complementary and interlinked platforms: A) Establishment of industrial zones or export-processing zones B) Building capacity C) inviting "Anchor Firms" D) Complementary firms The flowchart approach which is better located in a regional-dimension more than national - offers two basic guidelines for the implementation of the policy. First - like in the infant-industry argument - the timing and order of the policies is crucial. Second, there must be clear the economic agents responsible for building the various type of capacity necessary for the industrial policy, choosing among government, local institutions, semi-public actors and private firms. In this scheme, a central role is played by the "anchor firm", which attract and gives work to the related firms, without taking into account the positive inter-firms spill-overs. Many examples of the relevance of this model can be given: Canon in Hanoi (Vietnam), Toyota in Tianjin (China), Technopolis in Austin and Silicon Valley in California (USA). 24

Those experiences suggest us a pair of intersting insights: 1) 2) itself *** when we talk about the industrialization process, national perspectives are not enough local and regional institutions have an important task in this sense: by being more and a regional view should also be taken in great consideration; close to the local issues, they can provide more specific and adapted policies for the process

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Conclusions
In this paper we discussed four important aspects of the industrial development of emerging economies: the importance of the state, the infant-industry policies, the technology development and learning processes and, the role of the industrial clusters. Regarding the first issue, we presented many arguments prooving the importance of the State in the process, wether the policies adopted are based on its involvement or not. The great complexity of the industrialization process, with its infinite and interlinked variables, would very hardly turn into an economic development for the country by itself. For this reason, it emeges the need of an important leader-figure, with the task of providing the proper inputs, using managerial and entrepreneurial behaviours. The specific features required to the governments have been indentifies as: (1) strong support from the society, (2) low level of corruption, (3) proper skills, (4) managerial and entrepreneurial approach. In the second issue, we understanded why it is important for emerging economies to develop an own industry, and how this process can take place. As the many examples exposed in the chapter, almost every industrialized country used a certain form of infant industry protection, with very good performances when combined with the right timing and the proper incentives. The third topic treated was the role of the technology. After having illustrated the relevant correlation between the two processes of industrial and technological development, we tried to set up a general stages scheme according to the capabilities reqired to the relative industry. In this way we identified three stages: (1) the factor driven, (2) the efficiency-driven and the (3) innovation-driven. The process of switch 12 and 23 have dimonstrated, though, to be much different one to the other, with the involvement of different policies, actors and constraints: in this sense, reaching the last and higher step of industrialization seems to be a very hard task for certain emerging countries. Anyway, different strategies can be adopted by them, choosing among high or low degrees of autonomy (respectively, "autonomous" and "FDI-dependent" policies). The last issue that we discussed was at a more regional perspective: the industrial clusters. We saw that, while the discussions of industrialization usually take countries as subjects of analysis, the core of the process actually takes place in limited areas called "conglomerates" or "clusters". Because of that, specific regional and cluster policies should be considered by 27

the emerging countries, taking into account the complexity of the inter-firms interactions and spill-overs. The picture emerged from the topics we discussed is that the process of industrial development is very complex, and it involves many different factors. Simply because of this, a single successful strategy by which one economy can develop its manifacturing system, does not exist. Given this consideration, we observed that successful industrializations took place when the economic system could cope effectively with the state of the technologies, assimiling and improving them within the society. In this sense, various measure can, and must, be undertaken by the national actors: people, entrepreneurs, enterprises, regional institutions and - with a particular relevance govenments. The role the latter is determinant, given their nature of public-interest guarantor and national sovereignity institution. As we have observed in the paper, in the recent economic history many successful stories saw intensive government interventions, with great results in terms of knowledge- and technology-improvement. These experience suggest us that there is a significant role for the national institutions in providing the proper inputs needed for sustain the process of development.

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BALASSA B., A Stages approach to comparative advantage, World Bank Staff Working Paper, Washington, 1977. CHANG H.J., Globalization, Economic Development and the Role of the State, Zed Books, London, 2003. CHANG H.J., Kicking Away the Ladder, Anthem Press London, London, 2002. FAYOL H., Administration industrielle et gnrale - prvoyance organisation - commandement, coordination contrle, Paris, Dunod, 1966. Industrial Development Report 2009, UNIDO, p.XII; further evidences of the link between manufacture and development are pointed out in the chapter 1.2 "Is industrialization development-friendly?". KAPUCISKI R., Shah of Shahs, 1982. KUCHIKI A. & TSUJI M., The flowchart approach to industrial cluster policy, IDE-Jetro Paper, Palgrave McMillian, New York, 2008. LALL S., "Technology and industrial development in an era of globalization", in Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006. NAYYAR D., "Globalization and Development", in Rethinking the Economic Development, H.J. Chang, Anthem Press, London, 2006. SHAFFAEDIN M., Is industrial policy relevant in 21st century?, MPRA Paper 6643, University Library of Munich, Germany, 2006. SHAFFAEDIN M., Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?, UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development, 2005. TAMBERI M., Specialization and Growth Perspectives in the South Mediterranean Area, The European Journal of Comparative Economics, Vol.3, n.2, p.290, 2006. UNCTAD Trade and Development Report 1995.

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