Chapter 3 What is the Industrialisation?
Before we go on to the argument concerning coordination failure in the industrialisation process and the government intervention, it should be clarified. Chapter 2 demonstrated the background of the government intervention due to the multiple equilibrium model, but it does not fully cover coordination failure. If the general relation between the government and the coordination failure is discussed, only the individual example cannot be enough. Accordingly, the kernel of industrialisation should be defined first, and then, it follows precise understanding of the coordination failures.
3.2 introduces the Schumpeter and Austrian school to explain the engine for economic development at the enterprise level. 3.3 discusses that the competitive condition is required to generate innovation of enterprises. Then, what gives an incentive to push up entrepreneurship, in order to keep high competitiveness will be argued in 3.4. 3.5 digs into the elements and refers to some concrete facts which give incentive to the entrepreneurship. Reflecting to those arguments, 3.5 will deal with coordination failure that existing within the concrete facts giving incentive. Lastly, 3.7 summarises chapter 3 through the comparison with a comparison to the infant industry protection argument.
3.2 The Element to Develop Enterprises
In the current argument that we have mentioned in chapter 2, the government and the market appears as players to develop its economy. The structuralism treats the enterprises as what should be protected from foreign threat, which was the target of criticisms by neoclassical approach for the rent-seeking behaviour. On the other hand, neoclassical approaches obtained the market accomplishing static equilibrium, hence, the enterprises were treated as groups of managers only to control resource allocation.
The market can be defined as an organisation coordinating welfare maximum of private profits and utilities through pricing, while entrepreneurship has defined it in a different way. Though neoclassical school has emphasised the importance of the static equilibrium and the Walrasian optimum, it means the loss of additional benefit chance for the entrepreneurship. If the supply and demand determine the equilibrium condition, entrepreneurship could only to act heteronomously in accordance with it. However, in fact, the enterprises are not externality but the active subject seeking new profit chance.
The additional profit seeking behaviour of the entrepreneurs grades up the market structure by searching new resource allocation under imperfect market. This view has been discussed among dynamic market view rather than static market view. The idea that any market rarely forms perfect equilibrium is more realistic than the static market view. The Austrian school assumes the market as imperfect. The market is thought not to bring perfect information and any personally favourable strategy exist under imperfect information. The individual entrepreneurship acts in order to maximise its profit, because the market is imperfect. An additional benefit chance is motivated by imperfect market, not by perfect one. If it was perfect market realising Walrasian equilibrium, the active behaviour rather destroys its maximised benefit condition caused by desirable resource allocation. The fact is that, the individual strategy can only change imperfect resource allocation to different shape of imperfect resource allocation. In other words, the static market equilibrium and the perfect resource allocation are illusion.
Under this imperfect market, the additional benefit chance is realised by some new uniqueness, which other competitors do not obtain. If other entrepreneurs have, it cannot be regarded as, thus, not unique or beneficial. This creation of newness is the source of additional benefit. This newness, which destroys current condition and creates new benefit, has been assumed as the kernel of economic development by Schumpeter (1939, 1943). He explained the economic development as, the innovation or new combination in a production process created by entrepreneurs that destroy the current market structure and rebuild new and graded up one. Production means the combination process of various facts, and the new combination means the change of method or contents of the facts. Schumpeter displayed five elements of new combination: (1) new goods or quality, (2) introducing a new product process or method, (3) new market or segment, (4) new raw materials or source, (5) new type of management or organisation. At least, one of them can change the entrepreneurship behaviour to more complex yielding a new benefit.
In this way, individuals can seek benefit by new combination involved one of these five elements above, to improve market structure. The systematic mechanism of industrialisation can be understood from the viewpoint of individual entrepreneurship. Thus, it is concluded that the industrialisation requires new combination (= innovation).
3.3 What Generates the Innovation?
In the real world, any market are imperfect, inequilibrium, therefore individual entrepreneur can seek an additional benefit chance by new combination. The innovative activity, at the same time, improves the market structure as well as industrial structure, because the new combination involves product innovation. What should be noted here is what promotes the innovation. There are no guarantees the existence of innovation generators in nature. Incidentally, the discussion should involve not the individual entrepreneur but the group of entrepreneur, because of the complication process of regional industry rather than individual one, that is, the industry which engages a number of entrepreneurs. Especially, heavy chemical industry has strong dependency on forward and backward commitment, so, it requires not individual development but whole improvement of the industry.
What promotes the innovation of entrepreneurs? Porter (1990) regards the facing regional competition as most significant. A keen competition pressure pushes up the innovation to survive, and the innovation grades up the market competition, again. "Competitive Advantage of Nations" (1990: 143-144) describes the importance mutual stimulation as below:
"Rivalry has a direct role in stimulating improvement and innovation. Its significance is enhanced because rivalry is so important in stimulating firms to reap the benefits of other determinants, such as demanding buyers or sophisticated suppliers. But these benefits of domestic rivalry, described in the previous chapter, are only the most direct and more obvious ones. The discussion here makes it clear that domestic rivalry spills over to benefit the nations in many other and important ways:
Thus, a keen regional competition among domestic rivals promotes the innovative behaviour, which grades up the market, and the upgraded structure makes competition pressure keener, again. Then, here comes a new question, what keeps this mutual stimulation. Innovative behaviours should be repeatable, because the process of industrialisation cannot be built at once time.
If the mutual stimulation between entrepreneurs and the market competition grades up the industrial structure, the engine to keep the mutual stimulation should be elucidated. By the way, as long as market is not a living thing, it is expected to be dependence on the entrepreneur’s behaviour. So, the question above should be translated into the question what promote incentives to innovate for entrepreneurs, except competition pressure. If we answer this question with "market competitive pressure", it ends up with a tautology. Additionally, the existence of rival does not necessarily promise the existence of innovative behaviour.
According to Hirschman (1958: 10), the most crucial factor for successful development is "binding agent", which is supposed to organise and achieve cooperation among the many factors, resources, and abilities. He has also pointed out that the factor is created by "growth perspective" which comprises not only the desire for economic growth but also the perception of the essential nature of the road leading toward it.
If we apply those propositions to enterprises, which Hirschman explained about an economy, we can say the growth perspective brisks an enterprise, because an enterprise is equally the subject to organise and achieve cooperation among the many factors, resources, and abilities. Given that an economy development at macro level as Hirschman has suggested, the same logic should be applicable to an enterprise at micro level. Furthermore, the "inducement mechanisms", which is supposed to maximise not only the determination ability or investment ability as well as the formation of "binding agent", can be adapted to the incentives for an entrepreneur. The "growth perspective" means "profit perspective", or "the perspective for reinforced competitiveness" for enterprises, because it is an enterprise what pursues additional private profit.
In order to keep and improve the level of competition in a market by inducing for market competitors, clarification of the profit prospective is of immediate necessity. It is a positive precondition to push incentives. In the contrary, "hard budget constraints" can be a passive condition to keep incentives to competition. As Kornai (1980) suggests, enterprises with hard constraints take into account seriously the negative consequences of their actions on their profit while enterprises with soft budget constraints do not care about their losses or potential losses because they expect to bailed out by government at the end. In this respect, soft budget constraints are to be blamed at the point of reducing incentives to competition.
As we have seen above, the source of profit exists among five elements of innovation that Schumpeter has suggested. Those elements can be further classified into two groups: new market and new technology.
Generally speaking, in any industry, the productivity growth brings new profit, because productivity growth means productions of surplus or cost reduction. Thus, the productivity growth consists of two matters: technology innovation and economy of scale. First, technology innovation means the productivity growth by the change of product process with the same product amount. Second, economy of scale means the productivity growth by enlargement of product amount with same product process.
Thus, more concretely, we may say that the perspective of "new technology" or "new market/segment" can give incentives to competitors.
3.6 Profit Perspective and coordination Problems
These perspectives, however, are not always shown in a natural market. Moreover, the strength of the perspective varies depending upon the circumstances. To take an example in the field of new technology, there were Windows, Free BSD, OS/2, Mac OS, Tron and more were available for selection. For hard wear producers, it was not easy task to choose an operation system from those operation softs, because there was a risk to choose failing one, and the "right answer" should be dependent on the aim of their choice itself. This is a typical case of the coordination problem of multiple equilibrium concerning new technology. New market has a coordination problem in this same way. Any new market does not guarantee a promised profit therefore if some obstruction possibilities exists __ political uncertainty, an entrance of strong TNC or low reliability of information __, which inclines the profit perspective.
Thus, the profit perspectives may be inclined by coordination problem in some cases, though individual strategy as well as the whole industrial attitude are crucial factors through the industrial complication process. Such cases require the ability to solve the coordination problem, which are formed either the private sector or governmental sector. If the ability in the private sector is not sufficient, only the government can be involved to it.
3.7 the Difference between "Infant Industry Protection Theory" and Summary
What differentiates our discussion developed so far from the traditional infant industry protection theory? Currently, it is generally argued that the infant industry can be developed during protection period by accumulation of learning effect to realise cost reduction and productivity of the international level at the end. That is, low productivity at the beginning can be improved through governmental protection in order to accumulate learning effects. In the discussion mentioned, we have also noted the contribution to industrialisation by government, however, two important points are different from the traditional view.
First, the infant industry has its bases on the assumption that the accumulation of learning by doing is promised to achieve by defined proportions. Technology innovation or new market explore are regarded as "given" and indifferent to the enterprise activities. We cannot agree this point because productivity level cannot be achieved to the international level only separating itself from international market, for example, "national champions" failed at accumulation of "learning effects", which expected productivity growth to be achieved by a innovation pushed through a keen competition as we have seen in 3.3.
Second, soft budget constraints are often distributed to the protected enterprise. As mentioned above, soft budget constraints incline incentives to competition, though a keen competition is required for innovations. Any policy to reduce competition level is to be denied. I will discuss protection issue and rents in chapter 6, more precisely.
Thus, the industrialisation needs a competitive market to upgrade both market competition and enterprise innovation. Then, in order to give an incentive for enterprise, profit perspectives concerning innovative technology and new market/segment are to be indicated. However those signals do not always show up with the same level, partly because of coordination problems. Therefore, some methods to remove those problems are to be required. Chapter 4 will deal with the innovative technology issue, and chapter 5 turns to the new market/segment issue, discuss it in detail.