Chapter 5.Stages of Growth

8/16/2019 Chapter 5.Stages of Growth

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STAGES OF GROWTH

Economic development depends on the productivity

with which the national resources, economicfactors of production, are deployed.


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The level and growth of productivity are a

function of the kind of industries and segmentsin which a nation’s firms can successfully

complete, and over time of the competitive

advantages achieved in these endeavours.


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Hence, economic progress then depends on the

continual upgrading of the competitive

positions via developing higher-order

competitive advantages via the utilisation of

higher-orders of economic factors and

developing the capability to compete in new

and high productivity industries.


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This is what foreign investment in the

developing world is about where the foreign

company shifts less productive activity abroador puts high productive entities nearer foreign

markets to more effectively compete.


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An eample of the first is the outsourcing of call

centres, back office services and medicaltranscription to developing countries with

lower cost labour, and of the second is the

relocation of !apanese high-tech motor car production, using steel collar workers "robots#

in the $% to better attack that market.


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A nation then in this dynamic system ofcompetition is either upgrading its industries

or falling behind. &f the nation’s industries are

in a mutually reinforcing clusters then theupgrading in one industry spreads to the

others.


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'ontinuous upgrading of an economy then is

crucial to economic sustainability.

(ithout the ability to eport and sustain a position against imports in the local market

national productivity will be constrained.


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)urther, and since a country, especially a smallcountry cannot produce in all economic

spheres, the ability to eport in advanced

industries allows the country to import in less productive fields* a process that is

fundamental to the economic upgrading

process.


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)or eample, %ingapore saw that it was notcompetitive in agriculture so it imports a

substantial portion of its food and is still rated

in the first five of highly competitive nations.Also %ingapore takes advantage of cheap

subsidised food from other developed nations.


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This is not meant to be a recommendation that

T&T gets out of agriculture since each nationhas to develop its own strategies to attain the

objective of competitiveness.


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%tages of 'ompetitive +evelopment.Economies pass through a number of stages of

competitive development that reflect the

characteristics of the sources of the kind ofadvantage the national firms process and the

nature of its successful companies.


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Though these stages in this age of globalisation

reflect the nation’s international com-

petitiveness they also indicate the state of thedomestic industries. ote also, that it is not

inevitable that all nations pass through these

stages.


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&t must also be recognised that not all companiesor industries will be at the same stage of

development. )or eample, the $% has

companies whose competitive advantage isderived from the basic factor of natural

resources.


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However, the predominant industrial thrust in

that country upon which its general economic

performance depends utilises the advancedand specialised economic factors* it depends

on continued innovation.


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The general stages of growth of national

competitive development involve

factor-driven, investment-driven, innovation-

driven and wealth-driven.

The first three of these are characterised by

continuous upgrading of a nation’scompetitive advantages and are reflected in

rising national prosperity.


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The last stage, the wealth-driven stage, is one of

drift and ultimate decline.

These stages, though broad and the broadness ofeach merges into the other, give us a matri

within which to analyse the development of

economies and so identify the problems thatface the national economy and in particular its

firms.


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)actor-+riven "asic-)actor-+riven#

At this first stage of growth all internationallysuccessful industries in the nation obtain

advantage solely from basic factors of

production which include natural resources,


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favourable growing conditions for certain crops,

or an abundant and in-epensive semi-skilled

labour pool. &n reference to /orter’s +iamondonly factor conditions are important.


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'learly this source of competitive advantage

limits sharply the industries of the nation that

can compete and such firms compete solely on price in industries that re0uire either little

product or process technology or technology

that is inepensive and widely available.


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)urther in total factor-driven economies, like

ours, whatever technology is re0uired is notcreated locally but is sourced from abroad.


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1ore advanced product design technologies are

obtained through passive investments in turn-

key plants or are provided directly by foreignfirms that operate production bases in the

nation.


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2ery few of the nation’s firms at this stage have

direct contact with the end-users, i.e. they are

suppliers of commodities, and foreign firms provide most of the access to foreign markets.

+omestic demand for these goods may be

small or even non-eistent.


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%uch an industry is vulnerable to world

economic cycles and echange rates whichdrive demand and relative prices.

&t is also sensitive to loss of factor advantage to

other nations and to rapidly shifting industry

leadership.


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(hile the possession of large natural resources

could deliver high per capita income for a

sustained period of time a factor-driven

economy has poor foundation for productivity

growth and hence sustained economic

development.


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early all developing nations are at this stage of

growth. 1any prosperous nations with largeresources have industries that are still at this

stage "'anada, Australia#. 1any nations never

move beyond this stage.


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The mi of domestic oriented industries in afactor-driven economy may be enlarged

through import substitution supported by

production. This, if widespread, can reducenational productivity.


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Energy and Sugar Sectors of T&T.

The above comments fit like a glove ourexperiences (past and continuing in the

Energy and Sugar industries.


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&nvestment +riven

(hen a nation achieves this stage in itsdevelopment national competitiveness

depends on the willingness and ability of the

nation and its firms to invest aggressively.


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)irms would invest in modern, efficient and

often large scale facilities e0uipped with the

best technology available on the global

market.


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)irms also have to invest in ac0uiring more

comple foreign product and processtechnology through licenses, 3oint ventures

which allows competing in more sophisticated

industries and industry elements.


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&n many cases the technology so ac0uired is a

generation behind industry leaders who areusually unwilling to sell the latest generation.


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&f the firms are aggressive then the foreign

technology is 3ust not applied but improved

upon.

The ability of a nation’s industry to absorb andimprove foreign technology is essential to

reaching the investment-driven stage.


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This is the crucial difference between the basic-

factor and investment-driven stages.


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!n the energy sector during the first boom

years we invested in process plant.

"gain we have seen #$!#% invest in process

plant.

et because of our inability to improve on the

imported foreign technology we are not fully

into the investment'driven stage.


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The firms that are truly in the investment stage

would have mastered the foreign technologyand methods, and begin to develop their own

refinements and upgrades, and even their own

products.


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&n parallel, the nation, its citi5ens and firms,

invest to upgrade their economic factors tomore advanced factors and create modern

infrastructure.


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Though the economy supports increasingly

skilled workers who are still not well paid theyoperate sophisticated facilities and provide the

internal capability to assimilate and improve

the technology.


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The nation’s firms also have to establish some

international marketing channels of their own

as well as direct contact with buyers.

6ivalry among domestic firms encourages them

to invest continuously to pull down costs,improve product 0uality, introduce new

models and modernise processes.


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E%%ET&A7 to achieving this stage is that the

nation’s firms are risk-takers and that the basic

factor of debt capital support is available forsuch risks.


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6eferring again to /orter’s +iamond

competitive advantage in the investment-driven stage depends on both improving factor

conditions as well as firm strategy, structure

and rivalry among firms.


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)irms will still retain advantages due to basic

factor costs but comparative advantages begin

to include low cost but more advanced factors

e.g. university trained engineers.


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Also, it encourages the formation of factor

creation institutions such as educationalinstitutions, research institutes and 'entres of

Ecellence.

However, at this stage, the factor pools are

relatively generalised ones, not specialised to

particular industry segments.


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8et the firms in this stage still compete in

relatively standardised, price sensitive

segments of the market.

ut the range of industries available is wider

than if the nation were in the factor-driven

stage.


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The industries in which the nation is most likely

to succeed in this stage are those where itshome market demand is relatively large due to

local circumstances


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"ship building in !apan and 9orea, where each

nation had unusually high water transportation

needs given its location#,


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or where home demand market needs areheavily weighted towards segments that have

been ignored elsewhere.


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6elated and supporting industries are largely

undeveloped in the nation at this stage./roduction is almost solely dependent on

foreign technology, foreign e0uipment and

foreign components. This dependenceconstrains the pace of local innovation.


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The investment-driven route to competitiveadvantage is only possible in a certain class of

industries* those with significant economies of

scale and capital re0uirements but could havea large labour cost component,


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standardised products, low service content,

technology that is readily transferable and

where there are multiple sources of product

and process technology.


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Typically industries are relatively mature and

produce undifferentiated materials.

&n mature industries foreign competitors plants

may well be obsolete providing opportunitiesfor a nation’s firms to gain advantage "recall

the steel mini mills#.


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The investment-driven stage is accompanied by

the bidding up of wages and factor costs. 7oss

of competitiveness in the most price sensitive

industries and segments begin.

The economy improves its vulnerability to

global stocks but still remains fragile.


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The role of government can be large given that

competition depends on factors and the

willingness to invest.

!s the plan to invest in aluminium smelters such

a case


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Hence governments can attempt to channel

scarce capital into particular industries,

promote risk-taking, provide temporary

production to encourage entry of firms into the

sector,


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stimulating and influencing the ac0uisition of

foreign technology and encouraging eports.


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This model re0uires a national agreement that

favours investment and long-term economic

growth over current consumption and incomedistribution.


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This happened in !apan, %ingapore and %outh

9orea. Hence effective policy making willre0uire a political process that allows

disciplined and tough decisions as well as a

long term political hori5on.


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To date very few developing nations have madethe 3ump to this stage. !apan and %outh 9orea

have done it and Taiwan, %ingapore, %pain andra5il are nearly there. (e in T;T have noteven begun to plan.


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ut getting there re0uires the effective putting

together of the vision points in the diamond*

advanced factors, capable product and processtechnology, international marketing channels,

etc.


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Trinidad and Tobago has a large )*! driven

energy sector which to us may be more in the

basic'factor'driven stage.


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This sector definitely shows the re+uiredeconomies of scale. !s it possible to drive our

economy into the investment'driven stage viathe energy sector


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&nnovation-+riven.

&n the innovation-driven stage the full diamond

of /orter is in place. The mi of firms broadens and upgrades through specific

industries and clusters will reflect the nation’s

particular environment and history.


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'onsumer demand becomes increasingly

sophisticated because of rising personal income,

higher levels of education, increasing desire forconvenience and domestic rivalry among firms.


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ew competitive industries emerge out of related

and previously investment driven industries.


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'ompetitive advantage due to basic-factor costs

become more rare and growing success in many

new industries puts upward pressure on factor

costs "makes the cost of labour in agriculture

rise# and the value of the currency.


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%elective factor disadvantages stimulate

innovations that advance product and process

technology. The sophistication of established

universities, research facilities, centres of

ecellence and infrastructure grows.


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ew systems emerge to create advanced and

specialised factors and continually upgrade

them, increasingly tied to particular industries.


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This stage is innovation-driven because firms

not only appropriate and improve technology

and methods from other nations but also'6EATE them.


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)avourable demand conditions, supplier base,

specialised factors and the presence of relatedindustries in a nation allow firms to innovateand sustain innovation.

This capacity to innovate encourages yet newindustries.


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)irms in an innovation-driven economy compete

internationally in more differentiated industry

segments. They will of course compete on cost

where it is necessary.

ut where it depends, not on factor costs, but

productivity, they compete on high skill levelsand advanced technology.


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&nnovation involves nations at various levels ofadvancement. %ome industries take the lead in

the shift to innovation-driven stage by utilising

higher-order competitive advantages.

+eepening of the industry ensues.


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A more advanced economy in this stage is

capable of widening the range of successful

industries and spawning new ones.

The latter is important since new industries are

re0uired to offer 3obs to the people cominginto the 3ob market and those displaced by the

upgrading of the eisting firms.


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&n an innovation-driven economy more

advanced firms develop increasing

sophisticated service needs e.g. marketing,engineering,


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&n parallel it develops more skilled human

resources and other factors needed for theseservices. This home demand may be the basis

for the creation of industrial competitiveness.


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:overnment cannot keep track of every new and

eisting industry and linkages among them.

:overnment’s time is best spend in indirectways* creating more advanced factors,

improving 0uality of domestic demand,

encouraging new business formation.


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(ealth-driven stage.

This stage ultimately leads to decline. The

driving force in such an economy is the wealththat has already been ac0uired. %uch an

economy driven by past wealth is not able to

maintain its wealth.


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The motivation of investors, managers and

individuals shifts in ways that undermine

sustained investment and innovation andhence upgrading.


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)irms put more emphasis on preserving their

position than on enhancing it.

There is a declining corporate interest=

motivation to invest and firms tend to try to

insulate their position by influencing

government policy.


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Entrepreneurs lose their place in the corporation.

elief on competition falls in the companiesand in their unions who all lose the taste for

risk-taking.


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A symptom that may accompany a move to a

wealth-driven stage is widespread ac0uisitionsand mergers.

oth reflect the increasing desire to reduce

rivalry and increase stability.


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They create an illusion of progress without

creating new business or enhancingcompetitive advantage fundamentally in the

eisting businesses.


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(hilst in the innovation-driven stage the

capacity to innovate and sustain competitive

advantage is relatively widespread,


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the wealth-driven stage sees a narrowing of the

range of industries in which firms can sustain

competitive advantage.


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The nature of foreign investment changes from

investments that transfer know how or etend

home-based positions "typical of the

innovation stage# to purely financial

investments "see our Energy %ector#.


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)irms may also use their resources to ac0uire

foreign companies with competitive advantage

but these are managed autonomously byforeign management.

!s this what we want to do by going more deeply

into the gas based industry abroad


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The /rocess of ational Economic

+evelopment.

Each nation will go through its own uni0ue

process of development. The nation’s history

will play a defining role by influencing suchthings as the base of skills that have been

created,


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6esource rich countries "%weden-forestry, $%-

steel, forests, gas, oil etc.# began their

development process from a position of

international success in resource based

industries "iron, forest products, agriculture#.

'lusters formed around these and the economy

broadened to new industries


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Economies first began to upgrade at the top

"upstream industries# or the bottom "final

consumption goods and services# level of thecluster chart.


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%trong positions in the middle of the cluster "i.e

in industrial and supporting functions#

engaged only later in the investment-drivenstage or early in the innovation-driven stage.


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The process of moving through the stages can

take many paths. However, nations do not

inevitably progress, some may never move beyond the factor-driven stage.


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!apan has passed through each of the first three

stages.

However, economies can move directly from

factor-driven to innovation-driven over a long period of time skipping any noticeable

transition through the investment-driven stage

"e g &taly#


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This ability re0uires a long history of industrial

activity which leaves behind a legacy of

human resources, educational institutions etc.


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A nation with unusually abundant natural

resources for its si5e can en3oy high income

despite being in a factor-driven stage though itis not likely to be sustainable indefinitely

" ,uwait- Saudi "rabia- T&T


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'anada is another nation whose natural

resources "oil, gas, iron ore# have for long

supported a high standard of living though fewoutside of resource-intensive areas possess

international competitive advantage.


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Abundant natural resources provide a

satisfactory or even high level of national

income without the need to upgrade the /orter

+iamond.


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This makes it difficult to move beyond

advantage based on resources or to replace it.

Also, the level of wages supported by abundant

resources preclude competing in types of

industries that can serve as foundations for

new clusters "agriculture#,


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or the new areas of electronic goods or industrial

apparatus and components of intermediate

levels of sophistication.


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(here resources are so abundant a nation can

move directly from the factor-driven stage to

the wealth-driven stage "T;T>#.


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+iminishing competition, adversarial labour-

management relations and production may

arise as attention in the economy shift towards preservation of the status-0uo. "orway and

'anada face this risk.#


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)ew nations with truly abundant natural

resources have achieved sustained prosperity

in the last century of knowledge basedinternational competition.


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Chapter 5.Stages of Growth