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Capital, Technology and Entrepreneurial Capability. Are poor countries poor, because they lack capital and technology?. Capital. LDCs need to build factories and attain machinery in order to start modern manufacturing activities.
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Capital, Technology and Entrepreneurial Capability Are poor countries poor, because they lack capital and technology?
Capital • LDCs need to build factories and attain machinery in order to start modern manufacturing activities. • Capital is essential but poor developing economies could not have accumulated sufficient amount of capital. • Investment savings gap : little saving may not afford necessary investment .
Mobilization of Capital • Domestic capital - Forced saving by increasing money supply (Development inflation) • Foreign capital - Foreign direct investments (FDIs) : Foreigners’ initiatives (build, own and operate factories). - Foreign loans : Local firms’ initiatives.
Foreign Exchanges • LDCs must import machinery and facility from advanced countries to build their own factories. • They must also license modern technology and pay royalties. • Foreign exchanges are needed in order to pay for import of machinery-facility and royalty on licensed technology.
Foreign Exchanges Gap • Export of agricultural products and natural resources may provide needed foreign exchanges. • East Asian countries were not endowed with abundant natural resources. • Foreign exchanges gap : everlasting shortage of foreign exchanges. • FDI eases the foreign exchanges problem.
Technology from the Perspective of Developing Economies • R&D develops candidate commodities in the laboratory. : PhDs and MAs • Design specifies candidate commodity into reproducible content in large scale at profit (product design), and its production process (process design) : MAs, BEs with plant experiences • Production Management controls actual production works. : BEs
Continued • Processing - Assembly carries out task of actual production : technicians, skilled workers with long experiences.
How to assimilate technology? • Manufacturing begins from a given Design, and actual factory operation needs Production Management and Processing-Assembly. • Developing economies buy Design and invite foreign masters for PM and PA. • Local engineers and workers are attached to these masters as trainees.
Continued • When local trainees acquire necessary know-how, then the entire factory is operated by only local workforce. Independence in technology? No! • Design is the next stage, and foreign donor becomes increasingly uncooperative. • Reverse Engineering begins. • Samsung’s story.
Factor Accumulationor Technological Progress? • Krugman’s criticism : no improvement of total factor productivity was found in the growth of East Asian economies. • Growth accounting : capital, labor, tech. • The stage of absorbing technology may demonstrate no improvement of total factor productivity, even though the absorption is going on successfully.
Worldly Renowned Companies • Apple, MS, Intel, GE, Dupont, Pfizers, Siemens, Volkswagen, Toyota, Sony, Nokia, Alstom, Nestlee, Samsung, Hyundai, LG... • Are any of these renowned manufacturers from poor countries? • High paying good jobs are provided by good companies.
Good Jobs, Good Companies • People of poor countries are poor, because their jobs do not pay good. • Poor countries are poor, because they do not carry many good companies. • Good companies command sufficient amount of capital, advanced technology, and successful marketing at profit. • A goal of economic development is to retain as many good companies.
Entrepreneurial Capability • A good entrepreneur is able to raise needed capital. • A good entrepreneur is able to license technology and recruit skilled workforce. • A good entrepreneur is able to market his products at profit successfully. • So a good entrepreneur makes a good company.
Development Strategy on Entrepreneurial Capability • Poor countries are poor, because they lack entrepreneurial talents! • Development strategy must focus on fostering and hosting as many superior entrepreneurial talents as possible. • Then what is the basic nature of entrepreneurial talent?
The Nature of Production Works • The nature of work in agrarian epoch : autarchic work where each individual produces what he wants. • The work in social division of labor produces what other people need. • Any work which does not satisfy other people’s need is simply useless and wastes resources.
Directing and Directed Labor • Directing labor decides what and how to produce. • Directed labor undertakes what the directing labor has decided. • The distinction is not so meaningful in agrarian epoch, but it becomes very important in social division of labor, since directing labor often fails.
Theory of Economic Development - Schumpeter • … distinctions between directing and directed labor and … , the directing labor is clearly in a governing position in contrast to …the executing labor … If, therefore, an independent individual produces on his own account and also does executing work, then he splits, …, into two individuals, namely a director and a worker in the ordinary sense.
Karl Marx and Joseph Schumpeter • Marx lived in the incipience of Industrial Age, and viewed that only physical labor, i.e., the directed labor, produces value. • Schumpeter saw how poor directing labor wastes resources and fails as Industrialism developed further. • Schumpeter was born at the year 1883, when Marx died.
Entrepreneurial Talent as Directing Labor • Entrepreneurs take charge of directing labor in business operation, while employees undertake directed labor. • Entrepreneur must choose right item to produce, employ right manpower, and manage business efficiently. • If entrepreneur fails, then hard toiling works of employees will never get paid.
How to Attain Good Entrepreneurial Talents? • “Poor countries are poor, because they lack good entrepreneurial capabilities” implies that successful economic development must build up good entrepreneurial capabilities. • Economic catch-up begins from both inviting proven foreign talents and seeking for indigenous potential to foster.
Inviting Foreign Talents • Foreign direct investment is a most standard form of inviting foreign entrepreneurial talents. • MNCs bring their own capital and technology, and sell the products to their markets. But home market or local market? • MNCs provide local workforce with jobs and experiences in modern manufacturing.
Benefits of FDI • FDIprovides (good-paying) jobs. • FDI solves not only gaps of investment-savings and foreign exchanges, but also technology licensing and marketing. • MNCs encourage their local employees to produce certain parts-components at low cost, transferring entrepreneurial know-how.
Deficiencies of FDI • But all the benefits remain in the interest of not host country but MNCs. • FDI may preempt local market against emergence of local firms. • Hosting country must prepare herself to address these deficiencies, by right selection of industrial categories for FDI.
Fostering Indigenous Talents • How to find promising potential? • Substantial amount of subsidies is needed to foster promising potential. • Provision of subsidies to yet unproven potentialwill inevitably give rise to a good possibility of rampant rent-seeking and corruption. • Corruption scandals, public discontent.
Performance Based Criterion • Performance of subsidy recipients must be closely monitored. • Monitored performance must be rightly reflected in the decision of continuing subsidies. • Failures in either monitoring or subsidy decision or both will lead to wasting resources and promoting corruption.
Bureaucrats Incentives • Monitoring and decision of continuing subsidies are in the hands of bureaucrats. • System must be made transparent so that each failure or success is always accountable to certain bureaucrat. • Promotion for success, demotion for failure. • Transparent and accountable governance minimizes rent-seeking and corruption.
Government Officials and Private Entrepreneurs • Government bureaucrats must break the bottle-necks against mobilizing domestic capital, inducing foreign capital, and upgrading technology. • Private entrepreneurs actually mobilize domestic capital, induce foreign capital, and upgrade technology. • Entrepreneurs are main actors, while bureaucrats are supporters in catch-up.
