Int. J. Technology and Globalisation, Vol. 6, Nos. 1/2, 2012 Explaining sectoral leapfrogging in countries: comparative studies of the wireless sector Anil Hira* Political Science, Simon Fraser University, 8888 University Drive, Burnaby, BC, Canada V5A 1S6 E-mail: ahira@sfu.ca *Corresponding author Brian Wixted Centre for Policy Research on Science and Technology, Simon Fraser University, 515 West Hastings Street, Vancouver, BC, Canada V5A 1S6 E-mail: brian_wixted@sfu.ca Ricardo Arechavala-Vargas IDITpyme, Universidad de Guadalajara, Giosue Carducci 5621, Col. Jardines Vallarta, Zapopan, Jalisco, CP 45027, Mexico E-mail: yukoneagle2@yahoo.com Abstract: What explains the uneven competitiveness we find in global markets, where some firms are able to dominate? Obvious path dependency and ‘stickiness’ in markets persists, despite efforts by others with potentially greater comparative advantage. An evolutionary view of global market competitiveness provides the best answer. Timing determines fortunes. In order to take advantage of technological windows of opportunity, a co-evolutionary state-private sector partnership is required. Our study of the emergence of wireless manufacturing entrants suggests that success depends on the ability to adapt to changes in comparative advantage, markets, and technology. Globalisation therefore requires even more state intervention, albeit in more strategic ways, not less, and state intervention is at the heart of the success of national firms. The cyclical nature of global markets and technology advances offers currently unrecognised opportunities for late entrants. Keywords: innovation; technology; evolutionary cycles; windows of opportunity; wireless; globalisation; industrial policy; state-private partnerships. Copyright © 2012 Inderscience Enterprises Ltd. 3 4 A. Hira et al. Reference to this paper should be made as follows: Hira, A., Wixted, B. and Arechavala-Vargas, R. (2012) ‘Explaining sectoral leapfrogging in countries: comparative studies of the wireless sector’, Int. J. Technology and Globalisation, Vol. 6, Nos. 1/2, pp.3–26. Biographical notes: Anil Hira is Professor of Political Science at Simon Fraser University in Vancouver, BC, Canada. He is the author of 6 books and over 30 articles and book chapters, including The New Path: An East Asian Model for Latin American Success (Ashgate, 2007). His area of research is using industrial, technology, and energy policies to build globally competitive industries. His current research projects include investigations of cluster competitiveness, using the emerging science of genomics to create comparative advantage, developing science and technology capacity in developing countries, and renewal of corrupt and ineffective public institutions. Brian Wixted is a Research Fellow at the Centre for Policy Research on Science and Technology at Simon Fraser University. He received his PhD from the University of Western Sydney. His research interests include the international geography of sectoral innovation systems and the governance of publicly funded research system. Ricardo Arechavala-Vargas received his PhD from Stanford University in 1985. Back in Mexico he has developed a research and consulting career on technology management, innovation and science, technology and innovation policy. He has been a consultant for public research institutions and for private enterprise as well. He is founder and current director of the Institute for the Development of Technology and Innovation in SME’s at Universidad de Guadalajara, and a member of the National Research System in Mexico. 1 Introduction: Are technological breakthroughs a central axis for economic success? The recent rise of the Chinese, Indian and Brazilian economies raises questions about how previous ‘losers’ in the global economy were able to catch up. This is all the more remarkable given that these countries had limited industrial foundation, yet were able to ‘leapfrog’ into industries requiring advanced technological capacity. What explains this major shift in fortunes? While there are undoubtedly complex multiple political, economic and social factors behind such changes, our recent research suggests that the role of industrial policy in exploiting openings in windows of technological shifts that lead to the ability to enter new industries has been underestimated. For example, China’s development is undoubtedly centred on the development of brute manufacturing capacity, however, it is also a technological leader in a range of fields from electronics to green energy, in the case of the latter actively seeking to exploit an emerging technology developing into a new industry (Hira, 2007). India’s rise is closely linked to the development of software and Information Technology (IT) consulting capacity, arising originally from the need for additional capacity to solve the Y2K bug but also reflective of innovation in the industry, such as the movement of software generally towards modular programming (Hira and Hira, 2008). Brazil’s development as a major global competitor is also tied to the development of new industries, such as Petrobras’ development of offshore petroleum technology (Hira and Pineau, 2010), the development Explaining sectoral leapfrogging in countries 5 of Embraer when regional jets started taking off because of US deregulation (Hira and Oliveira, 2007), and the work of EMBRAPA, the Brazilian agricultural research, development, and extension agent, to push innovation into the sector, leading to major productivity gains (Hira et al., 2011). To explore this idea further, we take an inductive approach in developing case studies to examine whether success and failure in entering into new industries (sectoral leapfrogging) can be explained in part by the nature and timing of state policy interventions. The timing issue is not something that can be captured easily in the dominant econometric growth models, which in general do not and cannot capture either innovation or sectoral differences, let alone examine how those match up with particular policies. The end result is an ability to find obvious correlations, such as high growth and high level of education or ‘high-quality’ institutions (Hausmann et al., 2005; Rodrik, 2008), and rarely recognising that types of goods (i.e., sectors) matter (Hausmann et al., 2007), but little in the way of establishing policy decisions and outcomes. Similarly, the large n case literature overgeneralises, such as depictions of policies as ‘inward’ or ‘outward’, when the reality is far more complex and context specific (Rodrik, 2010, pp.38–41). Our comparative case study approach is also limited because naturally other factors such as level of human capital, costs of financing and a myriad of others undoubtedly play a role, yet we would not want to throw out all possibility of finding frameworks of explanation since states and companies face common situations and have similar tools at their disposal. Even diagnostic approaches need to start with an identification of key actors, variables and relationships. If timing matters, then it should be taken into account in designing industrial policy, and the only way to establish that is to look at cases of policies and outcomes. Controlling for sector, we compare state strategies to enter into cell phone manufacturing during the period in which they were introduced (the early 1990s). We focus on countries that did not have an already existing manufacturing base in telecommunications equipment. 2 Why focus on technological cycles? Historians of technology and economics, such as Lipsey et al. (2005), argue that general-purpose technologies such as electricity pave the way for a wave of cross-sectoral innovations and explain general economic transformation over long periods, including the West’s success. Indeed, the technology policy literature is replete with authors who point to the evolutionary cycle of different product lines that heuristically follow (Schumpeter, 1942; Vernon, 1966) outlines of moving from innovation to mass production, and from monopoly/oligopoly to more perfect competition, lower costs and mass production. While the cycle moves forward, oligopolies try to maintain their market share through branding, reputation, control of supply chains and marketing. Thus, as Vernon’s theory suggests – when production moves offshore, we still see some staying power during the life of the product cycle for generally North-based incumbents. By understanding the dynamic patterns of the opening and closing of innovation cycles, we might be able to identify the entry and exit points whereby countries are able to enter into global competition at specific historical points when the path dependency advantages of the incumbent are less formidable. We illustrate this dynamic through the opening and closing of one such window in the wireless sector. 6 A. Hira et al. Technology-based products seem to go through this cyclical evolutionary pattern. For example, before printing, books were hand-written and extremely dear. When the printing press first started, the process was slow and, while cheaper than writing, still price, limiting by technology and cost those who could engage in the industry, reflected by the fact the first items often printed were Bibles. Over time, the printing press became more standardised and spread, lowering the costs and leading to newspapers and book presses. By the 20th century, the stronghold of the city paper (e.g., the Hearst legend) was broken by the introduction of rival newspapers and other news media. This was followed more recently by the decline of the newspaper and the introduction of online sources, opening the way for new entrants, such as Slate.com, which may be beginning a new product cycle of online news sources, which offers a window for new providers. The pattern is common – in the 1950s, US brands such as RCA and Zenith commanded the North American television market, by the 1970s, these had moved to mass production overseas, primarily in Mexico, to be superseded by Japanese entrants such as Sony, which introduced innovation in terms of quality and reliability. Most recently, the introduction of high-definition televisions has seen a new Chinese producer, Haier, entering into the market. 3 Why states matter in such cycles While we can in no way comprehensively explore or develop a theory about cycles for every product, we do believe that it is a worthwhile research agenda that we can help to build upon. Automobiles may be just entering a new cycle now, where there is a hum of activity around electric vehicles, and potentially new producers, such as Tesla attempting to enter into this market as a new producer. This suggests that, a major innovation in a product market offers an opening. But the opening is not a level-playing field. Would be entrants need to be in a position to undertake the high rewards and high risks of an unknown production process and market, and requires both heavy financial backing and highly specialised knowledge and research and development. Tesla, for example, needed to gain a multimillion dollar loan from the US Government to begin mass production. Therefore, this suggests that state policy, as in the case of massive ongoing interventions in aerospace, could be an important component, particularly in states with disadvantages, based on market size, weak financial institutions, or the lack of an existing complimentary industrial and technological base. The celebrated recent development of the IT industry had strong links to the US defence industry; for example, the US Defense Advanced Research Projects Agency (DARPA) funded much of the early internet research (not Al Gore). As Lipsey et al. (2005) point out, “general-purpose technologies”, such as the internet, have a (shared) collective goods nature, requiring institutions to support basic research, but pushing the private sector to develop the specific applications technology. Such is the case with the massive funding of genomics research, with states financing the basic science, such as the Human Genome Project, but expecting the private sector to develop the actual agricultural and pharmaceutical products. Therefore, technological cycles might provide entry points in terms of path dependency in relation to the ability to produce a product that evolves over time. Incumbents enjoy huge advantages in financial capital, personnel, technology, managerial know-how and experience, and marketing and reputation, creating large barriers to entry. Explaining sectoral leapfrogging in countries 7 While not impossible, it took at least 20 years and massive state intervention before Hyundai was able to compete in the auto industry and gain the significant market share it presently enjoys, while previously invincible GM, Ford, Chrysler (“the big three”) and subsequently apparently invincible Toyota and Honda are experiencing severe challenges. Though the evolutionary approach is a proven method of demonstrating path dependency and innovation cycles (Chandler, 2005), there is not much in the literature that discusses the potential role of the state in aiding national firms to take advantage of such cycles through pro-active policies. In short, our discussion suggests the need for a dynamic institutional infrastructure that involves an evolutionary partnership between state and companies in relation to the timing of technological cycles. 4 Some limitations of the existing literature There is inadequate space to cover every literature discussing comparative advantage, technology and competitiveness. However, we review here a few of the key strands to illustrate that the exploration of dynamic state–private partnerships taking advantage of technological cycles is so far inadequate to explain the importance of timing. In terms of state policies, a more recent set of literature focuses more specifically on innovation as part of a National Innovation System (NIS), the ‘triple helix’ of business, the state and academics that must work cooperatively to create conditions for technological breakthroughs (Etzkowitz, 2003). This literature takes head on the responsibility to create knowledge for competitiveness, which economic historians note has been a key to industrial and technological development (Moe, 2007, p.23). A major limitation with this set of literature is that it again does not explain how national factors/systems can be developed; mainly it points out that where positive conditions exist, firms can succeed. The NIS literature is mostly national case studies, with limited study of firm outcomes. As Malerba (2005) points out, there are a number of reasons for examining innovative activities at the sectoral level. These go back to Albert O. Hirschman’s idea (1945) of backwards and forwards linkages, the tying together of vertical chains of production that are now being studied as global supply chains (Gereffi and Korzeniewicz, 1994). As in Silicon Valley or Detroit, we observe both geographically and in terms of network and transactional relations, including the introduction and diffusion of innovation activities, strong clusters of activities in sectors. Cantwell (2005, pp.561, 562) notes that the collective goods related to innovation activities for sectors implies (and studies demonstrate) the need for a strong public sector role. For example, in his study of the development of the automobile in the USA, Moe points to the role of the state in creating roads, supporting oil exploration and developing regulations for both the energy and the transportation markets. However, the state must be able to avoid rent-seeking by individual actors in the system (Moe, 2007, pp.24, 187). While the public sector plays a crucial role in the collective goods’ aspects of innovation, it is firms ultimately, not states, that must succeed or fail (Kim and Kim, 2006, p.61), and firms as well as states shape the factors of competitiveness, thus the developmental state literature under-theorises the role and capacity of firms. The nature of these factors will vary by spatio-temporal context and sub-sector. For example, most semi-peripheral (such as Canada or Finland) and developing economies’ home markets are quite limited, therefore they must export to achieve minimum economies of scale and 8 A. Hira et al. are unlikely to be able to support a lively and competitive market structure in their own economy. The national and business competitiveness literatures provide some insights, but equally daunting limitations. The general direction of the business literature on corporate strategy is directed primarily towards examining the two paradigms of competitiveness through superior management of resources and of environmental opportunities and constraints. The resource paradigm focuses on the internal assets and liabilities of a company, including human and financial capital, which create a competitive advantage and specialisation for a company. The environment paradigm includes regulatory, competitive, and production and technology factors that companies compete to take advantage of. Both views are in reality compatible – firms begin from different initial conditions, and respond at different degrees of effectiveness to changing market contexts (Cockburn et al., 2000), along with a third element of strategy, namely the organisation’s ability to add value (Lynch, 2006). However, the ability to define and measure competitiveness, like good institutions, in practice is quite problematic (Cockburn, 2000). The problem with these views is that the environment is effectively relegated to a background condition, when in fact companies and governments very much affect environments. Michael Porter’s famous The Competitive Advantage of Nations’ basic diamond model of competitiveness lays out the archetypical environmental conditions for firm success. In regard to countries, he suggests that the existence of national factors such as a skilled workforce, a large local market and related industries are the necessary environment for competition. For Porter, a successful firm embodies dynamic capabilities to deal with industry and product innovations, as well as changes in supplier and buyer segments, government regulation and new entrants. Porter as well as others point to the need to understand a company in the context of the particularities of the sector in which it operates, which led to the use of the term ‘cluster’ to describe the linked activities of a sector. In terms of industry dynamics, this means companies must be continually ready to re-invent themselves, simultaneously changing the industry and institutional environments while being shaped by them (Hamel and Prahalad, 1994, p.21). This is a useful starting point, but it does not really allow us to move towards any concrete propositions. The basic problem with this literature, including Porter’s national and firm competitive advantage factors, is again that we can identify them post-hoc, but we cannot explain how they are created or change over time. In addition, we have the heterogeneity problem discussed earlier. For example, Japan has been highly successful in a number of sectors, yet has not developed a strong petrochemicals sector. Moreover, Japanese auto production systems, such as Toyota, are managed differently than European or American ones such as Mercedes, yet both are successful. In cases such as Saturn, where an American company has tried to reproduce a Japanese production system, the results have been limited. In sum, we have strong insights from various literatures, but we are still in the dark as to a clear policy framework that helps us to make decisions. Furthermore, with globalisation, the fragmentation of production means that the Porter diamond model may also be spread across countries within a particular multinational (Rugman and Verbeke, 2003). The “national business systems” approach (Sorge, 2005, p.111) attempts to deal with this problem, by suggesting that institutions in both the public and the private sector are interdependent and dynamic, but require routinised yet creative coordination mechanisms to respond to changes in the global economy in a dynamic fashion. This adds the important element that not only Explaining sectoral leapfrogging in countries 9 are product and innovation cycles dynamic and adaptive, but NISs and institutions must be as well. 5 Insights into how late entry succeeds The political economy literature that examines East Asian development helps us to move towards clearer answers. The literature help us to blow up the fallacies of state vs. market, comparative advantage as fixed, and the supposed inability of developing countries to compete in global high value-added markets on the macrolevel. These studies follow the classic work by Gerschenkron (1962) on the fact that the role of the state in industrial promotion grew historically over time, reflecting the disadvantages of late industrialisation. Rather than seeing state and market in juxtaposition as do most mainstream economists, this literature suggests that some forms of state intervention are both ubiquitous and entirely compatible with the market. Johnson’s (1982) work on the “developmentalist state” describes the state guidance behind Japan’s success in industrial export diversification after World War II. Johnson discusses how MITI, the Japanese Ministry of International Trade and Industry, selected key sectors for export targeting and worked hand in hand with large Japanese enterprises to develop capacity. Robert Wade delivered an equally important contribution in his seminal work Governing the Market. In that book, Wade suggests the term “governing the economy”, to describe how the Taiwanese state guided finance, foreign direct investment and other economic policies towards moving up towards more sophisticated national production over time. As in Johnson’s work, Wade suggests that state guidance need not mean state ownership or management à la many of Latin America’s failed state-owned enterprises. Rather, the state pushes market forces towards national aims, but allows private forces to produce and succeed or fail. This literature provides the key aspect of a cooperative public–private sector relationship as one of the foundations for late entry into markets. When the private sector gains the upper hand in such a relationship, the outcome is more likely to be rent-seeking rather than learning. Comparative advantage is a basic building block for international economics, but there are many reasons to think it is only a partial explanation for trade. With the often flexible shifts in global production in the current world economy, it is hard to identify exactly what the sources of comparative advantage for high value-added goods are. If the success of Indian software is due to a ready supply of trained engineers, why has not software taken off to the same extent in other places where there are pools of technical capacity, such as Russia? Amsden (1989) goes farther in suggesting that comparative advantage in high value-added products can be dynamic. This makes logical sense as the increasing sophistication of goods means that human know-how (process and marketing as well as production technologies), and not raw materials, account for most of the value of a good such as a semiconductor chip. Amsden’s concept of dynamic comparative advantage is built upon her dense study of South Korea’s ability to create steel, shipbuilding and auto industries over the last four decades through emphasis on process technologies followed by innovation, despite having neither the raw materials nor initial human capital to do so. Particular success stories from outside East Asia are examples of reason for hope that development is not based purely on historical idiosyncrasies. Besides the dynamic growth of Indian software, there are other isolated examples. Embraer, a Brazilian firm, is one of 10 A. Hira et al. the four largest aircraft manufacturers in the world. Techint is an Argentine firm that has had success in global steelmaking. AméricaMovil, based out of Mexico, is an internationally active telecommunications service provider. Yet, these success stories are few and far between. On the other hand, it would be both irrational and fatalistic to conclude that Korea succeeded just because it is Korea, as one commentator suggested to us. Institutions and policies without the right strategy and vice versa are bound to fail to create collective benefits beyond a few firms or government officials. Moreover, the success of these firms suggests that globalisation has not prevented countries that are late entrants from capturing key global markets from positions where they control the production chains and so the largest portion of the revenues and profits, even as some of the manufacturing is being spread around the globe in search of cheaper labour costs. 6 Why globalisation makes state policy more, not less important One of the most important contributions in terms of understanding global industry location is Vernon’s product cycle work. Vernon’s work follows the evolutionary patterns of Schumpeter’s theory of innovation linked to business cycles (Schumpeter, 1939). Vernon (1966) suggests the importance of understanding the evolutionary phase of product development in terms of the size of the market, numbers of competitors and standardisation of the production process, all of which affect where a product is made. Vernon implicitly pointed out à la Schumpeter’s notion of creative destruction that the reason why most high cost, high value-added goods are produced in the North is because of constant innovation; hence, PCs are increasingly made in low-cost but industrially capable China, while iphones are still designed in the USA. Thus, the key to capturing higher rents in oligopolistic rather than mass competitive markets is, therefore, continual product and process innovation. While we cannot literally apply Vernon to today’s world and the exact dynamics will vary by country and sector, it reinforces Schumpeter’s broad outline of evolutionary cycles of product innovation. If we extend this idea to technological innovation, we should be able to identify the congruent cyclical wave cycle patterns of production and industry evolution that are product specific. For example, personal computers started out in the 1980s being expensive, heavy, slow and uncommon. Now, they are standardised commodities, albeit with continual components innovation, such as chips. Thus, chips can be seen as going through a different innovation cycle. So, while globalisation of production reflects the fragmentation of supply chains, both in terms of modularity and geography, it has not changed the cyclical nature of product innovation itself, which appears to afford easier (vis à vis incumbents) entry points for new state–private sector partnerships to enter. By contrast, the commodity chains literature focuses more on the global distribution of different parts of production chains, called Global Commodity Chains (GCCs). Gereffi proposes GCC along 3 key dimensions: the first is the input–output structure, representing the sequence of production and distribution steps; the second is the location where each of those steps takes place; and the third is the governance structure, or power relationships that “determine how financial, material, and human resources are allocated and flow within a chain” (Gereffi, 2008, pp.430–433). This literature distinguishes between buyer- and producer-driven chains. Gereffi posits that government intervention is facilitative in buyer-driven chains, but more Explaining sectoral leapfrogging in countries 11 interventionist in producer-driven chains (Gereffi, 2008, pp.430–433). There is discussion within this literature about industrial upgrading, but the focus is simply on the capabilities and power asymmetries of different participants of the different suppliers of the production chain (Bair and Gereffi, 2004, pp.64, 65). Commodity chain theorists indicate that capturing more elements of a value chain is increasingly difficult under globalisation. Sturgeon says, “vertical integration is consigned to the dustbin of history”, instead he suggests value chain modularity as the more appropriate way to think of the organisation of production networks (Sturgeon, 2005, pp.71–73). The GCC literature tends to be heuristic, rather than generating a clear set of policy or consistent empirical propositions. The question of dynamism in the chain and its linkages, including how the chain is upgraded, how units change their position and how power is distributed, can only be understood in descriptive fashion (Morrison et al., 2008). Sverisson (2004) points out further that the difference between buyer- and producer-driven chains is sometimes elusive. He also notes that the commodity chains literature exogenises changes in markets, particularly price and innovation, that drive changes to and in the chains. Furthermore, the links between and among chains and the fragmentation of chains related to specialised production functions, such as subcontracting for a Multinational Corporation (MNC), are not well mapped out. Thus, important factors that would help to guide the South towards how to produce more locally are not fully captured in the theoretical framework, particularly notable is the absence of any discussion of state policies to capture elements of the chain. What recommendations are found in this literature are focused on firm activities. Kimura, for example, suggests two possible strategies for late industrialising firms (Kimura, 2007, pp.52–55). The first is what he calls the ‘catch up’ strategy, whereby the company seeks to become a lead firm in the value chain, meaning it must compete with system integrators already in the market. The second is ‘upgrading’ whereby firms seek to capture module components or segments of the production chain and slowly learn how to expand their contribution to other parts of the chain. While the first strategy is more likely to be extremely difficult, the second strategy will also be fraught with potential for failure, as other firms in the chain will be doing the same thing, and the systems integrator will be very careful to isolate and reduce the possibilities for a usurper. Our cases demonstrate by contrast that the conclusion that globalisation leads to a watering down of the importance of national institutions is off-base. In fact, globalisation reinforces the importance of national systems, as only adept state-company alliances can take advantage of new cycles in either products or components. Thus, the locus of the firm is crucial to capturing the externality, linkage and multiplier effects of innovation. Though Embraer is a firm that integrates global components, it is still a distinctly Brazilian firm, capturing the lion’s share of the benefits for Brazil. Learning and risk-taking takes place within firms, and as proprietors of value-creating knowledge, one has to be very sceptical that foreign subsidiaries will pass on innovation capacity to the local environment. Radosevic (1999, pp.242, 243) concludes in his study of technology transfer: “our conclusion only confirms a historical truth…that the most distinctive factor determining the success of technology transfer is the early emergence of an indigenous technological capacity. In the absence of such a capacity, foreign technologies have not usually flourished. As a result of (globalisation)…the linkages within national economies have weakened…however, these processes have not undermined the local and firm-specific nature of technology as the 12 A. Hira et al. main generator of growth. Policy attempts to attract FDI, subcontracting or alliances without local processes of active assimilation cannot generate long-term growth…From this follows our second conclusion that the treatment of technology transfer as an isolated and generic area is fraught with difficulties.” Indeed, seen in this light, the movement towards free trade and investment agreements can be understood as an attempt by the leading technology countries to ‘lock in’ first mover advantages and access for their global corporations, while using their strong institutional and resource advantages to continue to compete through factor productivity and sometimes more subtle means, such as regulation and dumping (Hira, 2003). A 2003 European Commission study estimates that most R&D flows were predominantly within the triad economies as related by Table 1. Table 1 Source and destination of R&D expenditures, triad, 2000 Destination (% of private R&D expenditure) Source USA EU Japan Rest of world US 85.4 11 1.1 EU 8.2 86.2 2.3 3.3 Japan 1.7 0.4 96.4 1.5 2.5 Author calculations from Spithoven and Teirlinck (2005, p.388). Schumpeter’s keen insights in his 2 modes of innovation (1939) help us to understand the micro–macro linkage in terms of the punctuated equilibrium nature of technological cycles. The first mode is through the activities of individual or small enterprises that see an unmet niche or a new opportunity or way of doing things. This is behind our ideal depiction of the garage-level inventor such as Bill Gates, who with little in the way of formal postgraduate education is able to create an empire. Schumpeter’s later work in Capitalism, Socialism, and Democracy (1942) takes a more ominous view in which he suggests that large monopolies or oligopolies in the commanding heights of the economy are able to buy out and choke off entrepreneurial activity, and to dominate government. This would ironically reflect much of the current view of Microsoft’s dominance of software markets today, leading to recent antitrust suits in Europe and the USA against it. The increasing specialisation of knowledge by firms in the manufacturing or service delivery process that has happened over time leads Pavitt to point out that large firms’ innovation activities tend to be path dependent and product specific, not only responding to users’ immediate needs, but also leading to certain ‘rigidities’ (Pavitt, 2005, pp.95, 96, 107). Thus, we should conclude that both of Schumpeter’s models are simultaneously correct – that there is always room for entrepreneurship, at least in terms of the possibility for new firms to find new applications or processes on the basis of ongoing basic research breakthroughs, but that there are monumental barriers to entry in established industries and economies of scale and transactions costs often favour large vertically and horizontally (economies of scope) integrated firms. If we are correct, that explains Microsoft’s stickiness despite losing the innovative edge, and its policy of buying or crowding out competitors. This reinforces further the precept that developing country firms must be at the cutting edge of technology to be able to export globally. Explaining sectoral leapfrogging in countries 13 While these literatures provide important correctives to the false dichotomy of state planning vs. free market reliance, we are still in the dark as to why some late entry firms succeed in some areas of global production at some times and why some fail. In particular, we do not know much about the nature of the public–private partnerships that lead to success. Lacking any clear roadmap, policy-makers move along with a garbage can model of often ad hoc politically oriented solutions. We would like to suggest that grand theorising in terms of technology development is missing both the forest and the trees. We suggest rather that a more complex view of development needs to be considered, one that grapples with contingencies (even luck) and timing. We believe that by matching the macrolessons of East Asia with the microlessons of Vernon’s product cycle and the NIS and business systems literatures along with some creative work we can begin to develop a better theoretical basis for understanding late entry. 7 The importance of sectoral innovation policy The purpose of this study is, therefore, to provide some initial cases to explore the factors behind unusual country successes and failures in particular sectors. In this sense, we follow the lead of Dan Breznitz’s (2007) effort, Innovation and the State: Political Choice and Strategies for Growth in Israel, Taiwan, and Ireland. Breznitz helps to move the literature forward by recognising that the optimal role of the state depends on the sector in question, and that it must also shift over time. He also highlights, building on Evans’ (1995) work, the importance of networks between the state and the private sector (16). We find this approach both sound and promising, however, Breznitz does not offer a clear framework that would inform policymaking. He brings in a number of other actors, such as the need to build relationships with MNCs, including foreign financing (24 & 27), something that goes against our contention that such enterprises are more likely to ‘crowd out’ and constrain rather than aid industry development, especially in the early stages. He suggests that the goal is to try to capture small parts of the supply chain (24), while we feel that moving up the ladder (Chang, 2002) and capturing as much of the commanding heights of the supply chain is the key to prosperity and innovation rents. While we cannot make arguments specific to the IT sector that he studied, and surely it is among the more innovative, fragmented and globalised sectors, we would suggest that his choice of cases does not allow for a proper distillation of the variables. By choosing 3 cases of success in entering IT, he cannot begin to isolate variables that explain success vs. failure, rather his analysis is focused on differences among successful cases. This creates a mismatch between his overall policy lessons and framework in regard to developing high-tech industries and his analysis of the cases themselves. We correct this problem by choosing cases specifically along the lines of successful vs. failing entry into the same markets when the innovation window opens. In short, while Breznitz claims that “the role of the state, in strategically managing technology transfer, while it might prove important in the early stages, is diminishing” (36), we contend the opposite that paradoxically the acceleration of innovation and globalisation has made the role of the state more, not less important. While one must be sympathetic to the contingent nature of every case, we believe that examining the same cases now would reinforce our approach, even in regard to IT. Breznitz’s underestimation of the importance of state leadership and his overestimation of what could be accomplished in entering into multinational product niches are reflected in the new 14 A. Hira et al. success of Taiwanese manufacturers such as Acer, which are on the cutting edge of product innovation, and the relative decline of such companies in Ireland by contrast. While this study focuses on the wireless sector, the analytical framework we construct could be applied to any technologically based sector. We suggest a framework that will encompass several elements from the above-mentioned literature that reflects how developing states can create dynamic comparative advantage, with timing being a primary consideration. We focus on countries that are late entrants, reflecting limited capabilities and home markets, but adequate baseline resources for manufacturing and advance services. These are parts of the global economy that often serve as places for components manufactures of large Northern multinationals, begging the question of why it is so difficult for them to produce their own national champions. 8 Overview of findings from case studies 8.1 Case selection It would be foolish and impossible for us to claim an exact or complete prescriptive theory for state policies for late entry given the dynamic nature of product/processes/industrial organisation, the will to win/leadership, and luck, among the myriad of other factors alluded to above. However, what we hope to do is see if the ability states and national firms have to recognise, adapt to, and take advantage of opportunities as they arise is a factor in terms of successful late entry. We have, therefore, chosen to follow an inductive approach to our case studies, to take into account the idiosyncrasies that may belie a general approach to technological cycles, and in recognition of the limitations of existing theories. We hope that these studies will provide a basis for developing a better theory. Over 2008–2009, we produced case studies of wireless sector development in Finland, Mexico, Brazil, Canada and South Korea based on field research. We focused on cell phone manufacturing because wireless services are a different sector that require fewer start-up costs, less sectoral externalities, including less research and development, and are harder to trace in terms of data and locational capacity. While we can certainly see the value of capturing component manufacturing, the oligopolistic and sticky nature of large Northern multinationals suggests to us that the integrator of the supply chain, whether it is Dell or Wal-mart, is ultimately the strongest and most lucrative position. Moreover, we see in recent history the possibility to study a new product cycle with the rise of cell phones. Thus, our focus is not on predicting the future of the wireless industry, but in using its recent product cycle as a source of general lessons for state–private partnerships in innovation policy. We deliberately selected the cases to contrast the successful cases (Finland and South Korea) with the partially successful one (Canada) and the failures (Mexico and Brazil) to see common patterns emerge that help to explain the outcomes. We selected these cases not only to explore whether and how state-firm relationships can explain different outcomes, but because there was ample documentation of each states’ deliberate attempts to develop wireless manufacturing capability. We believe that a small comparative case study approach makes the most sense in approaching this topic. We are not only able to control for sector, but also take into account the context of each case, Explaining sectoral leapfrogging in countries 15 allowing us to focus on how both state and national firms evolved over time, and recognising as one must, the importance of contingency and circumstance. The co-evolutionary and co- and path-dependent nature of state, firm, and industry and need for luck mean that an exact recipe for success is impossible (Breschi and Malerba, 2005, p.24; Bresnahan et al., 2005, p.121). However, we strove to answer four basic questions in each inductive case study: • Does successful state intervention follow an evolutionary path? Do both the level and role of state intervention change in response to industry needs and market conditions? Is a sustained effort through a learning curve required? • Do states work hand-in-hand with key leading national companies to try to develop sectors, or is it purely a private sector initiative? Does the level of success depend on the timing of entry into a product and innovation cycle that is at a starting phase? Is there evidence of intensive state support in the infant industry stage, and modification throughout the development of the national sector? In general, do the levels of intervention and support decrease over time as the sector/firm evolves? Does intervention rise in response to particular crises? • Do states use a wide variety of tools from setting up an innovation system to cluster-specific activity at the regional and sectoral level to firm-specific policies? Does the particular level of intervention depend on the combination of national, sector, and firm-specific details as well as the level of development of the sector/firm both in the product/innovation cycle and nationally? • Does dominant state intervention, where the state becomes primarily responsible for outcomes, stifle the private sector? On the other hand, does a very passive state presence lead to failure? Since all our cases experienced the same global market product/technological cycle opportunities in the wireless sector, by comparing the relative success of different states that have attempted to enter into the same markets (in this case, the wireless industry), we can help to discern what types of policies and levels of intervention make sense at what stages in the local and global evolution of the sector. While we recognise differences in local conditions require adjustments in policies, we believe that a pattern across the cases of state–private sector relations could give us a clearer idea of what types of policies can work in developing new sectors, niches, or product lines. 8.2 Observations from our case studies There are several factors we considered in each of the case studies, though as stated, we allowed each author the liberty to adapt their study to the context of the case. The first factor is that we need some way to understand how state intervention changes over time, as reflected in the East Asian experience, where countries such as Japan, Korea and Taiwan moved from strong state-private company partnership with sectoral targeting towards a more open, market-oriented economic model over time. The second is that we need to understand why some enterprises in East Asia and elsewhere, such as aerospace in Japan, failed, while other sectors succeeded. In sum, rather than seeing the need for enabling macroeconomic systems and NISs being separate from sectoral and firm success, we see that there are a large number of interstices between the two. Part of the 16 A. Hira et al. state’s job is to figure out which levels of intervention to use at which period of development. Early on, one would expect higher levels of intervention at the micro-level and later, as the sector/firm matures, lower levels. We would also expect that the tools of intervention have to be appropriate for sector/firm development. Some tools may stifle growth and others may be inadequate for what the sector/firm needs at a particular stage. The tools for one sector/firm likely will not be appropriate for others, owing to the differences in nature of the sector/firm. The tools needed to develop a hybrid auto industry will be quite different in both level of intervention and nature from those needed to develop software. Figure 1 summarises some of our case-based observations on what seem to be common stages in the evolution of macro–micro linkages (to be further tested). Figure 1 Convergence of product/innovation cycles, state promotional policies and industry evolution Stage 1: Market Opportunities Match with National Capacities: In this phase, either the state or domestic firms see the possibility of competing in a new market based on national factor conditions. The possibility of competing is a calculated risk, and often fails, e.g., Japan’s aerospace promotion. Risk is reduced when there is a possibility of innovating new products, such as the phenomenal development of Microsoft during the 1980s when operating systems and PCs were new mass products. These openings allow firms to cement their positions and ward off later competitors, raising the barriers to entry over time. Whether national capacities provide a true comparative advantage or not is usually unclear at the outset. With most innovative products, the idea of comparative advantage relying on natural endowments of resources is almost completely irrelevant, as the cases of the East Asian tigers illustrate. In this phase, the state and firms set up some exploratory experiments in product development and in industrial planning, which may include basic research and development investments. Again, this is a calculated risk period as there are more likely to be numerous opportunities available at any given time, thus there may be either small incipient entrepreneurial firms or large firms that see this as a side business that might one day develop. Explaining sectoral leapfrogging in countries 17 Stage 2: Numerous Failures Create a Learning Curve as the Market Develops: In this phase, states provide a caretaker role as domestic firms experiment with intellectual and manufacturing processes; with product and market testing and with developing retail and distribution channels. The state here has to provide an incubatory environment, including protection from foreign competition; direct subsidisation; re-alignment of domestic sectoral and industrial relations, such as allowing for domestic mergers and acquisitions in certain areas; and otherwise promoting domestic consumption rents. This allows firms to further develop the product to the point where production for a mass market with comparative advantages becomes possible. Firms that see encouragement in local markets begin to put more resources into the development of that product. Some firms and policies will obviously fail through poor coordination, inadequate resources or misalignment with market conditions. Stage 3: Export Promotion: In this phase, the state works with firms to increase the size of the market, and capture economies of scale and scope to establish global market presence. The state has an important role in negotiating free trade and investment agreements to ensure access to markets, providing export finance and market intelligence, and otherwise aiding firms to succeed in gradually expanding from domestic to regional to global markets. Firms move to form global production and distribution chains through a variety of mechanisms. At first, they are more likely to be through alliances with existing companies in large overseas markets, but over time as firm capabilities increase, they will need to develop their own intellectual imprimatur to capture the rents at the top of the chain. Firms must do this through developing unique capabilities, such as design breakthroughs (e.g., the ipod), or process innovations (such as amazon.com). Stage 4: Cementing Success and Diversifying as a Global Multinational: In this phase, the state takes a step backwards and focuses instead on maintaining national advantages in the industry. This may take the form of a promotional cluster policy, such as subsidising supporting subcontractors (often in the form of small and medium enterprise programmes), or more indirectly through the promotion of research and development and human capital. Firms in this phase may feel strong magnetism to re-locate large parts of the now more standardised production process to lower labour cost areas, while at the same time hoping to retain national control on the board and research and development and design jobs in house. Firms may also begin to look to expand through horizontal integration into new but related product lines. If the national business system succeeds in developing a new line of production and diversifying the economy, there will be a cascading effect of multitudinous shifts in economic and political relations, reflecting the new systems of production and power in the economy. These shifts will encourage the economy to shift even further in that direction, creating winners and losers among industries and their concomitant labour forces, interest groups and regions. Yet, as markets change, fortunes will as well, thus the role of both states and firms must be seen as attempting to navigate in unknown and unpredictably changing seas. The co-evolution of state, firm and markets, along with innovations in the system itself, such as through the reduction of transaction costs with the development of the internet, mean that a theory has to be grounded in specific national and sectoral contexts in order for lessons (even if accidental in the first instance) to be garnered for future cases. Figure 1 based on the cases suggests that success depends on a needed convergence of policy instruments, product cycle development and national firm responsiveness to 18 A. Hira et al. new opportunities. Thus, it is a mix of timing, evolutionary state policy and evolutionary firm capacity that must work together for success. Figure 2 lays out some examples of the state policies we found at each stage. It is by no means exhaustive; as we said every situation requires different policies. We lay out four levels of policies, from the most macro NIS level to the firm level, again reflecting the need for macro–micro policy consistency. The five stages here shown from left to right (a timeline) reflect the need for continual adjustment as firms and industries mature, as well as anticipating the possibility that efforts could fail along the way. It recognises the general pattern of every country from the USA on that protection is important in the incipient stage of industrialisation, but that regulatory policies aimed at facilitating industries and promoting advantage in factors of production (including human capital) then take over. It recognises that once national industries are leaders, the strategy shifts to locking in ‘fair’ trading rules so that one can then retain global market share. Figure 2 Policy grid for evolutionary stages of state promotion (see online version for colours) Figures 1 and 2 should be seen as working together. They recognise that capturing dynamic comparative advantage is not something that any state can do at any time. We emphasise again that this not a blueprint, but a set of principles from our research that needs further testing. State intervention should not be seen as a smooth, gradual evolution, but rather one that is uneven, flexible and responds to changing political, economic and global sectoral conditions. As Schumpeter notes, “…if innovations are at the root of cyclical fluctuations, these cannot be expected to forma single wavelike movement, because the periods of gestations and of absorption of effects by the economic system will not, in general, be equal for all the innovations that are undertaken at any time. There will be innovations of relatively long span, and along with them others will be undertaken which run their course, on the back of the wave created by the former, in shorter periods. This at once suggests both multiplicity of fluctuations and the kind of interference between them which we are to expect. When a wave of long span is in its prosperity phase, it will be easier for smaller waves- which as a rule, will correspond to less important innovations-to rise… When some innovation has been successfully carried into effect, the next wave is much more likely to start in the same or a neighbouring field than anywhere else.” (Schumpeter, 1939, pp.141, 142) Explaining sectoral leapfrogging in countries 19 To be more precise, Figure 1 posits that there are certain “windows of opportunity” for entering into new markets through the introduction of entirely new products, along the lines of what the innovation literature calls “general-purpose technology” disruptions (Lipsey et al., 2005). As Lundvall notes, from this evolutionary perspective, there is a great deal of uncertainty – some innovations will fail, unanticipated results will accumulate, and innovation may not lead to a commercialisable application, at least not immediately (Lundvall, 1992, p.12). Therefore, it is impossible to identify an optimal firm (or country) long-term strategy in concrete terms (Nelson, 1996, p.113) given ubiquitous contingency. Nonetheless, by recognising the contours of the directionality of development cycles, and the consequences thereof, we can certainly demonstrate that the lack of an enabling environment of innovation in general, as is the case in most developing countries, is surely inhibiting growth and leading to missed opportunities. We identify windows of opportunity for technological innovation through the incipient introduction of new products and appropriate types of state support at key periods of evolutionary development in the wireless sector. Given that we are examining differing state responses to just one window, namely the introduction of cell phones, we cannot offer further insights into the timing of when windows open or close, however this should be a subject for further studies. Still, we can suggest from our cases that there is both a global and domestic component to these windows. The introduction of new products and processes are the brief openings in product and innovation cycles that represent opportunities. However, there must be adequate preconditions before a state can take advantage of them. Haiti, with few engineers, does not have the preconditions to enter into computer software. But, India did. On the other hand, simply having preconditions is not enough. Argentina has many of the preconditions for developing software, yet it is not a global competitor. Similarly, Mexico has long had labour-intensive segments of the auto industry, yet has been notably unable to move up the value-added chain in terms of capturing other parts of the production chain. Part of the failure in both cases, as in the case of India for decades up to the 1990s, is that state-developed knowledge alone is insufficient – firms need to develop application-specific technologies, particularly among latecomers to an industry or technology. Developing countries also need to develop access points to large Northern markets or create products that are under-served by Northern competitors (Bresnahan et al., 2005, pp.122, 126). What we suggest in the rest of Figure 2 is that state intervention in a strategic and evolutionary fashion in partnership with a latently potentialised private sector is what gives the possibility, but not the guarantee, of entry into new competitive markets. We wish to emphasise that both states and companies can fail in this process, as Japan has in aerospace repeatedly. It would not make sense to try to map out the reasons for failure, as there are innumerable sources of firm, state and timing failure. However, we suggest that our evolutionary framework does help to explain many of the successes in how states enter into new markets. In terms of timing and policy, our framework highlights the importance of establishing ‘lead firms’ for new products and processes in a home country. When local firms can establish themselves early in the product cycle, they can locate crucial ‘gatekeeper’ functions in a global production chain in the home country (such as operating software). While we agree with other analysts that keeping complete vertical integration of a sector within a nation is unrealistic in a global age (Sabel and Saxenian, 2008), we do not agree with claims of ‘flatness’ in innovation (Friedman, 2005). The challenge of establishing global production chains means that small firms, 20 A. Hira et al. even a cluster of small firms, are unlikely to be able to capture this function (Eraydin, 2005, pp.75, 82), in the absence of a large company anchor. This gives the initial application of the innovation a head start over potential competitors in several key aspects (Beise, 2001, pp.3, 86–108). There are obvious benefits in terms of testing products and processes against demanding customers. These will translate into proprietary advantages in both price and quality, essentially allowing for a domestic learning curve, preceding global competition. This will lead to an ability to accumulate factors and basic and specific research and knowledge clusters around the product/process, as well as early market monopoly/oligopoly rents following the product cycle. The head start will also help enormously in understanding the contours and possibilities for potential markets through responding to customer demands and developing and maintaining marketing outlets and strong brand recognition closely identified as the standard for the new product (such as the ipod). The leading firm/market will also have a strong hand in developing technical, product, and other standards for the product, reflecting local knowledge and development, a significant advantage. As the lead market provides a testing ground, it will also lead to the early accumulation of economies of scale, know-how, complementary activities, products and services, alignment with the sectoral and NIS, and offer a demonstration effect for the mushrooming to other markets. In short, being in the lead provides an incalculable advantage on a number of fronts, from risk and uncertainty reduction to early agglomeration and development with minimal competition. Being in the lead may be the best strategy for global product success and staying on the fat side of the product cycle. Of course, this depends on whether the product succeeds or not. There are many cases such as Sony’s beta video recording technology that are superior but fail. As in that case, it is hard to see where one firm or country could be fully independently in the lead in new product development. The cases thus suggest a trajectory for state policy as reflected heuristically in Figure 3. Our study suggests that in successful cases, pro-active state policies nurtured nascent companies before the technological window opens, then ramped up intervention during the window itself with emphasis on domestic markets (in this case the early 1990s), switch to a more export-oriented stance, and then ramp down upon success. Timing is crucial to understanding the window in the case of the introduction of cell phones as a mass product. The deregulation of telecoms markets as symbolised by the breakup of telephone monopolies around the globe, principally from the late 1980s, in combination with its early lead in the technology help to explain Finnish leadership-timing was everything in this case. It is interesting to further note that in the cases of both Korea and Finland, policies were adopted during a period of crisis and with military support, however we should be cautious about concluding that a crisis is necessary for pro-active state policies. Crises were also experienced by Mexico and Brazil with both cases ending in failure, and Alberta has had mixed success following a crisis related to the need to diversify away from petroleum. We match this general sense of state trajectory of the cases against the timing of technological breakthroughs as discussed in Section 2. We can see that the end of the product cycle for line-based telephones is continuing to slowly phase out as wireless technologies improve. The current movement, obviously anticipatory, is towards an iphone type device where a convergence of applications including internet access are accessible through the former cell phone. Leadership in cell phones gives countries/firms a head start, but in no way Explaining sectoral leapfrogging in countries 21 guarantees that firms such as Nokia will be able to compete with sectoral newcomer Apple, but it does give it a considerable head start over new entrants. Table 2 summarises the empirical findings of our cases. We see that the timing and adaptability of state policies help to explain the outcomes of each case. Table 2 Timing and outcomes of state policies in cell phone manufacturing 22 Figure 3 A. Hira et al. Rise and decline of state intervention-timing suggested by wireless industry cases This table summarises some interesting findings from our study. First, that state ownership does not seem to lead to good outcomes. Second, that timing is extremely important. In the two cases of success, efforts at technology and management development began well before the market for cell phones arose. In both cases, direct state subventions and support were key. In the two cases of failure, the state’s inability or unwillingness to develop the technology and support domestic champions through pro-active policies led to an arrested development of the national sector. Then, the possibilities for developing incipient firms were negated when liberalisation of the sector led to domination by foreign entrants, in the case of Brazil, taking away for minimal cost the native technology painstakingly developed through the state–private sector partnership. Capacity has developed in the area exclusively of service provision, where the sector initially favoured national firms through the privatisation process. Ironically, the initial monopolistic position offered to Mexican América Móvil in service provision has led to it becoming a regionally dominant company. The end result is that the window has probably closed for both countries to enter into cell phone manufacturing in any part of the value-added range of the supply chain, and with it, the possibilities for developing with any facility the next generation of technology. Our cases confirm the applicability of the evolutionary view of state-firm relationships in late developers, though obviously more cases and more sectors would help us to further elucidate and develop a more useful framework. In contrast to the prevailing economic paradigm that good governance entails minimal state intervention, essentially casting the state as a caretaker for regulating the market (Sabel and Saxenian, 2008, p.19), the successful cases of Finland and South Korea point to the need for state intervention to succeed, and that the nature of that intervention must evolve over time. For example, we see that the nature of finance tends to be tightly conditional by state institutions in the incipient period of the industry, but that control must dissipate over time, or lead to rebellion by private industry once the sector starts to take off. Explaining sectoral leapfrogging in countries 23 The Mexican case further confirms that state domination of an innovative sector can create white elephants, which turn more to rent-seeking than productivity building and export development. The case of Brazil shows that when the state abandons support mechanisms too quickly, local industry can collapse. Moreover, in contradiction to Breznitz, we find that a reliance on MNCs as a vehicle for sectoral growth is a disastrous policy choice. Meanwhile, the case of Alberta, Canada, suggests that even if the state fails in its promotional policies, there is still a chance for component or niche production to take hold of the initial efforts. In cases where there is limited support or capabilities or the window has been missed, it might make sense to see such outcomes as optimal for late or limited entrants. One thing we had not expected to find, but which deserves further scrutiny, is the importance of informal networks and a shared sense of purpose between the state and private capital. In the success cases of Finland and South Korea, the public–private networks were extensive, and both formal and informal. More notable still is a strong sense of national purpose, the need to rally together in the context of a major crisis. These factors seem more important than egalitarianism or attention to social welfare, since if one takes the Canadian case into account, it was distrust between public and private partnerships and the lack of a long-term state strategy that really distinguishes it from success. In Brazil and Mexico, we do not detect either cooperative state–private partnerships or a shared sense of national purpose. Our success stories also point to another cautionary note, one that reinforces rather than contradicts our framework, and one that could apply to any sector. Even after success, the evolutionary dynamism of both the state and the firm must continue. The challenges for Nokia and the Finnish state require a continual reinvention amidst new challenges, such as developing global production platforms and reckoning with converging applications, thus success is fleeting, following the sectoral innovation cycles of Figure 1. Success in a global production system may amount to ‘compressed development’, i.e., intensive innovation efforts required to capture the production of segments or components of sectors. In other words, a strategy to break into sections of global value chains rather than the full chain itself (Zhu et al., 2010), but such segmentation does not in any way contradict the crucial evolutionary state-firm relationship we expose here. 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