Globalization and industrial performance

1. Globalization and industrial performance Sanjaya Lall Oxford University

2. I use it to mean the closer integration of economies brought about by technological change, and the resulting restructuring of production, trade and factor flows. I do NOT take it to mean policy liberalization. Successful globalization means tapping the opportunities opened by technological trends in many ways, not necessarily by passive ‘opening up’ There are many meanings attached to ‘globalization’.

3. Rapid technical change is at the heart of globalization and the new competitive scene The ‘death of distance’ opens new markets and access to inputs, allowing narrower forms of specialization in ‘fragmented’ or ‘segmented’ production and outsourcing It changes the structural dynamics of industrial activity, shifting the production and exports towards technology-intensive products and activities It makes it imperative for all productive activities to constantly access and use new technologies, while raising the minimum entry levels for using technologies efficiently

4. Recent growth of hi-tech & other manufacturing production in 1980-98 (US National Science Board)

5. Technical change alters the organisation of production and trade Harnessing innovation and globalization needs more than opening up to trade or FDI: it needs building capabilities to use new technologies efficiently and moving up the technology scale Thus: globalization offers new markets and mobile resources but competing for these calls for more than primary resources or cheap labour – it requires the ability to harness innovation Globalization raises the role of MNCs in innovation, technology transfer, production and particularly exports. Around 2/3 of world trade is handled by MNCs, about 1/3 is within companies

6. ‘Slippery slopes and sticky places…’ • Productive factors, including highly skilled labour, are increasingly mobile - through FDI but also various other means • One major driver of mobility is the search for low cost production and service sites • But increasing mobility does not mean factors spread themselves evenly over poor countries: efficient production requires local capabilities to complement the mobile factors • Thus, globalization needs efficient ‘localisation’: countries must provide the technical, skill, quality and reliability needs of competitive production

7. Efficient ‘localisation’ involves far more than passive opening up ... • Technologies cannot be effectively used by developing economies just by opening up to global trade, technology or capital flows • Technology cannot be fully embodied in machines, licences or people: it has strong tacit elements • These tacit elements need time, investment and effort: to understand, adapt, use & improve technologies – to build new capabilities • Such effort generally faces pervasive market and institutional failures: within the firm, between firms and between enterprises and factor markets & institutions. • Proactive strategies, often selective in nature, are essential for industrial success

8. Policies are necessary at all levels, but more at lower levels where market/institutional failures are greater • For poor countries without significant industrial sectors: to promote basic industrialization, without which sustained development, export growth and modernization are almost impossible • For newly-industrializing economies: to move up the value chain, enter new areas of competitiveness and dynamism • For advanced countries, to sustain growth & employment, keep ahead of competition from NIEs and promote skill and innovation system

9. The impact of globalization is necessarily very uneven, across activities, regions and countries. There is a growing wedge between the technological ‘haves’ and ‘have-nots’ in the developing world. Why?1. Minimum entry levels are rising2. Leads and lags are cumulative: learning and agglomeration externalities3. Capacity to overcome market failures is very limited in most lagging countries 4. Governments have withdrawn from industrial policy 5. ‘Rules of the game’ and indirect pressures constrain policy space available to intervene

10. I illustrate divergence in manufacturing with data on production, exports and technological performance for 1980-2000 • Technological performance is shown by dividing production and exports by technical sophistication – a crude but useful tool • I also consider some structural ‘drivers’ of competitive performance: skills, FDI, domestic technological effort, licensing and infrastructure. • This benchmarking, conducted for UNIDO & IDB, cannot quantify policy parameters – I don’t trust normal measures of openness, good governance etc. (and don’t agree with Easterly and Levine on what constitutes ‘good policies’)

11. Technological categories • Primary products • Manufactured products • RB (Resource based): e.g. food, wood & forestry products, processed minerals, petroleum products • LT (Low technology): e.g. textiles, clothing, footwear, toys, sports goods, simple metal products • MT (Medium technology): e.g. automotive products, TVs, machinery, chemicals, steel • HT (High technology): Advanced ICT and electricals, pharmaceuticals, aerospace, precision instruments

12. Changing shares of global manufacturing value added (MVA) 1980-2000 (%)

14. Compare two leading industrial regions in developing world: LAC and East Asia

15. LAC versus EA: former remains heavily dependent on RB while EA moves rapidly into MHT

16. But EA grows much faster than LAC in RB – and other categories: WMS by technology… Total Resource based Low tech MHT

17. The 5 fastest and slowest growing industrial activities (1980-2000): prospects for LDCs?

18. Growth rates of world exports by technology categories, 1980-2000

19. Resource based High Technology Medium Technology Low Technology

20. Role of hi-tech products is more evident in the 50 fastest growing exports over 1990-2000 (% shares)

21. How is the developing world doing in this dynamic scene? Actually rather well…

23. East Asia (with and without China) also dominates manufactured exports

24. A closer look at Latin America: the impact of massive liberalization…

25. Leading 12 developing country exporters of manufactures

26. By technology levels, concentration is highest in high technology exports (2000)

27. And concentration is cumulative over time… 2000 1985

28. Leading developing HT exporters ($ m.)

29. Leading medium technology exporters ($ m.)

30. Leading low technology exporters ($ m.)

31. Leading resource based exporters ($ m.)

32. Some structural ‘drivers’ of industrial competitiveness and success…

33. It’s certainly not low wages per se…

34. Skills, measured by tertiary technical enrolments (per 1000 people)

35. National tertiary technical enrolments, (1985-98, % population) What accounts for Chinese competitive success?

36. R&D financed by productive enterprises ($ per capita)

37. R&D financed by productive enterprises at the national level (% GDP, latest available year)

38. Indicator of integration into global production systems: R&D per unit of high-tech exports

39. Annual inward FDI (US$ per capita)

40. FDI as % gross domestic investment

41. Developing world FDI distribution 10 COUNTRIES GET 80% OF FDI IN THE DEVELOPING WORLD: AND THEIR SHARE IS RISING OVER TIME LARGE PART OF RECENT FDI, PARTICULARLY IN LAC, IS NOT IN MANUFACTURING OR EXPORT-ORIENTED ACTIVITIES: THE MAJOR EXCEPTION IS MEXICO

42. Technology licence payments abroad (US$ per capita)

43. What then explains increasingly divergent performance? • Incomplete liberalization, macro mismanagement, poor governance etc.? • Adjustment lags? Just give it longer? • Or underlying structural factors, market failures and & institutions? • All these matter, but the most important, and the most difficult to tackle, is the last one • The normal course of globalisation exacerbates differences because of cumulativeness, path dependence, systemic effects and agglomeration (national and regional) in building capabilities • Success provides resources, institutions and government capabilities to build further success

44. The new policy environment • Facilitates globalization, trade and FDI • In doing so it ‘levels the playing field’ in a way that disadvantages weak countries • It raises dependence on FDI for countries with weak local enterprise; if they can attract FDI they risk being stuck at low technology levels • It does not leave sufficient policy space for countries to strengthen or develop new capabilities and properly tap FDI • It can retard the development of capabilities and freeze comparative advantage

45. But local capabilities remain vital • For building domestic industry and related technology intensive services • For attracting high quality FDI: the stronger is domestic industry the more and ‘better’ are FDI inflows • For upgrading within value chains, as wages rise and technologies change

46. They are even more important because international production systems have inherent limitations • Relatively few activities have technologies and logistics for widespread segmentation. These are limited in geographical scope and offer strong first mover advantages • Other FDI does not cover very large parts of industrial activity – local enterprise have to carry bulk of industrialization in most economies • There is heavy concentration in FDI flows and cumulative agglomeration. • Most poor countries are marginal to globalised production and likely to remain so if liberalization and globalization proceed ‘as usual’ under present rules of the game