Innovation dynamics of industry

Industrialization has never been easy is an extraordinarily understatement. All successful late industrializing countries have had the benefit either of a large and rapidly expanding local market or of infant industry protection and usually both. But late industrial entrepreneurs have tended to grow up relatively quickly in comparison to earlier ones, at least in some key sectors. It is not clear as to how long the protection period for infant industry should be. Protection requires to be integrated into a coherent industrial policy. There are indeed many cases where protection has not had any noticeable innovation or investment enhancing effect. This reflects the failure to integrate protection with a wider industrial policy, or link it to export performance, or make the quid pro quo conditions credible, or to maintain macroeconomic stability. If protected producers know that in the foreseeable future protection will be much reduced. There may be pressure by the respective governments to enter export markets to avail protection which may give them breathing space in to undertake the necessary investment and innovation.

Import protection is, as neoclassical theory says, a powerful tool. Like any powerful tool it can be badly used producing a trade regime full of inconsistencies.

The East Asian evidence suggests that protection can also be used in combination with other measures to foster the creation of internationally competitive industries.

Thus infant industry establishment is more than import-substituting industrialization since the aim is the establishment of internationally competitive industries, not the substitution of local for foreign production.

Export orientation is also associated with state-led policies to strengthen industrial development. Exporting has several benefits for firms. Competing with international best practices, firms are forced to provide value for money. Serving larger markets allows firms to operate at international scale. The key benefit for East Asian firms was learning by exporting. Selling in export markets was a disciplining tool that focused local technological effort on making firms internally efficient and pushing them up the product value-chain as local wages rose.

Follower firms in follower countries were able to learn how to build capabilities for innovation that allowed significant industrialization.

The earliest, technology-push, made R&D the starting point, the resulting idea gradually becoming marketable innovations in firms with heyday in the 1950s and 1960s. Then, market pull theory, from the 60s and 70s, emphasized the key role of markets in pulling innovations. Both ‘models’ are firmly within the linear model school which held sway in policy circles until the 1980s and beyond.

Integrated’ models which modeled the parallel development of product development teams and linkage with users, and finally, ‘systems integration and networking’ models (post 1990). All three latter models take account of complexity,

Important for the focus of this however is that none of these ‘models’ attempt to deal with the issue of latecomer catch up from behind the technology frontier.

The five models do not integrate any empirical evidence from follower-firms, rather taking their lead from big R&D-rich firms with formal R&D units, in countries with massive science and technology infrastructure, using the concept of ‘innovate’ to mean first in the world.

Investment in science is done in the hope of eventual application. More recently, they have, to some extent, taken account of complexity, systemic and networks approaches in some circumstances, such as in cluster strategies. But such changes have taken place only very recently.

Countries are fundamentally different from that of developing countries. Others have taken up these new ideas. The argument appears to hold best for the NICs of East and SE Asia and for the more industrially advanced LDCs such as India and Brazil, maybe even Russia and East and Central Europe, there are examples of interesting firm level innovation dynamics everywhere.