Markets, States or Transnational Networks? Explaining Technology Leverage by Latecomer Firms in Industrializing Countries

Abstract

The market versus state debate still shapes teaching and scholarly work on how latecomer firms acquire capabilities to become internationally competitive in industries new to their country. However, the developmental state approach underestimates the importance of firms as key actors in the articulation of economies into global markets and overestimates the role of the government. Industry studies filled this gap by showing how firms responded to government industrial policies, by identifying the mechanisms of technology leverage, and by underscoring the importance of aligned interests between foreign and domestic firms. Yet, we do not know under which conditions technology leverage happens and how the absorptive capacity of latecomer firms to leverage technology is generated in the first place. This article presents an explanation of the origins of absorptive capacity of latecomer firms based on a systematic analysis of the experience of domestic firms in East Asia. The framework emphasizes the role of transnational networks linking foreign and domestic firms as well as foreign firms’ business strategies. The article then applies this framework to explain the emergence of an apparel export industry in Mauritius in the 1970s, an exceptional success case in the African region, drawing on original empirical data.

Keywords:

• technology transfer
• foreign direct investment
• industrial policy
• late industrialization
• apparel global value chains
• Sub-Saharan Africa

Acknowledgements

The author thanks all interview participants in Mauritius. Without their time and valuable insights, this work would not have been possible. She also thanks Kristoffer Marslev for assistance in accessing trade data and creating the figures used in this article as well as Tobias Wuttke and Felix Maile for commenting on earlier versions and providing insightful suggestions for revisions. The author also thanks the journal editors and the two anonymous reviewers for their very useful comments. The data on which the article is based are available to researchers on request by contacting the corresponding author.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 This paper adopts the term latecomer firm from Hobday (1995, pp. 33–34). The latecomer firm is a manufacturing company (existing or potential) that faces two sets of competitive disadvantages in attempting to compete in export markets: it is dislocated from the main international sources of technology, and it is dislocated from the main international markets it wishes to supply in advanced countries.

2 The seminal works usually cited under the developmental state approach are Johnson (1982) on Japan, Amsden (1989) and Evans (1995) on Korea, and Wade (1990) on Taiwan. For a review of this revival of industrial policy, see Whitfield et al. (2015).

3 In addition to Hobday’s book, seminal works include Dedrick and Kraemer (1998), Mathews and Cho (2000), Lee and Lim (2001), Saxenian (2006), and Yeung (2016). The most incredible example of this process of technological learning is how local firms and state agencies in South Korea, Taiwan, and Singapore built internationally competitive semiconductor industries at the technological frontier.

4 For example, most development studies students have read (or at least heard of) Peter Evan’s 1995 book Embedded Autonomy on economic development in Korea but few have heard of Hobday’s book Innovation in East Asia published in the same year, which provides a counter to the developmental state approach by detailing the role of latecomer firms’ initiatives in technological learning and their alignment with foreign firms investments in the electronics industry in Korea and other East Asian countries.

5 Yeung (2016, p. 14) notes that Robert Wade conceded this point in the preface to the second edition of his influential book on Taiwan, Governing the Market (2003, p. xvii).

6 Such contractual relations include sub-contracting, buyer-supplier relations, licensing with technical support, technology transfer agreement that involves substantial technical support, joint development agreement in which firms agree to collaborate without creating a new corporate identity, joint ventures in which the joint development is housed in a new corporate identity and purchasing of a company (Mathews & Cho, 2000, p. 81). Hobday (1995, p. 35) presents a similar list of mechanisms of foreign technology acquisition by latecomer firms.

7 For summary reviews of the foreign direct investment spillover literature, see Pavlinek and Zizalova (2016) and Paus and Gallagher (2008).

8 Korean entrepreneurs followed the organizational business model of the zaibatsu in Japan, especially the early form where the zaibatsu was driven by individual leadership with a chairman at the center (Mason et al. 1980, p. 285). The Chinese characters for chaebol are the same as for the Japanese zaibatsu.

9 During the 1960s, Japan turned to synthetic fiber production in the face of restrictions on its cotton textile exports to the West, and by 1970, Japan was the second largest manufacturer of man-made fibers in the world (Rosen, 2002, p. 50).

10 In their book on the electronics in Taiwan, Amsden and Chu (2003) contribute successful technology transfer to domestic firms in the personal computer and integrated circuit industries to the institutions of the developmental state, in particular the publicly funded research and development agency Industrial Technology Research Institute (ITRI) and its subsidiary the Electronics Research and Services Organization. However, Saxenian (2006) shows that behind government policymaking lay networks of overseas Chinese in Silicon Valley that advised government politicians and policymakers since the 1960s and were central to the early joint ventures with foreign firms. Overseas Chinese returning from Silicon Valley also ran the ITRI and played crucial roles in the establishment of the Taiwan Semiconductor Manufacturing Corporation (TSMC), a joint venture between the government, local investors, and Philips that kickstarted the VSLI program in Taiwan. The success of ACER, Taiwan’s largest and best-known technology company, is also closely tied with the overseas Chinese community in Silicon Valley.

11 Much of the literature on apparel export sectors, especially from the perspective of global production networks and chains, does not distinguish ownership of apparel firms, so it is hard to get a completely accurate picture of domestic ownership as apparel production spread globally. For one of the most comprehensive surveys of the literature on apparel export industries, see Whitfield, Marslev, and Staritz (2021).

12 On Lesotho, Eswatini, and South Africa, see Gibbon (2002); Morris and Staritz (2017); Morris, Plank and Staritz (2016); and Morris, Staritz and Barnes (2011). On Ethiopia, see Whitfield, Staritz, and Morris (2020) and Whitfield and Staritz (2021b).

13 Esquel continued to operate a factory in Mauritius until 2020, when it closed that factory along with several others globally in response to declining orders in the context of the Covid-19 pandemic.

14 Political instability in Madagascar in the 2000s caused Mauritian firms to exit and then enter again in the 2010s.

15 Database of firms compiled by the author based on the directory produced by Enterprise Mauritius.

16 Between 1970 and 1983, local investment was 47.1% of total EPZ investment, and 31.5% between 1983 and 1985 (Lamusse, 1989).

17 The French settled Mauritius around the mid-eighteenth century to use it as a base to enter the direct China trade in partnership with Fujian and Cantonese merchants (Brautigam, 2003, p. 157).

18 An important source is the Lamusse (1989) report produced for the World Bank, which is based on a study undertaken in 1984 by Professor Lamusse of the University of Mauritius of 91 EPZ firms, of which 53 produced apparel, using the official records of the Registrar General.

19 Yaoundé Convention was a trade agreement between the EEC and the Associated African States and Madagascar in 1963 and then Mauritius was added in 1969. It was replaced in 1976 by the Lomé Convention between the EEC and the 71 African, Caribbean, and Pacific countries.

20 Knitted products are also called knitwear in the reports, which can be confused with products made from circular knit fabric. Tellingly, the literature on Hong Kong and the early reports on Mauritius make a distinction between garments and ‘knitwear’. Later reports on Mauritius confirm that exports in the 1980s were in woolen sweaters produced on hand-flat machines and simple woven cotton garment (World Bank, 1994).

21 The founder had worked in his family’s business since the 1950s, which started out with sub-contract work producing gloves, then sweaters, and became a joint venture with friends in 1965 called Cordial Knitting Factory. Today, Crystal Group is one of the largest apparel firms globally. For the Greater Good, Kenneth Lo, Cristal Knitters Ltd, Hong Kong, 2017.

22 The Greater Good, pp. 49–50.

23 Importantly, Mast Industries was later acquired by Limited Brands, the parent company of Victoria’s Secret, and Mast Industries played a significant role in the founding and group of the apparel export industry in Sri Lanka (Athukorala, 2018). Thus, transnational networks linked to Hong Kong were also important in the emergence of Sri Lanka as a major apparel exporting country and the emergence of local firms through joint ventures, which also later transnationalized.