World Development, Vol. 20, No. 2, pp. 165-186,1992. 0305-750X/92 $5.00 + 0.

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Printed in Great Britain. 0 1992 Pergamon Press plc

Technological Capabilities and Industrialization

SANJAYA LALL*
Institute of Economics and Statistics, Oxford

Summary.- This paper reviews the implications for industrial strategy of recent research on
technological capabilities at the firm and national levels. After exploring the nature and
determinants of microlevel technological development, a simple framework for explaining the
growth of national capabilities is set out, based on the interplay of incentives, capabilities and
institutions. Each may suffer market failure and so require corrective intervention. The
experience of some industrializing countries is described to assess the validity of this framework.
It is concluded that interventions, carefully and selectively applied, are necessary for industrial
success.

1. INTRODUCTION tions (since the only admissible countrywise

differences in theory are capital/labor ratios,
This paper is a review of the nature of adaptations are necessarily restricted to move-
technological activity in developing countries and ments along the function). Innovative activity is
the case for government interventions to streng- an investment in something unrelated to produc-
then technological, and, through it, industrial tion. In theoretical modeling, such investment is
development. Much of the traditional literature, guided by a known innovation possibility fron-
theoretical and empirical, has neglected the need tier, with marginal returns equalized with other
for, and production of, technological activity in returns (Nelson, 1981). In the developing coun-
developing countries. Simple neoclassical writing try context, it is assumed that major innovations
assumes the problem away. In the highly simpli- all occur in the advanced industrial countries.
fied models used in trade theory, for instance, Developing countries select and costlessly apply
technology is taken to be freely available to all those innovations that are useful or appropriate.
countries and, within countries, to all firms. As the general level of capital accumulation (and
Countries simply settle on appropriate level of skills) rises, more capital-intensive (or complex)
capital/labor intensity in accordance to their technologies become economical - these are
factor price ratios, determined by their relative also bought from the international technology
endowments of physical capital and labor. Firms shelf.
in a given industry are all on the same production The general thrust of conventional approaches
function and select their techniques with refer- is to minimize, not just the role of technological
ence to relative factor price ratio, shifting cost- activity in developing countries, but also the need
lessly along the function as this ratio changes. To for policies to support, protect and induce such
the extent that technological lags are admitted, activity (Pack and Westphal, 1986). What are
developing countries are taken to receive all now termed “neoclassical approaches” to de-
relevant improvements from developed country velopment (associated with Balassa, Krueger and
innovators: there is no problem in assimilating others) tend to confine themselves to prescrip-
the transferred technology in the developing
country; there are no adaptations required, since
alternatives are available for all factor prices; all
firms remain equally efficient; firm-specific *The ideas contained in this paper have evolved over
learning or technical effort are unnecessary and an extended period and have benefited from discus-
sions with numerous people. I would like to thank, in
irrelevant; and so on (Nelson, 1987).
particular, Carl Dahlman, Ashoka Mody, Henry
These traditional approaches to technology Ergas, Farrokh Najmabadi, Ganesh Wignaraja and
also assume that innovation (movements of the Simon Teitel. Two anonymous referees made very
production function rather than along it) is a useful suggestions, for which I am grateful. The
completely distinct activity from gaining mastery responsibility for the paper, of course, is ultimately
of technology or adapting it to different condi- mine.

165
166 WORLD DEVELOPMENT

tions such as “get prices right,” “reduce or Technological knowledge is not shared equally
eliminate protection” or “free international flows among firms, nor is it easily imitated by or
of capital and technology” and cut back on transferred across firms. Transfer necessarily
government intervention in industrial activity. requires learning because technologies are tacit,
Where more moderate neoclassicals admit the and their underlying principles are not always
need for interventions in industry, they favor clearly understood. Thus, simply to gain mastery
neutral (or “functional”) rather than selective of a new technology requires skills, effort and
interventions (i.e., those that support the func- investment by the receiving firm, and the extent
tioning of markets, such as education or research of mastery achieved is uncertain and necessarily
and development, rather than those that promote varies by firm according to these inputs. Further-
some industries or technologies over others). more, firms have more knowledge of their “own”
These approaches disregard the peculiar nature technology, less about similar technologies of
and costs of technological learning in specific other firms and very little about dissimilar alter-
activities, the externalities it generates and the natives, even in the same industry. They operate,
complementarities it enjoys, which may lead to in other words, not on a production function but
market failures and may call for a more selective at a point, and their technical progress, building
approach to policy than conventional theory upon their own efforts, experience and skills, is
admits (Lall, 1991). Yet selective interventions (to varying degrees) “localized” around that
can be justified within the neoclassical frame- point (Atkinson and Stiglitz, 1969). The extent to
work if such sources of market failure are taken which firm-level differences in technological
into account. effort and mastery occur may vary by industry,
In contrast to the analyses just mentioned, a by size of firm or market,. by level of develop-
number of “unconventional” approaches to the ment or by trade/industrial strategies pursued.
issues of technology in developing countries have There is little doubt that as a description of
appeared in the past decade. These have assigned reality, in developed or less developed countries,
a central role to indigenous technological effort the evolutionary approach is far more plausible
in mastering new technologies, adapting them to than the production function approach. As Dosi
local conditions, improving upon them, diffusing (1988) puts it, evolutionary theories can explain
them within the economy and exploiting them the “permanent existence of asymmetries among
overseas by manufactured export growth and firms, in terms of their process technologies and
diversification and by exporting technologies quality of output” (p. 1155). Scale economies and
themselves. They can be framed in neoclassical vintage differences in capital goods explain part
terms but their emphasis is often on the reasons of this asymmetry, but they “are also the
that markets are not efficient. This paper pro- different innovative capabilities, that is, different
vides a brief review of these approaches. It draws degrees of technology accumulation and different
out the industrial policy implications that arise efficiencies in the innovative search process” (p.
from the specific characteristics of technological 1156). Once firm-level technological change is
development, and illustrates their relevance with understood as a continuous process to absorb or
reference to the experience of the newly indus- create technical knowledge, determined partly by
trializing countries (NICs) of East Asia and external inputs and partly by past accumulation
other, less spectacularly successful countries. of skills and knowledge, it is evident that “in-
Section 2 deals with firm-level technology, Sec- novation” can be defined much more broadly to
tion 3 with national capabilities and Section 4 cover all types of search and improvement effort.
with the experience of selected developing coun- From the firm’s point of view, there is little
tries. Section 5 draws some conclusions and difference in essence between efforts to improve
policy implications. technological mastery, to adapt technology to
new conditions, to improve it slightly or to
improve it very significantly - though in terms of
2. FIRM-LEVEL TECHNOLOGICAL detailed strategies, degrees of risk and potential
CAPABILITIES (FTC) rewards these efforts will certainly be different.
There are various ways to categorize firm-level
The microlevel analysis of technology in de- technological capabilities (FTC). Drawing upon
veloping countries has drawn inspiration from Katz (1984, 1987), Dahlman, Ross-Larson and
the “evolutionary theories” developed by Nelson Westphal (1987) and La11 (1987)) Table 1 shows
and Winter (1982), and explained in Nelson an illustrative matrix of the major technical func-
(1981, 1987) and Dosi (1988). The starting point tions involved. The columns set out the major
of these theories is that firms cannot be taken to FI’Cs by function, the rows by degree of com-
operate on a common production function. plexity or difficulty, as measured by the sort of
 Table 1. Illustrative matrix of technological capabilities

FUNCTIONAL
INVESTMENT PRODUCTION
LINKAGES
PRE PROJECT PROCESS PRODUCT INDUSTRIAL WITHIN
INVESTMENT EXECUTION ENGINEERING ENGINEERING ENGINEERING ECONOMY

B SIMPLE, Prefeasibility and Civil construction, Debugging, Assimilation of Work flow, Local procurement
A
D ROUTINE feasibility studies, ancillary services, balancing, quality product design, scheduling, time- of goods and
s
E I (Experience site selection, equipment control preventive minor adaptation motion studies. services,
G
C based) scheduling of erection, maintenance, to market needs Inventory control information
R
investment commissioning assimilation of exchange with
process technology suppliers
ADAPTIVE Search for Equipment Equipment Product quality Monitoring Technology transfer
DUPLICATIVE technology source. procurement, stretching, process improvement, productivity, of local suppliers,
(Search based) Negotiation of detailed adaptation and cost licensing and improved coordinated design,
c
0
z contracts. engineering, saving, licensing assimilating new coordination S&T links
M D Bargaining training and new technology imported product
P A recruitment of technology
L
suitable terms.
Info. systems skilled personnel
E F
’I A INNOVATIVE Basic process In-house process In-house product Turnkey capability,
N
T
C
RISKY design. Equipment innovation, basic innovation, basic cooperative R&D,
Y E (Research based) design and supply research research licensing own
D technology to others
168 WORLD DEVELOPMENT

activity from which the capability arises. The ment selected, and the understanding gained by
categorization is necessarily indicative, since it the operating firm of the basic technologies
may be difficult to judge a priori whether a involved (which, in turn, affect the efficiency
particular function is simple or complex (Teitel, with which it later operates the facility). Produc-
1984). Nor is it meant to show a necessary tion capabilities range from basic skills such as
sequence of learning, though the very nature of quality control, operation, and maintenance, to
technological learning (i.e., accumulated experi- more advanced ones such as adaptation, im-
ence of problem solving, aided by external inputs provement or equipment “stretching,” to the
or formal research effort) would seem to dictate most demanding ones of research, design, and
that mastery would proceed from simpler to innovation. They cover both process and product
more difficult activities, different firms and technologies as well as the monitoring and
different technologies adopt different sequences. control functions included under industrial en-
This sequence would depend on various factors, gineering. The skills involved determine not only
described below. how well given technologies are operated and
The functions set out in Table 1 may not be improved, but also how well in-house efforts are
exhaustive, and not all of them have to be utilized to absorb technologies bought or imita-
performed for every industrial venture. Even ted from other firms (on the significance of
where they are performed, moreover, not all research and development for assimilating exter-
need be undertaken by the firm itself - several nal innovations see Cohen and Levinthal, 1989).
specialized services can be brought in from Linkage capabilities are the skills needed to
(domestic or foreign) contractors, consultants or transmit information, skills and technology to,
other manufacturing firms. Yet there is a basic and receive them from, component or raw
core of functions in each major category that material suppliers, subcontractors, consultants,
have to be internalized by the firm to ensure service firms, and technology institutions. Such
successful commercial operation. If a firm is linkages affect not only the productive efficiency
unable by itself to decide on its investment plans of the enterprise (allowing it to specialize more
or selection of equipment processes, or to reach fully) but also the diffusion of technology
minimum levels of operating efficiency, quality through the economy and the deepening of the
control, equipment maintenance or cost im- industrial structure, both essential to industrial
provement, or to adapt its product designs to development. The significance of extramarket
changing market conditions, or to establish linkages in promoting productivity increase is
effective linkages with reliable suppliers, it is well recognized in the literature on developed
unlikely to be able to compete effectively in open countries. (For references see the survey by
markets. Moreover, the basic core must grow Cohen and Levitt, 1989, and for an empirical test,
over time as the firm undertakes more complex Cohen and Levinthal, 1989. The last chapter of
tasks. The ability to identify a firm’s scope for Lall, 1985, develops and applies the linkage
efficient specialization in technological activities, concept in a development setting.)
to extend and deepen these with experience and The emerging empirical literature of FTC in
effort, and to draw selectively on others to developing countries (apart from the references
complement its own capabilities, is the hallmark above, see Dahlman and Westphal, 1982; Enos,
of a “technologically mature” firm. Before full forthcoming; Fransman, 1986; Herbert-Copley,
“maturity” is achieved, firms will vary in their 1990; Rath, 1990; Teitel, 1984; Vernon, 1989;
mastery of the various functions involved. While Westphal, 1982) has touched on various aspects
this is true of any economy, it is likely that the of the development of FTCs. These need not be
typical firm in developing countries, with de- reviewed at any length here, but it is worth
ficiencies in skills and limited experience of noting the main influences on the demand for
manufacturing, will use the same technology less and supply of FI’Cs. On the demand for efforts to
efficiently than its counterpart in developed built FIG, the most important factors are
countries. Scattered evidence confirms that this is threefold. First, there is an inherent need for the
in fact that case, and that such differences also development of new skills and information sim-
exist between more and less advanced developing ply to get a new technology into production. This
countries (Pack, 1988). necessity operates regardless of policy regime
Znvestment capabilities are the skills needed to and provides the elemental drive for firms to
identify, prepare, obtain technology for, design, invest in capability building; the form that capa-
construct, equip, staff, and commission a new bility building takes depends on the nature of the
facility (or expansion). They determine the technology (process or batch, simple or complex,
capital costs of the project, the appropriateness large to small scale).
of the scale, product mix, technology and equip- Second, apart from this inherent pressure for
 TECHNOLOGICAL CAPABILITIES 169

capability acquisition, external factors strongly level differences in FTC development and to
influence the process. As with any investment “idiosyncratic” results) and those that are com-
decision, the macroeconomic environment, com- mon to given countries (depending on their
petitive pressures, and the trade regime all affect policy regimes, skill endowments and institutio-
the perceived returns to FTC development nal structures). It is these common factors to
efforts. A stable, high-growth environment is which we now turn.
conducive to higher investments in FTC. So is
competition, with international competition
probably the most potent inducement to skill and 3. NATIONAL TECHNOLOGICAL
technology upgrading. Competition is, however, CAPABILITIES (NTC)
a double-edged sword, and given the necessary
costs of learning, can stifle capability building in Let us now consider national technological
newcomers when certain market failures exist. capabilities (NTC) in developing countries.
This type of “infant industry” argument is taken National capabilities are not simply the sum of
up in the next section. Trade orientation also thousands of individual firm-level capabilities
affects the content and pace of FTC develop- developed in isolation. Because of externalities
ment. The evidence (see Lall, 1987; Amsden, and interlinkages, there is likely to be synergy
1989; Kim, 1988) suggests that inward-oriented between individual FTCs. Despite individual
regimes foster learning to “make do” with local idiosyncrasies, there is a common element of
materials, “stretch” available equipment, and response of firms to the policy, market and
down-scale plants, while export-oriented regimes institutional framework. It makes sense, in other
foster efforts to reduce production costs, raise words, to conceive of national differences in
quality, introduce new products for world mar- technological capabilities. Clearly, countries -
kets and often reduce dependence on (expensive) developing or developed - differ in their ability
imported technology. to utilize or innovate technologies, which mani-
Third, technological change itself, which pro- fests itself in their productivity, growth or trade
ceeds continuously in almost all industries in the performance. There is little by way of theory
developed world, stimulates developing country which brings together all the factors that may
firms to try to keep up. Exposure to competition influence these variables (see OECD, 1987;
mediates this incentive, and highly protected Ergas, 1984, 1986; OTA, 1990; and Fagerberg,
firms can delay their upgrading for long periods. 1987, 1988). The analysis of NTC is nevertheless
Nevertheless, the existence and potential avail- important because of the current dominance of
ability of more efficient technologies can create some partial explanations of industrial success,
their own incentives to invest in FTC. which may lead to misleading policy conclusions
On the suppry side, the ability of firms to (Lall, 1990, 1991). In particular, it is necessary to
produce new capabilities depends on: the size of look again at approaches that, as mentioned in
firm (where technologies are complex and call for the introduction, trace success to “getting prices
large-scale production, large amounts of skilled right” and noninterventionist strategies, treating
labor or intense technological effort and particu- them as both necessary and sufficient conditions.
larly where capital markets are deficient); access These approaches are based on particular read-
to skills from the market; organizational and ings of technological capability and the efficiency
managerial skills in the firm and its ability to of markets in developing countries. This section
change structures to absorb new methods and analyzes their validity.
technologies (Hoffman, 1989; Katz, 1987); access The OECD explains long-term differences in
to external technical information and support the performance of advanced industrial econo-
(from foreign technology sources, local firms and mies thus: “Over the longer term, economic
consultants, and the technology infrastructure of growth arises from the interplay of incentives and
laboratories, testing facilities, standards institu- capabilities. The capabilities define the best that
tions and so on); and access to appropriate can be achieved; while the incentives guide the
“embodied” technology, in the form of capital use of the capabilities and, indeed stimulate their
goods, from the best available sources, domestic expansion, renewal or disappearance. In the
or foreign. advanced economies, the capabilities refer pri-
In sum, FTC development is the outcome of marily to the supplies of human capital, of
investments undertaken by the firm in response savings and of the existing capital stock, as well
to external and internal stimuli, and in inter- as to the technical and organizational skills
action with other economic agents, both private required for their use; the incentives originate
and public, local and foreign. Thus, there are largely in product markets and are then more or
factors that are firm-specific (leading to micro- less reflected in markets for factor supplies -
170 WORLD DEVELOPMENT

thereby determining the efficiency with which the curriculum to changing technical needs, are
capabilities are used. Both incentives and capabi- clearly very important. To the extent that public
lities operate within an institutional framework: or private training facilities do not meet the need
institutions set rules of the game, as well as for such skills, firms have to invest in their own
directly intervening in the play; they act to alter training facilities, but will do so only if mobility is
capabilities and change incentives; and they can low and their investments yield appropriate
modify behaviour by changing attitudes and benefits (King, 1984); low mobility thus has this
expectations” (OECD, 1987, p. 18). This three- benefit, but is offset by the restraint it places on
pronged approach, involving the interplay of the diffusion of knowledge. Ergas (1984) and
capabilities, incentives and institutions, is a OECD (1987) outline the very different systems
useful way of organizing the numerous factors dealing with these problems in the United States,
that influence NTC in developing countries (see Germany and Japan, each with its own strengths
Lall, 1990 for a more detailed exposition). and weaknesses.
The final capability relates to national tech-
nological effort. Trained labor and physical
(a) Capabilities capital are only fully productive when combined
with efforts by productive enterprises to assimi-
At the country level, capabilities can be late and improve upon the relevant technology.
grouped under three broad headings: physical As discussed earlier, such effort comprises a
investment, human capital and technological broad spectrum of production, design and re-
effort. These three are strongly interlinked in search work with firms, backed up by a techno-
ways that make it difficult to identify their logical infrastructure that provides information,
separate contributions to national performance standards, basic scientific knowledge and various
(Nelson, 1981), but they do not always go facilities too large to be owned by private firms.
together. If physical capital is accumulated with- It is impossible to measure properly such tech-
out the skills or technology needed to operate it nological effort, but rough proxies are available
efficiently, NTC will not develop adequately; or in the form of technical personnel available for
if formal skills are created but not combined with technical tasks, or expenditures on formal re-
technological effort, efficiency will not increase search and development (input measures), or
dynamically (see Romer, 1990, for a theoretical innovations, patents and other indicators of
analysis). Physical investment is in some sense a technological success (output measures). The
“basic” capability, in that plant and equipment interpretation of all such measures is fraught with
are clearly necessary for industry to exist, but it is difficulties (Cohen and Levin, 1989), since not all
the efficiency with which capital is utilized that is effort is equally efficiently made, and no measure
of greater interest. The ability to muster the captures fully the routine engineering work
financial resources and the embodied technology devoted to minor innovation or mastery. Never-
that make up physical investment (and the need theless, it is evident that different countries
for an efficient financial system to support this) devote different levels of effort to technology (on
need not be spelled out at any length in this developed countries see OECD, 1987; Ergas,
paper. 1984; OTA, 1990; Dertouzos, Lester and Solow,
The term human capital is used broadly here to 1989. On developing countries see Teitel, 1987;
include not just the skills generated by formal Lall, 1990; IDB, 1988). Even a crude measure is
education and training, but also those created by of some use.
on-the-job training and experience of technologi- Apart from domestic technological effort, the
cal activity, and the legacy of inherited skills, extent and nature of a country’s reliance on
attitudes and abilities that aid industrial develop- foreign technology is also directly relevant to
ment. Literacy and primary education are essen- NTC. All countries need to import technology,
tial for all forms of efficient industrialization, and but different modes of import have different
may be largely sufficient for early industrial impacts on local technological development. In
efforts utilizing simple technologies (McMahon, semi-industrial countries, for instance, a heavy
1987). As more sophisticated technologies are reliance on foreign direct investment (FDI) may
adopted, however, the need for more advanced, become a substitute for domestic effort at the
specialized skills on the part of both workforce “advanced” levels shown in Table 1, because FDI
and managers emerges (Teitel, 1982). Moreover, is an efficient means to transfer the results of
the gap between the workforce and engineers has innovation rather than the innovative process
to be reduced to facilitate skill transfer (Mody, itself. The alternative strategy, ri la Japan, of
1989a). The quality of formal education, espe- building a strong domestic technological base
cially of technical training, and the relevance of may therefore entail a selective curtailment of
 TECHNOLOGICAL CAPABILITIES 171

FDI entry, at least at certain stages of the prop up unviable enterprises that should die out
development process (see below). (see World Bank, 1989, for a brief review of the
most common types of competition-retarding
policies).
(b) Incentives International competition from imports, entry
of foreign investors or export activity can be an
While both physical and human capital are even greater stimulant to healthy technological
necessary for industrial development, they will development than domestic competition, in small
not be utilized effectively if the structure of or large countries (size of economy does not
incentives for investment and production is affect whether enterprises in the country are
inappropriate. Incentives, arising from market exposed to such competition). Yet governments
forces, institutional functioning and government place many barriers to such competition, often in
policies, affect the pace of accumulation of a sweeping, irrational and prolonged way that
capital and skills; the types of capital purchased retards technological development, efficiency,
and the kinds of skills learned; and the extent to export growth and structural change. The recent
which existing endowments are exploited in development literature has analyzed the costs of
production. In most developing countries, the inward-oriented trade strategies at great length
role of policies assumes great importance, in both (for a useful review, see the World Bank, 1987b).
positive and negative ways: positive because Most of the conventional arguments are not
structural and market failures call for remedial couched in terms of the impact of trade strategies
action, negative because interventions can be on technological capabilities, but the implicit
excessive or misjudged, and even justifiable assumptions made about technological capability
interventions can be poorly administered. (TC) development are very relevant to the issue.
Three broad sets of incentives affect the The debate over intervention in trade flows is
development of NTC: of long standing (Bhagwati, 1989, has a lucid
review). While acknowledging the benefits of
(i) Macroeconomic incentives market competition, economic theory accepts
Under this heading, we include signals that that interventions in the incentive framework of
emanate from GNP growth (rate and stability), free trade in the form of infant industry protec-
price changes, interest rates, exchange rates, tion or promotion are needed to overcome many
credit and foreign exchange availability and (but not all) market failures affecting resource
similar economic variables, as well as political allocation (Westphal, 1982, 1990; Pack and
stability or exogenous shocks (e.g., terms of Westphal, 1986; Lall, 1990). It is important to be
trade). The impact of growth, stability, sensible clear about the correct case for such intervention.
balance-of-payments, monetary or fiscal policies, Some arguments for protection are misplaced: if
favorable external circumstances, etc. on invest- the source of market failure lies outside the firm,
ment and capability building are obvious and (e.g., lack of skills, infrastructure, institutions)
need not be discussed in detail here. intervention to protect the firm will do nothing to
ensure that costs come down over time. To the
(ii) Incentives from competition extent, however, that failures arise from the
Competition is, as discussed earlier, the most firm’s own lack of investment in capability
basic of incentives affecting capability develop- building, due to externalities (loss of skills or
ment. Domestic competition is influenced by the technology, or interdependencies between firms;
size of the industrial sector, its level of develop- Pack and Westphal, 1986), risk aversion, or lack
ment and diversification, and government poli- of information (due to missing information mar-
cies on firm entry, exit, expansion, prices, owner- kets or “learning to learn” phenomena; Stiglitz,
ship, small-scale industry and so on. Most de- 1987), intervention may have a justifiable role to
veloping countries impose constraints on internal play in restoring efficient resource allocation.
competition, to prevent excessive entry (and thus The intervention may not necessarily take the
fragmentation) in protected markets, to preserve form of import protection. Theory suggests that
employment, to promote small firms or public subsidies are preferable because they involve
enterprises, to hold down prices, to force indus- lower consumption costs than import restrictions.
try to locate in backward areas, or to prevent the But protection is easier (and cheaper) for the
growth of large firms or the concentration of government to administer, and historic evidence
economic power. Some industrial regulation is suggests that tariffs have been used by every
clearly necessary in every economy, but high developed country in critical stages of industrial-
levels of intervention can frustrate or dissipate ization (Vernon, 1989). While protection has
the development of healthy capabilities, and often been misused, as the trade strategy debate
172 WORLD DEVELOPMENT

shows, it has also accompanied entry into diffi- workers) and to remedy the failures directly by
cult and complex activities with high learning providing finance (loans, venture capital financ-
costs. In fact, the existence of such costs in ing, R&D subsidies, etc.) to firms or activities
developing countries (with imperfect capital and where social returns exceed private returns. Such
information markets and strong linkages and interventions are often regarded as functional
externalities) suggests that protection is a neces- rather than selective, and so are considered with
sary condition for development beyond techno- greater favor by those who mistrust selectivity
logically simple activities. It may not usually, (“picking winners”) by governments. The distinc-
however, be sufficient, because market failures tion, however, is often spurious. Interventions in
in factor markets and institutions can hold back finance, education, research, information or
full gains in efficiency. retraining are generally selective above a certain
Such interventions have to be selective, requir- (fairly low) level: for instance, after providing for
ing that policy makers identify specific sectors, general levels of secondary education, the train-
activities or even firms for promotion over others ing of university-level engineers may need to be
to exploit their superior growth potential, link- guided toward specific industrial needs. Given
ages or externalities. There are two basic require- resource limitations, selectivity in industrial sup-
ments for such intervention to be effective. First, port is inevitable. But there is a stronger case for
since protection itself reduces incentives to invest selectivity in factor market interventions: some
in FTC, it should not be too widespread, activities have greater linkages and externalities
indiscriminate or prolonged, and should be offset than others. As Grossman (1990) argues, “When
by other incentives for increased efficiency. The market activity is too low relative to an efficient
best combination may be the selective and outcome, it is because the active and potentially-
temporary protection of domestic markets, active firms fail to appropriate all the benefits
together with strong incentives for export activity from some aspect of their operation. Corrective
and domestic competition. Second, policy government policy should be targeted to the
makers should be able to identify suitable activi- particular activity that generates positive spill-
ties for protection, and have the authority to overs, and not merely encourage firms to pro-
correct mistakes and modify choices over time duce more output” (p. 118).
(i.e., shut down inefficient operations). This
option requires considerable informational and
organizational resources, as well as political (c) Institutions
strength, on the part of the government. Some
countries can provide such resources, but many The development of capabilities and the play
cannot; we return to this below. of incentives express themselves only through
specific market and nonmarket institutions. If
(iii) Incentives from factor markets markets create the necessary institutions natu-
Theory suggests that well-functioning, flexible rally, there is no need to consider them separ-
factor markets and correct relative factor prices ately. If they do not, however, the development
are necessary to achieve efficient production and of a proper institutional framework becomes an
resource allocation. Efficiency in capital markets area of concern. Since underdevelopment is
requires that long-term financing be available, almost defined by the deficiency of institutions,
especially for risky projects involving new tech- clearly the subject requires consideration. Of the
nologies, and that price signals achieve proper vast array of institutions that affect economic life,
interfirm and interindustry resource allocation. we note only those that are external to firms and
Efficient labor markets should be responsive to that most directly affect industrial capabilities. In
changing needs, not hampered by restrictive addition to the legal framework supporting in-
practices, and be equipped with requisite skills. dustrial activity and property rights, these are:
Similarly, efficient technology markets should industrial institutions (those that promote inter-
provide both adequate flows of information to firm linkages in production, technology or train-
enterprises, and “public goods” such as stan- ing, or provide support to smaller enterprises, or
dards, testing facilities and basic research. In help firms to restructure and upgrade); training
general, incentives should be sufficient to ensure institutions (where firms underinvest in training
that private firms do not underinvest in their own or fail to provide the right kind or quality of
technological development. Where market fai- training); and technology institutions (on the
lures occur and firms invest less than is socially United States, see Nelson, 1988; Tassey, 1982,
desirable, governments must be able to step in, 1986; on Japan, Freeman, 1988; OTA, 1990;
to enable firms to internalize markets (e.g., Nagaoka, 1989: and Ergas, 1984; OECD, 1987
provide self-financing or subsidize training of on developed countries in general).
 TECHNOLOGICAL CAPABILITIES 173

4. NATIONAL TECHNOLOGICAL may be partial and misleading, but let us look at

CAPABILITIES: SOME EVIDENCE FROM the available evidence.
DEVELOPING COUNTRIES The first issue is incentives. Macroeconomic
management has, with one anomaly in South
Korea during 1979-80, been excellent in the four
This section applies the above framework to a East Asian NICs and Thailand, moderately good
selection of eight industrializing countries: the in India and poor in the two Latin American
four East Asian NICs (South Korea, Taiwan, NICs. Their trade strategies are well known:
Hong Kong and Singapore), India, the two consistently highly export-oriented (i.e., with
dominant Latin American industrial economies incentives that were neutral between domestic
(Brazil and Mexico), and one second-tier NIC, and export markets, or biased in favor of the
Thailand. This sample gives a fair coverage of the latter) over a long period for the East Asian
different types of countries that have achieved a NICs, with little or no protection in Hong Kong
measure of success with industrial development. and Singapore but with selective, variable and
There is also some consensus about their strate- often high protection for several industries in
gies and achievements, which makes possible a South Korea and Taiwan; more inward-oriented
classification that incorporates relevant elements for Brazil and Mexico, with large areas of high
that cannot be easily quantified. effective protection, but with export incentives to
Table 2 sets out some relevant data on partially offset the bias; highly and consistently
industrial structure and performance and two sets inward-oriented for India; and increasingly
of determinants of NTC on which figures could export-oriented for Thailand, but still with rem-
be obtained: education and science and techno- nants of protected import substitution. At the
logy (see Lall, 1990). The top section of the table trade strategy level, therefore, export-oriented
is intended to provide background information, strategies seem to be positively correlated with
and illustrates some features of the sample industrial success, supporting the arguments of
countries. The four East Asian NICs are the most the liberal school that competition in internatio-
dynamic and efficient (in terms of international nal markets stimulates efficient specialization
competitiveness) of the group. There are, how- and healthy FI’C development; in addition, it is
ever, significant differences between their indust- suggested, export orientation provides free in-
rial structure, export specialization and reliance flows of information from world markets, gives
on overseas investment. Of the larger countries, greater and more stable access to foreign technol-
Brazil has the biggest industrial sector, with an ogy and equipment and is associated with less
advanced technology in many areas of heavy rent-seeking behavior (Balassa et al., 1982; Nishi-
industry; however, it has large areas of uncom- muzu and Robinson, 1984).
petitiveness (Dahlman and Frischtak, 1990), a These simple categorizations of “export orien-
high foreign presence in modern industry and a tation,” however, may be misleading depictions
large public sector. Mexico is similar in many of strategies that are much more complex in their
ways, but has a smaller capital goods capability, a impact of NTC. There are several varieties of
higher foreign presence and a lower manufac- export orientation (Edwards, 1989). Hong Kong
tured export base. India’s industrial sector is very is at one extreme with fully Iaissezfaire economic
diverse, but riddled with inefficiency and tech- policies combined with stable administration, a
nological obsolescence; it has suffered low rates strong presence of British trading and financial
of growth of exports and value added (until very enterprises (with considerable spillover benefits),
recently), but has the distinction of having a very a concentration of textile-related skills and tech-
low level of reliance on foreign investment and nology (from Shanghai), and a long tradition of
technology imports in other forms (Lall, 1987, entrepbt trade which created a variety of contacts
1985, chapter 10). Finally, Thailand is a relative and skills. Singapore offers no protection, but
newcomer, with a shallow industrial base but intervenes heavily in several ways, in guiding
very dynamic export growth based on the reloca- investment, setting up public enterprises (these
tion of labor-intensive activities away from Japan account for 10% of value added in manufac-
and the older NICs. turing) , directing wages, and encouraging
The pattern is well known - such diversity of savings (Krause, 1988). It permits only very
industrial performance, as typified by the relative selective immigration (of skilled personnel) and
success of the East Asian NICs (and the emerg- is generally highly involved in guiding the eco-
ence of “new” NICs in the region), has prompted nomy’s development, especially by inducing
much theorizing on the virtues of liberal trade foreign investors to upgrade the skill and capital
strategies (World Bank, 1987). Our framework intensities of the projects they undertake. As a
suggests that simple incentive-based explanations result, the industrial structures of the two island
 Table 2. Indicators of national technological capability in selected NICs

South Korea Taiwan Hong Kong Singapore India Brazil Mexico Thailand

A STRUCTURE AND PERFORMANCE b

1. Mfg. Value Added Sb. (1985) 24.5 22.2 6.7 4.3 35.6 58.1 43.6 7.7 ?I
Mfg. Growth 1%~80/1980-86 18.7/9.8 16.4/12.9 17.017.0 13.312.2 4.318.2 9.618.2 7.410.0 10.915.2
2. Mfd. Exports (1986) $b. (1986) 31.9 35.9 32.6 14.7 7.2 9.1 4.9 3.9
Growth of Merchandise Exports: 1%5-80/198&86 27.3/13.1 19.0/12.7 9.500.7 4.716.1 3.713.8 9.4/4.3 7.7ff.7 8.519.2 b
3. Gross Domestic Investment as % GDP (1986) 29 19 23 40 23 21 21 21
2
4. Capital Goods Prod. as % of Total Mfg. (1985) 23 24 21 49 26 24 14 13
5. Capital Goods Imports $b. (1985) 10.6 5.6 7.1 811 3.7 2.2 6.1
(as % MVA) (43.3) (25.2) (106.0) (188.4) (10.4) (3.8) (14.0) (3:::)
6. Stock of Foreign Direct Investment $b. (1984-86) 2.8 8.5 6.0-8.0 9.4 1.5 28.8 19.3 4.015.0
7. FDI Stock as % GDP 2.8 8.1 20-26 53.8 0.7 9.6 13.6 10.5-13.1
B EDUCATION
1. (a) Education Expenditure as % household
consumption (I 980-85) 6 n.a. 5 12 4 5 6
(b) Public Expenditure % GNP 4.9 5.1 2.7 2.9 :.9 2.6 3.9
(1985) (1986) (1978) (1980) (19:; (1984) (1985) (1984)
Central Government Expenditure on education
% Total Government Expenditure (1986) 18.1 20.4 n.a. 21.6 2.1 3.0 11.5 19.5
% Age Group enrolled (1985)
- Primary 96 100 105 115 92 104 115 97
- Secondary 94 91 69 71 35 35 55 30
- Tertiary Education 32 13 13 12 9 11 16 20
Vocational Ed. Enrol. (1984) NOS (‘000) 815 405 32 9 398 1,481 854 288.0
as % population working age 3.06 3.24 0.86 0.5 0.07 1.83 2.0 0.96
5. No of tertiary level students
- in S/E fields (‘000) 585 207 36 22 1,443 535 563 360
% population 1.39 1.06 0.67 0.89 0.21 0.40 0.70 0.70
(Year) (1987) (1984) (1984) (1984) (1980) (1983) (1986) (1985)
- in engineering (‘000) 228 129 21 15 397 165 282 n.a.
% population 0.54 0.68 0.41 0.61 0.06 0.13 0.35
C. SCIENCE AND TECHNOLOGY
1. Patents Granted: Total (1986) 3,741 10,615 n.a. 598 2,500 3,843 2,005 n.a.
of which % local 69 56 n.a. 8 20 9 9 n.a.
2. R&D % GNP 1.1 n.a. 0.7 0.6 0.3
of which % local (19:; (1986) (19;; (19oR;r (1982) (1984) (1985)
3. R&D in Productive Sector % GNP 1.5 0.7 na. 0.2 0.2 0.2 0.2 na.
4. R&D financed by Productive Enterprises % GNP 1.9 0.6 n.a. 0.2 0.1 0.1 0.01 0.04
5. Scientists/Engineers in R&D
Per million population 1.283 1,426 n.a. 960 132 256 217 150
6. All scientists/engineers
(a) Total nos. (‘080) 361.3 n.a. 145.5 38.3 1000-2000 1,362.2 565.6 20.3
(b) Per million population 8,706 n.a. 26,459 15,304 1282-2564 11,475 10,720 472
(Year) (1986) (1986) (1980) (1985) (1980) (1970) (1975)

Sources: Asian Development Bank (1988).

Evenson (1990).
Republic of China (1985, 1987, 1989).
UNESCAP (1988).
UNESCO (1989).
World Bank (1987, 1989).
176 WORLD DEVELOPMENT

economies differ quite sharply (Krause, 1988). promoting firm size. Its DRAM production
Hong Kong has remained specialized in light facility was set up by a public sector firm, and the
consumer goods, essentially assembling imported Taiwanese government had to coordinate related
components, while moving up the quality scale - technology import, design, manufacture and
its industry does not have great technological marketing by several private firms. In effect, “the
depth or high vertical linkages (Chen, 1989), and government is doing in Taiwan what forward and
competitive pressures are forcing it to relocate in backward integration does for companies”
cheap-labor areas (chiefly China) rather than (Saghafi and Davidson, 1990, p. 67).
deepening domestic industrial activity. Singapore The large countries were also very interven-
has a much “heavier” industrial structure, with tionist in their industrial and technology policies.
strong emphasis on producer goods, and very Brazil promoted several large public research
high requirements of technical skills. organizations, and its giant public enterprises
South Korea and Taiwan have been much invested in research and development. It inter-
more interventionist, with the former tradition- vened in technology imports to support the
ally far more so than the latter (Kuznets, 1988; development of local capabilities in the selected
Wade, 1988). Until the 198Os, the South Korean industries (the best-known case being minicom-
government highly protected and promoted puters). Despite its heavy investments and major
selected (strategic) industries, sometimes set up successes in some specifically targeted areas
public enterprises (such as its highly efficient (aircraft, minicomputers, special steels, arma-
Pohang steel plant), directed investment at the ments), however, Brazilian strategy in techno-
sectoral and often the firm level, promoted logy development was to a large extent ineffec-
exports by several direct measures, intervened in tive in achieving competitiveness for large parts
technology transfer agreements and technology of industry (Dahlman and Frischtak, 1990).
development (as in petrochemicals; see Enos and Mexico also pursued policies to build up domes-
Park, 1987), restructured industries, and en- tic industry behind import protection, but did not
forced labor training (see Amsden, 1989; Pack adapt Brazilian-style interventions to develop
and Westphal, 1986; Westphal, 1990; World specific technologies; it also lagged in the de-
Bank, 1987a). Even today, despite considerable velopment of local capital goods. As a result
liberalization, a strong element of “guidance” Mexican technological prowess is generally consi-
remains in South Korea. Taiwan also protected dered to be behind Brazil’s.
emerging industries, guided expansion along India’s industrial strategy has remained highly
particular lines and had a very active technology interventionist within its import substitution
development policy (Hou, 1989; Wade, 1988). orientation. The Indian government was suspi-
The South Korean strategy, however, was more cious of private enterprise in general, and large
specifically directed at creating and supporting private firms and foreign investors in particular;
giant firms (the chaebol) that could internalize and barriers to entry, exit, growth and diversifi-
many inefficient markets, though at the risk of a cation were rife. It set up a large network of
high level of government direction and the science and technology (S&T) institutions, but
rigidities associated with size. Taiwanese strategy these were divorced from manufacturing enter-
concentrated on providing support to small and prises and excessively bureaucratic. The adminis-
medium-sized firms, providing great flexibility tration of Indian policies was slow, complex and
but holding back large, risky investments in prone to corruption.
technology by the firms themselves. It was Another issue is capabilities, in particular
perhaps a safer, more “incremental” strategy, human capital. Based on 1958-59 data, Harbison
while the South Korean one was more risky but and Myers (1964) developed their famous com-
permitted larger leaps into high-technology acti- posite index of human resource development in a
vities. In the production of semiconductor large international sample of countries. At that
(DRAM) chips, for instance, South Korean time Argentina emerged with the highest rank in
chaebol were able to cross-subsidize, enter into the developing world, followed by South Korea
production and export in a major way with little and Taiwan. Then (of our sample) came India,
explicit government support (Kim, Lee and Lee, Mexico and Brazil (others in our sample were not
1987; Mody, 1989b); an electronics research included). In 1965, enrollment in secondary
institute set up to launch semiconductor technol- schools (as a percentage of the relevant age
ogy was quickly bypassed as the chaebol went group) was distinctly higher in East Asia (South
directly into production with massive facilities. Korea 35%, Taiwan 38%, Hong Kong 29%,
The Taiwanese government, on the other hand, Singapore, 45%) than in other countries (Brazil
had to adopt a far more interventionist strategy 16%) Mexico 17%, India 27%, or Thailand
because of its earlier “hands off” stand on 14%). Enrollment in tertiary education was also
 TECHNOLOGICAL CAPABILITIES 177

ahead (6%, 7%, 5%, 10% respectively in East and Austria. South Korea’s primary school stu-
Asia, 2% and 4% in Latin America, 2% in India dents did 2.5 times better than India; its secon-
and Thailand). dary school students 3.8 times better. In another
By 1985, the East Asian lead in secondary test, reported in OTA (1990), two other sample
education had been maintained or widened, countries, Hong Kong and Thailand, were in-
while that in tertiary education had been nar- cluded in a sample of 14, again mostly developed
rowed or eroded - with the exception of South countries. Twelfth graders were tested in
Korea. Mexico and Thailand had made particu- geometry and algebra in the mid-1980s. The top
larly large gains in tertiary education. (It should performer in both was Hong Kong, followed by
be noted that, according to UNESCO data, Japan. The United States came 12th in geometry
Hong Kong and Singapore have large propor- and 13th in algebra. Thailand came last in both
tions of students in higher education overseas, tests. These tests should, however, be treated
32% and 25% respectively, so the figures in with caution, because they may not be robust
Table 2 are underestimates.) India has the indicators of educational standards across the
smallest stock. In Latin America, Mexico is board.
ahead of Brazil. Thailand is expanding very The technical competence of an industrial
rapidly from a low base. workforce is improved by education imparted by
Enrollment figures for education by them- various formal training systems and by in-firm
selves may be misleading. The true impact on training. While the precise nature of the benefits
technological capability development also de- of vocational as opposed to general training, and
pends on the drop-out rate, the technical orienta- preemployment as opposed to postemployment
tion of the students, and the quality of teaching. training, is still the subject of debate (Dougherty,
Drop-out rates are exceptionally low in East 1989), it is indisputable that the speed of techni-
Asian NICs (Oshima, 1988; Kim, 1988). The cal change in modern industry necessitates in-
technical orientation of education is highest in creasing inputs of training and retraining. Data
Singapore (60% of tertiary students are in S&T are most readily available on vocational training
subjects), followed by Mexico (48%), Hong (from UNESCO); these are shown in Table 2, in
Kong (46%), South Korea (42%), Brazil (36%), total and in relation to the size of the population.
India (27%) and Thailand (21%). There is no South Korea and Taiwan are far in the lead (over
information on Taiwan, but we can safely assume 3% of the population of working age is enrolled
the figure to be high. More important is the in vocational training), exceeding relative levels
proportion of each country’s population enrolled in Latin America (about 2%) and other East
in science and engineering. This broad measure Asian NICs. Singapore is also relatively low
of technological capacity is led by South Korea (OS%), but this figure is misleading because of
(1.39), followed by Taiwan (1.06), Singapore the large size of its employee training program
(0.89), Mexico (0.7), Hong Kong (0.67). Brazil run on a cooperative basis by government and
(0.4) and India (0.21). Allowing for students industry. Hong Kong has a relatively poor
abroad (and taking the proportion in science and showing (0.86%), behind that of Thailand, re-
engineering to be the same as at home), the flecting the specialized and technologically unde-
figures for Singapore and Hong Kong rise to 1 .Ol manding nature of its industrial structure. India
and 0.81. South Korea’s rises to 1.41, while those has very small enrollments, suggesting wide-
of others (Taiwan data are missing) are not spread skill deficiencies.
affected. Taking engineering on its own, Taiwan In-firm training figures are not widely avail-
leads the sample, followed by Singapore and able, but McMahon (1987) singles out South
South Korea. These three NICs have figures Korea as an exceptional case in that “Since 1960
some 10 times higher than India’s, or 4-5 times South Korea has insisted that companies spend at
higher than Brazil’s, least 56% of their total budget on education and
The only relevant indicators of the quality of training programs, involving the private sector in
education are scores of primary and secondary the education process in a meaningful way” (p.
school students on the International Education 19). It is doubtful whether any other country in
Review’s tests in science and mathematics. In one the sample has a training effort comparable to
test, administered in 19 mostly developed coun- this. Presumably, this effort has provided the
tries, with only South Korea and India included basis for efficient production in South Korea’s
from our sample (quoted in World Bank, 1981), rapid drive into new, demanding industries.
South Korea came second only to Japan in nearly The impressions that emerge from these data
all tests, and in one it beat Japan. It consistently are: (a) the East Asian NICs have the largest
outperformed countries such as the United stock of human capital in a broad sense (formal
States, the United Kingdom, Germany, Sweden, education at secondary and tertiary levels). They
178 WORLD DEVELOPMENT

are followed by Mexico, then Brazil and Thai- utilization of its meagre human resources.
land, with India clearly at the bottom. (b) In The most common measure of national tech-
terms of technical education and vocational nological effort is total spending on research and
training, South Korea and Taiwan are clear development (R&D) in relation to GNP. By this
leaders (with South Korea pulling ahead at a measure, sample data (not available for Hong
generally high level, and Taiwan ahead in en- Kong) show that South Korea, with 2.3% in
gineering education), with Singapore close be- 1987, is now well ahead of the others (more than
hind. Hong Kong comes next, followed by double that of Taiwan, its nearest rival) and
Mexico, then Brazil or Thailand (depending on planning to reach 5% by the year 2000. Taiwan
the measure), with India again lagging well and India are close to each other, around l%,
behind. (c) In terms of the quality of education, followed by Brazil and Mexico, Singapore and
patchy evidence suggests that the East Asian Thailand.
NICs, with their strong cultural emphasis on Total R&D expenditures may be less relevant
education, are ahead of the others. (d) In firm- a measure of industrial technical effort than
level training, South Korea is likely to be the R&D performed or financed by productive
leader. Singapore leads in employee training enterprises. Total R&D includes large elements
provided externally. of nonindustrial R&D, or industrial R&D per-
These impressions conform broadly to the formed in government laboratories, or per-
patterns of “revealed NTC” discussed earlier. formed in productive enterprises but financed by
While the most successful countries have the others. Each has different implications for indus-
largest investments in human capital formation, try in terms of effectiveness, control and rele-
preceding and accompanying their industrial vance. It is usually a safe assumption that R&D
growth, South Korea and Taiwan are in a effectiveness is higher the more it is performed
different class from Hong Kong and Singapore. and financed by productive enterprises (Gri-
South Korea and Taiwan’s larger relative techni- liches, 1986, finds, for instance, that privately
cal skill endowments explain their greater ability financed R&D in the United States yields much
to tackle more complex, demanding industrial higher returns from R&D financed by the federal
technologies. Hong Kong is distinctly behind government and performed by the same enter-
Singapore, which conforms to the observed prises). On this criterion, rows C.3 and C.4 of
differences in their industrial structures and Table 2 show again that South Korea is far in the
technological prowess. Interestingly, Singapore’s lead, with Taiwan some distance and other
heavy reliance on foreign investors in its high- countries much further behind. The bulk of
technology industries does not relieve it of the South Korean private R&D is performed by its
need to provide educated and trained technical giant chaebofs, themselves the products of earlier
labor; multinational corporations (MNCs) are policies to select, protect and subsidize large
able to set up such industries there only because firms to lead the industrialization drive. In this
of the availability of appropriate personnel (and sense, even the private R&D of South Korea can
Singapore is widely regarded as having one of the be traced to the selective intervention, which
world’s best employee training systems). created chaebols, directed them into heavy and
Mexico seems to have a better trained work- complex activities and forced them to compete
force than Brazil by every measure. Its apparent internationally.
lag in NTC must then be attributed to specific Patent data are also available but are noto-
industrial and technological policies, which have riously difficult to compare meaningfully. Never-
failed to develop technological capabilities (at theless, the figures on the proportion of patents
least in selected areas) as forcefully as Brazil. taken out by residents (which may include
India’s substantial lag in human resources may foreigners) are suggestive (Evenson, 1990).
appear surprising, because of the general aura it South Korea and Taiwan (69% and 56%) are far
has of a country with an oversupply of technical ahead of India (20%), Brazil and Mexico (9%
and educated labor. There is certainly a large each), or Singapore (8%). The commercial value
absolute supply (although of highly variable of these patents may be questionable, but it is
quality), and graduate unemployment and emi- instructive in this context to refer to Fagerberg’s
gration are real problems. In relation to the size (1988) growth accounting exercise. Fagerberg
of the economy, however, the stock is poor, and used patents taken out internationally as a
what there is seems to be concentrated in the measure of innovative activity, and included
larger establishments. The apparent oversupply Asian NICs (Hong Kong, South Korea, Taiwan)
is more a reflection of the economy’s poor and Latin American NICs (Argentina, Brazil,
performance than anything else: wrong policies Mexico) as subsamples.
have held back even the absorption and effective Fagerberg’s calculations showed that both
 TECHNOLOGICAL
groups of NICs grew faster than the “frontier”
countries (United States, Switzerland, Germany,
Japan, Sweden), East Asia 6% faster and Latin
America 1.9% faster. The difference between
the two subgroups was primarily due to their
innovative efforts. For Asian NICs, these efforts
contributed 2.9% of their relative growth per-
formance; for Latin America the figure was
-0.1%. Such exercises suffer from well-known
limitations and interpretation problems, but the
general results are plausible and in conformance
with other sorts of evidence. Innovative effort is
important for growth even among NICs, and
East Asia performs far better than Latin
America.
The employment of scientists and engineers in
R&D in relation to population is another com-
mon measure of technological effort. The figures
for this measure (row C.5) show Taiwan ahead of
others (1,426 per million population in 1986,
higher than France’s 1,365 in 1984). South Korea
is a close second with 1,283, followed by Singa-
pore with 960. There is then a large gap, with
Brazil and Mexico having 256 and 217 respective-
ly. Thailand has 150 and India 132. The quality of
R&D scientists and engineers may differ by
country, and their economic value may depend
on the type of R&D they are engaged in, but
there is no reason to believe that, as far as NICs
are concerned, these factors would reduce the
apparent lead of East Asia. If anything, they
would strengthen it.
A similar measure of the total “potential
stock” of scientists and engineers is shown in row
C.6 of Table 2. The data (taken from UNESCO,
which collects the figures by questionnaire) are
sometimes dubious (especially for Hong Kong,
where they appear to be overestimates), but they
show the two island NICs of Asia with the highest
stocks of scientists and engineers, followed by
Brazil, Mexico and South Korea. India comes
out ahead of Thailand on this measure, but well
behind the others.
The technological data broadly support the
trends revealed by the figures on education. The
Asian NICs, in particular South Korea and
Taiwan, have invested not only in educating and
training their populations, but also in technologi-
cal innovation. This investment was primarily
oriented to the commercial needs of productive
enterprises, and has drawn upon a large pool of
scientists and engineers. Combined with a highly
skilled workforce these investments yielded the
competitiveness and dynamism that revealed
themselves in growth and export performance.
Export orientation played a permissive and
stimulative role, and as such was necessary - but
it was not sufficient.
CAPABILITIES 179
Turning now to technology imports, all sample
countries import large amounts of technology,
but their import patterns differ greatly. In part
this disparity is due to differing rules and controls
on buying know-how and services abroad: the
international technology market is subject to a
spectrum of failures caused by asymmetric infor-
mation, opportunism, missing markets and so on,
and different governments have adopted differ-
ent measures to overcome such failures and help
national enterprises to purchase technology on
fair terms. In part, however, it is due to a more
fundamental difference, on national technologi-
cal strategy. This concerns the relative roles of
foreign and local enterprise in building indige-
nous capabilities. There are striking variations
across the leading semi-industrial countries in the
extent to which they have drawn on foreign direct
investment (FDI) to provide technology and
skills.
FDI can, in appropriate conditions, be a very
efficient means of transferring a package of
capital, skills, technology, brand names and
access to established international networks. It
can also provide beneficial spillovers to local skill
creation and, by demonstration and competition,
to local firms. Where local skills and capabilities
are inadequate, FDI can sometimes be the only
means to upgrade technologies and enter high-
technology activities. The very fact however, that
FDI is such an efficient transmitter of packaged
technology based on innovative activity per-
formed in advanced countries has serious impli-
cations. With few exceptions, the developing
country affiliate receives the results of innova-
tion, not the innovative process itself: it is not
efficient for the enterprise concerned to invest in
the skill and linkage creation in a new location.
The affiliate, in consequence, develops efficient
capabilities up to a certain level, but not beyond:
in the literature this process is called the “trunca-
tion” of technology transfer. Such truncation can
diminish not only the affiliate’s own technologi-
cal development, but also its linkages with the
host country’s technological and production in-
frastructure, and thus limit beneficial externali-
ties. Moreover, a strong foreign presence with
advanced technology can prevent local competi-
tors from investing in deepening their own
capabilities (as opposed to becoming dependent
on imported technology or, where the technology
is not available at reasonable prices, withdrawing
from the activity altogether).
For these reasons, countries with technological
potential may find it beneficial to restrict FDI
and import technology in “unpackaged”
forms (including foreign minority-owned joint
ventures). The choice of modes of technology
180 WORLD DEVELOPMENT

imports is thus not neutral - some are more plex, large-scale, fast-moving technologies are
beneficial than others for certain strategies and at involved (Westphal, 1990). Singapore, in con-
certain stages of development. The sample coun- trast, relied entirely on technology generated
tries cover the whole range of FDI strategies. elsewhere, but intervened (selectively) to induce
Rows A.67 of Table 2 set out data on stocks of investors to move up the technological scale and
foreign investment in each country and on FDI as (functionally) to provide a well-trained work-
a percentage of GDP in the relevant year. It force. The strategy worked well for Singapore -
shows, at one extreme, low levels of reliance on but whether it can be emulated by larger econo-
FDI by India and South Korea, and, at the other, mies, and whether it will lead to a broad base for
very high levels by Singapore and Hong Kong, sustained industrial development (b la Japan or
and fairly high levels, among large countries, by South Korea) is open to question. The Latin
Mexico, Thailand and Brazil. The interesting American economies have come somewhere in
cases are those of South Korea and Singapore, between. Brazil has set up large public enter-
both successful NICs which have opted for prises and restricted foreign entry in certain
opposing strategies on foreign capital. sectors to protect indigenous learning; Mexico is
South Korea has developed arguably the most also doing so on a much smaller scale. The heavy
advanced and competitive base of technological reliance of these countries on MNCs for a great
capabilities in the developing world, drawing on deal of advanced technology may well have
foreign technology mainly in nonequity forms prempted indigenous capability development in
(i.e., by capital goods imports, licensing and the sectors concerned. India has had a very
minority foreign ventures; Westphal, Rhee and different experience, excluding MNCs in much of
Pursell, 1979; Westphal, 1990). In order manufacturing, but also suffering technological
to nurture this massive effort it followed the lags and inefficiency as a result of its trade and
Japanese example of some decades earlier - industrial policies and poor human capital en-
protection against imports and selective exclu- dowments.
sion of foreign investment, accompanied by the Institutions are not considered here because it
upgrading of skills, huge investments in R&D is practically impossible to compare institutional
and the sponsoring of the giant chaebols to structures and performance across countries.
internalize various markets and so cope with the This is not to deny their importance - institutio-
rigors of international competition. The strategy nal support is clearly an integral part of capability
may be characterized as one of “protecting development - but to leave their consideration
domestic technological learning” at a stage of to a different venue.
development when externalities and uncertain-
ties abound, information linkages are imperfect
and basic capabilities are in the preliminary 5. CONCLUSIONS AND IMPLICATIONS
stages of development. This stage is similar in
many respects to the microlevel process of The analysis presented above on the determi-
developing a new innovation by a developed nants of NTC provides a broad, suggestive
country firm, when (as Grossman, 1990, argues) framework rather than a precise set of causal
“the strongest case for government intervention connections. It has been suggested in this paper
may arise . . . [because this would] involve that the development of capabilities is the out-
substantial research outlays and costly learning- come of a complex interaction of incentive
by-doing [and] private firms often are unable to structures (mediated by government interven-
capture more than a fraction of the benefits they tions to overcome market failures) with human
create for consumers and for other firms in the resources, technological effort and institutional
industry” (p. 119). factors (each also strongly affected by market
The South Korean strategy went well beyond failures and so needing corrective interventions).
supporting R&D to restricting imports and direct Partial explanations of NTC development, which
investment. Technological development by an concentrate exclusively on market-driven incen-
industrializing LDC is different in a critical sense tives, on the one hand, or on capability-building
from a firm innovating a new technology: the measures, on the other, are apt to be misleading
LDC faces an external environment where sev- for analytical and policy purposes. It is the
eral competitors have already undergone the interplay of all these factors in particular country
learning process and have developed the neces- settings that determines at the firm level how well
sary institutional structures. The need for inter- producers learn the skills and master the infor-
vention in LDCs is concomitantly greater. South mation needed to cope with industrial technolo-
Korea demonstrates that protection of the learn- gies and, at the national level, how well countries
ing process can be highly effective when com- employ their factor endowments, raise those
 TECHNOLOGICAL CAPABILITIES 181

endowments over time, and grow dynamically in size and scope by internalizing deficient markets)
the context of rapidly changing technologies. (Westphal, 1990).
With the current prevalence of noninterven- As far as capabilities are concerned, there is
tionist views on economic development strategy, perhaps more agreement on the need for policy
it is important to be clear about the implications interventions to promote physical and human
of the framework of NTC presented here. One capital development and technological effort.
set of determinants cannot by itself produce The interventions needed, however, may be
dynamic, broad-based, sustained industrial de- selective as well as functional if education and
velopment. Just getting proper incentives in technology strategies are to be geared to realizing
place will be better, ceteris paribus, than giving specific forms of dynamic comparative advant-
the wrong signals, but just “getting prices right” age. In the early stages, industrial development
may lead to specialization in activities with static needs basic human capital (literacy and numer-
comparative advantage if the skills, technology, acy, with some vocational skills); the period
or institutions are not present to permit efficient needed to absorb simple industrial technologies
diversification. Similarly, generating skills alone is short and needs little protection or external
would achieve little if incentives for efficient support. At this stage, relatively nonselective
industrial activity were lacking. Given skills and educational interventions may be appropriate.
incentives, performance would still differ (as it As development proceeds, more difficult tech-
does among developed countries), depending on nologies are used and the need for more sophisti-
the ability of institutions and government policies cated and specialized education/training grows.
to overcome market failures and protect activi- To the extent that the education “market” lacks
ties with genuine dynamic potential. The exist- information on these specialized needs, or under-
ence of market failures considerably modifies invests in providing facilities of the right kind and
what are regarded as neoclassical prescriptions quality, there arises the need for selective inter-
for development, even within the strict rules of vention. Moreover, since there is a serious risk of
neoclassical analysis. private underinvestment in training at the firm
Government policy affects all three compo- level when labor is mobile, human capital de-
nents of technological development. Let us velopment requires measures to induce more
reiterate, starting with incentives. A consensus is investment to support employee training, by
emerging on the trade and industry policies that firms individually or cooperatively, or by govern-
promote healthy NTC development. These are ments where private agents consistently underin-
largely taken to be market-oriented policies that vest. These measures may be functional, applied
promote competition, specialization by compara- to all activities, or they may be selective,
tive advantage, and free international flows of targeting emerging sectors.
technology and capital. It is recognized, how- The need for specific technological effort to
ever, that there can be serious failures in the acquire technological capabilities also rises with
provision of correct signals from free markets. industrial development. Easy capabilities may be
The existing configuration of prices and costs acquired by brief training combined with
may not be a reliable guide to resource allocation learning-by-doing (i.e., repetition without tech-
(including investments in capability building) nical search, investment or experimentation).
where there are externalities, complementarities, More difficult capabilities ncessarily require
uncertain learning gains or capital market more training and technological effort to master,
failures (Stiglitz, 1987, 1989). There may then be with concomitant risk and uncertainty. As tech-
little theoretical or empirical justification for nologies grow more complex, the development of
some fashionable policy prescriptions, e.g., free capabilities runs into problems of appropriabil-
trade, or giving low and uniform effective protec- ity, externalities, lumpiness and requirements of
tion to different activities. There may be a valid very specialized skills (Teece, 1989): policies may
case for intervening in free trade on infant be needed to overcome these problems in firm-
industry grounds. There may also be a valid case level efforts. The policies must also cover the
for selectivity: some activities may well need development of institutions external to firms, to
much higher protection (and capability-building provide information, standards, basic research
support) than others, depending on their techni- and other similar “public goods” relevant to
cal requirements, externalities and the cost and capability development (Grossman, 1990). As
risk involved in developing the necessary capabi- development proceeds, moreover, institutional
lities. By the same reasoning, there may be interventions may grow more selective as the
justifiable reasons for promoting “strategic” in- initial basic needs are met and markets function
dustries (because of extensive linkages) or more efficiently.
selected individual firms (to realize economies of Technological development always needs tech-
182 WORLD DEVELOPMENT

nology imports from advanced countries. The selected industries or of selected enterprises,
extent of dependence on imported technology fostering of particular types of industrial struc-
and the form that technology imports take, tures, reliance on domestic as opposed to foreign
however, affect NTC development. A passive ownership of industry, and development of an
reliance on foreign skills, knowledge and tech- indigenous base-of technology and skills. These
nology may lead to NTC stagnation at a low choices dictate, in turn, different degrees and
level, while selective inputs of foreign technology combinations of selective and functional inter-
into an active domestic process of technology ventions. It is an open question which set of
development can lead to dynamic NTC growth. choices constitutes an ideal long-term develop-
Imports of technology must therefore be directed ment strategy. What is evident is that many
to forms that feed into local efforts rather than strategies are viable, that each is based on a
suppress them. Adverse effects can arise from a different combination of incentives, capabilities
massive foreign presence in the form of MNCs and institutions, and that each carries its own set
that keep their main R&D functions overseas. of concomitant interventions.
They can, however, also arise from licensing or The choice of a less selective set of interven-
use of foreign consultants in ways that do not tions (b la Hong Kong) reduces the risks of
transfer “know why” to local agents, and that backing expensive losers, but it has its own
transfer all the benefits of learning abroad. demands and drawbacks. To achieve something
Licensing can be deep or shallow, a stimulus to approximating the industrial success of Hong
local learning or a drain on it: NTC development Kong, a government would need to intervene
requires appropriate information selection and initially to build up a comparable base of skills,
negotiation. Thus specific interventions are entrepreneurship, trading know-how and infras-
needed to promote NTC development, and these tructure. To enable competitive new activities to
will have both selective and functional aspects. emerge without selective promotion, further-
The above is not meant to suggest that there is more, the government would have to intervene
a single optimal path to industrial development over time to create new skills, technologies and
for all developing countries. The experience of institutions. If the objective is to establish a deep
NICs shows clearly that there are many roads to and diverse industrial structure (as it should be in
success. Some differences in viable strategies are larger economies), such functional measures
given by the “state of nature” viz. size, resource would have to be very extensive indeed. It may
endowment or location. Small countries are not, even be the case that dynamic industrial develop-
other things being equal, handicapped by their ment with nonselective interventions would place
size, but the sorts of industries they can set up greater demands on administrative capabilities
and the technological options they can pursue (to mount functional interventions) rather than
differ from those for large countries. But there less. If such capabilities were lacking, the process
are other differences in possible strategies which of development may be slower or more uneven
depend more on the strategic choices of policy than with a package that included careful selec-
makers than on the “state of nature.” The extent tive interventions. In any case, it is not clear that,
and pace of industrial deepening, for example, is in the absence of selective interventions (in factor
a strategic variable for the policy maker: this or product markets), such a country would be
determines, in turn, the pace and content of able to diversify into more complex, demanding
human resource development, incentives needed industries with heavy learning costs. Certainly
via protection or credit allocation, requirements industrialization experience does not suggest that
for technical support or infrastructure, and so on. it would.
A country which (like Hong Kong) is content to In the final analysis, therefore, a large role
specialize in light industry needs to invest heavily remains for government policies in promoting
in (generic) human capital, infrastructure and each of the three determinants of technological
some (selective) support for likely export activi- development. But “governments face informa-
ties, but it needs to intervene less (and less tion and incentive problems no less than does the
selectively) in other ways than one which aims for private market . . . Good policy requires identify-
heavy industry of particular types. Similarly, the ing them [market failures], asking which can be
desired extent of national ownership or depth of directly attacked by making markets work more
indigenous technological capability (the two may effectively (and in particular, reducing govern-
be closely linked) determines the need for efforts ment imposed barriers to the effective working of
on local skill creation and investments in R&D. markets) and which cannot. We need to identify
Each of the NICs represents a different model which market failures can be ameliorated
of industrial development because of its choice through nonmarket institutions (with perhaps the
among strategic
u variables: the 1 nromotion of government taking an instrumental role in estab-
 TECHNOLOGICAL CAPABILITIES 183

lishing these nonmarket institutions). We need to corrupt that selective interventions inevitably
recognize both the limits and strengths of mar- lead to the “hijacking” of policy by entrenched
kets, as well as the strengths, and limits, of interests, it may be better to suffer market failure
government interventions aimed at correcting than pervasive “government failure” (Biggs and
market failures” (Stiglitz, 1989, p. 202). Levy, 1990). In such cases, however, it is not
The experience of developing countries is evident that nonintervention would lead to in-
replete with instances of misguided intervention. dustrial success. It should be feasible to streng-
It has been suggested here that many of these then the administrative capabilities and power of
failed interventions were neither economic nor governments by providing better information and
truly selective. The relatively few cases of suc- building in measures to safeguard sensible econo-
cessful selective intervention that exist suggest mic policies, and to limit interventions in scope to
that interventions are necessary in the presence prevent the worse abuses. But this takes us
of widespread market failures. Consequently, beyond the scope of the present discussion, into
improved methods of intervening are worth the realms of political economy proper, where
striving for. Much depends on the competence, again fears of “government failure” may have
honesty and political strength of the policy been too sharply drawn (Shapiro and Taylor,
makers: where governments are so weak or 1990).

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