Chapter 4 Prospect for New Technology

4.1 Introduction

As discussed in the previous chapter, the stronger prospect for new technology the enterprises bear, the higher incentives for competition are given for them. The incentive for the competition, which is thus reinforced, activates their innovative behaviour. At the same time, the upgraded enterprises’ action upgrades market competition. Again, the keen competition presses innovative behaviour for enterprises. Thus, to complicate the industrial structure, this spiral mutual stimulation will be indispensable. What should be noted here is, what would create and maintain the prospects, in concrete. In other words, the question is what coordination would resolve the natural obstruction, as regard to technology.

4.2 will introduce some studies focusing on the importance of technology, in order to clarify how this dissertation is located in the current literature. A famous study that has investigated the importance of "technology transfer" is Gerschenkron's (1965) "Economic Backwardness in Historical Perspective". He demonstrates some key factors for late industrialisation. The other studies by Lall (1987, 1989, 1993a, 1993b, 1994a, 1994b) have emphasised the "technology capabilities" (TCs), which involves not only the ability to receive advanced technologies but also to arrange and even to create technologies. Additionally, it has also referred to the importance of competition to develop TCs. 4.3 argues how to coordinate the coordination problems in nature, as an uncertainty for new technology is thought to be one of the problems and some concrete policies will be enumerated. 4.4 introduces an example of those policies executed in practice in Japan to explain what was the coordination problem and how they are resolved.

4.2 Gerschenkron model and Technology Capability

Krugman, (1994a, 1994b) emphasises the importance of productivity growth, mainly provided by technology advancement. The argument that Asian rapid growth, like that of the Soviet Union in its high-growth era with inherently limited progress, seems to be driven by extraordinary growth in inputs like labour capital rather than by gains in efficiency due to the convergence of advanced technologies (1994b: 70) is debatable, thus, many objections would be expected. However it is beyond of this chapter to introduce all of them. Only we would like to note here is his emphasis on the importance of the convergence of advanced technologies. The word of "technology advancement" can be defined as "the process of introduction and fixation of new technology to economic behaviour" (Hara, 1996: 86), therefore, the kernel of industrialisation is thought to be the accumulation of new technologies by Krugman. However, this argument is not the one newly introduced. Gerschenkron (1965) had already studied the system of late industrialisation by the technology transfer from DCs to LDCs, based on 19c Europe.

Gerschenkron (1965) argued that industrialisation process in backward countries could be curtailed, because they could exploit already made information and technologies. He defined this possibility to shortcut the industrialisation process as "advantage of backwardness". He depicted some characters of the starting phase of industrialisation with backwardness as:

  1. Late industrialisation process is shorter than that of forerunner countries, because late starting countries can save time and resources of technology development and capital accumulation by enjoying technology transfer and capital imports.
  2. Late industrialisation develops heavy chemical industry in earlier stages than that of advanced countries, because backward countries are ①lack in sufficient skilled labour force, ②able to set up new technology through imports, and ③able to establish new large-scale capital investment institution at once, while an advanced country has difficulty in scraping old facilities.
  3. Big business groups or conglomerates are to occur because those large-scale capital investments require large size minimum running scale.
  4. The industrialisation is formed from the top, that is, the government, states, or industrial instruments like industrial bank or investment bank, because backward countries do not have enough number of entrepreneurs with good ability to respond to requirements of high level. Especially, rapid industrialisation in heavy chemical industry needs more resources than the private sector can provide in nature.

We should not overlook the significance of "advantage of backwardness" through the technology transfer from advanced countries, as his theory starts from this point. However, this advantage is not promised but merely possibility to exploit. In order to enjoy the possibility, backward countries are required autonomous abilities to imbibe advanced technologies effectively. If they cannot receive advanced technologies, but just pause at the same level, the gap between an advanced country becomes large, and it resulted in "backwardness because of backwardness". Gerschenkron pointed out the necessity of institutional instruments which was supposed to develop industrialisation therefore, the advantage of backwardness was to be externalities to enterprises, while it should be enterprises to imbibe imported technologies in practice. Accordingly, in order to realise the possibility of "advantage of backwardness", the abilities in private sector to imbibe the transferred technologies are indispensable.

There is another point to be noted. His theory explains the catch up process, but leaves the following process unexplained. Even if the theory could be applied to explain Korea, it would not tell the reason for Japanese success in becoming forerunner in the world. If Japan achieved industrialisation by enjoying the advantage of backwardness, the advantage must have vanished after it catch up U.S.A. Thus, the advantage cannot account for the whole cases of industrialisation.

Lall (1994a: 6) distinguishes ""technology capabilities" (TCs) from "technology abilities" by pointing put "Technological capabilities in industry are the information and skills __ technical, organizational and institutional __ that allow productive enterprises to utilize equipment and information efficiency. Such capabilities are firm specific, a form of institutional knowledge that is made of the combined skills and experience of its members. The development of TCs should not be thought of as the ability to undertake frontier innovation, though innovative capabilities are one form of TC. It comprises a much broader range of effort every enterprise must itself undertake in order to absorb, adapt and build upon the knowledge that has to be utilized in production. The growth of capabilities may be defined as industrial technology development (ITD); this process is evolutionary, and depends on the conscious and purposive efforts undertaken by every enterprise. " Then he asserts that it is TC what develops industrialisation. As the prerequisite for TCs, he (1993b: 733) mentions "The promotion of domestic competition, with free entry and exit of firms, is an essential part of building healthy capabilities." This argument has a similarity with this dissertation in the point recognising the importance of competition for TCs improvement. However, his argument lacks a significant point that the TCs improvement grades up the competition as well. Therefore he cannot explain the reason of competition development from the viewpoint of enterprises. According to Lall (1987, 1989, 1993a, 1993b, 1994a, 1994b), a competition is the second factor to stimulate the first factor of TCs grade up, that is, the competition is heteronomy and externality to enterprises. However, enterprises are autonomy to competition through levelling their challenge. It suggests there is considerable validity to suppose that activated behaviour of enterprise activates competition again, as Porter (1990) suggests. There are some coordination problems that subjective decisions wander, for example, under multiple equilibrium, because enterprises can level their will depending on profit perspectives. If Lall were right, there could not exist any coordination problems because the level of competition is given heteronomically to decide incentive level of enterprises. In practice, enterprises can control the level of competition to some extent, therefore, even if some other subjects want to keep the competition level high, but enterprises do not, the competition level might be reduced. Therefore, of course other subjects are requires making effort to keep high competition level, but also the efforts to keep high incentives except competition pressure are necessary. Profit perspective, including new technology perspective, is significant.

　

4.3 Some Coordination Problems and the Solutions

As discussed before, the less uncertainty of new technology, the more incentive enterprises would be activated. There are some policies to solve problems of increasing uncertainties.

We should keep it in mind that technology transfer requires high ability to receive. Receiving country needs to comprehend, apply, arrange and even develop the transferred technologies. Of course some technologies require not only "learning" information but also "doing" production at same time. But focusing on the information phase, the existence of an institution that process the advanced information is required. Normally, it is enterprises to execute the process and their R&D institutions are expected to assimilate the information. And, those R&D activities are not only to receive but also to generate unique information, because assimilation processes equal to adding new information behaviour. Therefore, it may be possible to say that TCs of information phase are high if the quality and quantity of generated information are high.

On the other hand, there is an argument that R&D activity should be in charge of public sector, like governments or bureaucrats in some cases. Lau (1996: 64) explains the reason as follows: "It has long been recognised that the basic issue in the financing of R&D is appropriability. To the extent that the gains from R&D cannot be captured by the enterprise engaging in the R&D itself, the social returns will be greater than private returns, and there will be circumstances under which the government should finance, organise, and support these activities. The situation is further complicated if an industry consists of only small and medium-sized enterprises. In this case, even if in principle the gains are appropriable, in practice, no one single enterprise will have sufficient resources to finance an investment with a large capital requirement, long gestation period, and uncertain outcome and the ability to bear the risks to enable it to capture the appropriable gains eventually." Accordingly, if we expect the private sector to undertake all of R&D activity, it is possible that undesirable result might appear, as Kim and Ma (1996: 128) describe: "An individual firm, facing the possibility of not reaping all the gains from the investment, will prefer to undertake less than the society optimal degree of R&D investment." This equal to the coordination problem of multiple equilibrium caused by the gap between the preferable strategy of each enterprise and the desirable result in whole. However, the solution varies depending on conditions. As regard to government intervention to R&D, Lau (1996:43) describes: "The initial size distribution of enterprises also has a significant and lasting effect on the appropriate role of the government. For example, if the economy consists of a large number of small enterprises, as in Hong Kong and Taiwan, the government will have to take a more active role in the promotion of R&D __ simply enacting an R&D investment tax credit will have very little effect because none of the small enterprises has the capital or is able to accept the long gestation period and risk inherent in R&D projects. However, for an economy dominated by a small number of large, well capitalised enterprises, such as South Korea, an R&D tax credit may well be very effective."

Any technology life cycle curve shows each its own uniqueness according to its kind and character, but the technology of manufacturing machinery industry has strong liquidity and low reliability at the beginning stage. Robert and Rogers (1972) classified the adopter categories into five groups, namely; innovator, early adopter, early majority, late majority, laggards. This classification implies that the number of adopter begins to increase rapidly at certain level. The reason is that, the information network among the adopter function has a limit under a little experience and a little reliability. When the experience and reliability become sufficient, the network works well and the knowledge is spreading out. If this "certain level" of information is achieved by repletion of information network or accelerated information flow, advanced information may be a competent advantage. The advantage is evident profit perspective.

There are some cases in which coordination problem occurs even if there are more fluent information network and workable information generation ability than certain level. For example, there is no rational reason why Japan uses 100 volt of household electricity, while U.K. uses 220 volt. Certainly, there were many possibilities to be standards, but the lack of rational background causes difficulty in standardisation, though it depends on the strategies that they choose. This is a typical trap of multiple equilibrium. Lau (1996: 52) explains the reason as follows: "When the number of economic agents is large, there can be tremendous economies in adopting a government-imposed solution to a bargaining game situation." Therefore, as Lau (1996: 50) suggests, In any case, setting standards and conventions is a highly important and society productive activity of the government. These qualifications of standard will reduce the risk for these methods.

Mainly, technology transfer is carried out through FDI. FDI includes not only technology information, but also whole management resources. However, those management resources are reflected in the needs of TNCs, but not the requirement of receiving countries. In other words, only opening the door does not call its necessities in necessary level and amount.

The administration of technology transfer required for another reason. A coordination problem will come out from the gap between the technology character and an enterprise strategy. For example, suppose there are two kind of technologies: a technology which can make money instantly but does not have good prospect, and a technology which is promised strong profit but has a long latent period. If the enterprise were myopic, it would take first choice, though long industrial period requires second one.

Third reason is explained by noting the relationship of TNCs and indigenous enterprises. The free trade world market works unfavourably for the local enterprises, because those advanced technology markets are monopolistic by a little number of TNCs. Kim and Ma (1996: 124) show the importance of the administration of technology transfer with a reason caused by a coordination problem: "Trade theory shows that in international competition, a domestic monopoly or monopsony can react strategically to the rival country’s demand and supply conditions. In contrast, a large number of domestic producers or buyers in the same sector will compete among themselves and reduce their bargaining power with foreigners. This is a typical form of coordination failure by the private sector (a "prisoner’s dilemma"): each firm chooses a strategy that maximises its own interest, but the equilibrium outcome of these actions is in fact detrimental to every player’s interest. This provides a case for the government deliberately to limit the number of buyers (e.g., entrants in the petrochemical industry) of foreign technologies, that is, to use its cohesive power to "coordinate" the private sector’s technology imports."

Last reason for the administration is justified by the fact that "black box" technology less contributes to industrialisation than "unpackaged technology" does. A packaged technology promises instant profit but has difficulty in spilling over or diffusion of the technology information. If foreign engineers are in charge of institution and maintenance, local labour force cannot accumulate skills and knowledge. Accordingly, local enterprises do not develop and TNCs are remains with strong menace.

Thus, an individual enterprise will face coordination problems if there is no regulation or arbitrary coordinator with strong authority to control individual strategies.

　

  1. The Practised Policies in Japan and Korea

Those principles discussed above have been executed in practice, in most of HPAEs, especially in Japan and Korea.

Japanese deliberate councils are good examples. The councils were established in order to link government bureaucrats and private sectors. Whenever the bureaucrats created any industrial policies, they held meetings with representatives of the private sectors. In fact, in 1970s, MITI had 27 councils to coordinate interests and purposes between public and private, concerning various industries; machinery, petrochemical, coal, electron information computing, aviation, general energy. Through these councils, the government failures caused by the lack of information were avoided as EAM mentioned. Moreover, those industries have founded each industrial party, which amounts to more than a thousand. And frequently those parties exploit its information network to decide industrial standards. Those activities, consequently, resulted in keeping high equilibrium among multiple choice.

And also, the government exploited those industrial parties to execute its policy. For example, the government founded the subsidy named "the grant for new computer development promotion" in 1972, which was to supposed to promote development of new computer emulating to IBM370 series. Under this subsidy, Japanese computer enterprises were divided into three groups: Fujitsu+Hitachi, NEC+Toshiba and Mitsubishi+Oki. They enjoyed 57 billion yen to develop competitive machines between 1972 to 76.

In Korea, a small number of big conglomerates have functioned to undertake information generation and diffusion of technologies. Matsunaga (1996: 224) summarises the role of Korean conglomerate as:

  1. Many small enterprises under the big conglomerate could enjoy subsidies from parent companies. In other words, instead of public industrial bank, conglomerate bank functioned to aid financial, in Korea.
  2. Diversified operation helped to reduce the risk for large capital investment, like heavy chemical industry. Moreover, the complicated network of the conglomerate spread the technologies, to accelerate innovative activities.
  3. Transaction cost has been reduced by internal trade. The transaction cost includes the risk for external trade, costs concerning to contract, or tax.
  4. The externalities like forward linkage effect or backward linkage effect could be internalised.

Thus, Japan and Korea had systems that undertake information generation and repletion of information network, to solve coordination problems.

Kim and Ma (1996: 125) describe the example of the unpackaging effort in Japan and Korea as: "While 100 per cent TNC subsidiaries and importation of turnkey projects were probably the quickest ways to build up production capability, the East Asian governments, particularly those of Japan and Korea, consciously realised that this mode of technology transfer would not help the development of local technological capability, because the imported technology was treated as a "black box." Only by "unpackaging" an imported technology could local engineers grasp its contents and eventually reproduce or improve it. The governments of Japan and Korea have deliberately promoted the "unpackaging" of imported technology through three sets of policies: policy formation, selecting domestic players, and selecting foreign technologies and suppliers."