Between copying and creating: where does East Asia fit?

Rajah Rasiah1 takes issue with the argument that the growth of some East Asia economies is largely a reflection of increased inputs rather than technological innovation.

It is now over two decades since Young (1994) and Krugman (1994) threw cold water at East Asia’s economic growth with the latter equating it to what happened during Stalin’s rule in Soviet Union. Explaining the growth by a focus on factor inputs rather than technical change, Krugman (1994) argued that such a perspiring growth strategy would combust as a consequence. While orthodox economics has pushed relentlessly to use the same methodology to trace sources of growth, it is time to rethink such ideas to give East Asia the credit it deserves. South Korea, and Taiwan, especially, have grown rapidly over the period 1965-2015 while weathering major storms during the difficult years of 1973-75, 1979-80, 1985-87, 1997-98 and 2007-09 when externally induced crises caused by oil and financial shocks threatened to derail them.

The fundamental point to examine is whether East Asia enjoyed technical change over the rapid growth years. The Solow-Romer model of total factor productivity (TFP) estimations over the period 1970-85 had shown factor inputs as the prime source of growth achieved by South Korea, and Taiwan (Young, 1994). Until the mid-1980s, as Amsden (1989), Wade (1990), Kim (1997), and Saxenian (2006) have shown, there is evidence to suggest that these countries were learning from foreign technology acquired through licensing, knowledge transfers carried by human capital and mergers and takeovers. If one does not regard such transfers of foreign knowledge as technical change, then the capital accumulation argument advanced by Rodrik (1995) can be the only plausible explanation in the initial phase. However, even so one cannot hide the truth that firms in these countries were adapting foreign sources of knowledge to improve productivity through both producing similar products more efficiently and to producing new products rather than simply copying them. Such a development would easily fit Schumpeter’s (1934) reference to incremental innovations whereby entrepreneurs adapt or modify existing stocks of knowledge to produce things more efficiently or new products.

Even if the results of Young (1994) and its consequent interpretation by Krugman (1994) over the period 1970-85 for South Korea and Taiwan are to be accepted, such arguments will be questionable from the 1990s as firms in South Korea and Taiwan have caught up and leapfrogged to shape the technology frontier in a number of industries. Not only are there some recent TFP studies that indicate considerable scope for further capital accumulation in these countries (Timmer and Ark, 2000), there is also evidence of firms taking technological leadership of high technology industries (Rasiah, 2015). Indeed, firms in South Korea and Taiwan have taken on what Schumpeter (1942) had favoured, which is the initiation of cycles of innovation by creating new stocks of knowledge. For example, Samsung Semiconductor took leadership of memory chips to lead its miniaturization process from the 1990s, while Taiwan Semiconductor Manufacturing Company has begun dominating logic chips since the turn of the millennium (Rasiah, 2015). Similarly, South Korea and Taiwan have become leaders in the launching of new products in several industries, including integrated circuits, smartphones, automobiles, refrigerators, notebooks, television sets, and ships (Chang, 1994).

Clearly firms in South Korea and Taiwan have not run aground. In contrast, firms from these countries are now shaping the technology frontier in many industries. Hence, it is time for the world to accept that South Korean and Taiwanese firms were adapting technologies copied until the 1980s but have since the 1990s turned themselves from technology adaptors into technology creators (Rasiah, 2015). Accepting this truth is critical if one wishes to draw implications for similar catch up experiences across the developing world. Both South Korea and Taiwan moved from poor nations to developed nations in one generation, which is unprecedented in history. Efforts to learn through adaptation and subsequently creating from the experiences of these countries by other latecomers would require a full scrutiny of not just the catch up and leapfrogging experience of their firms but more importantly the institutional change that supported their successful transition. Interestingly both countries are diverse examples with South Korea dominated by vertically integrated firms that have evolved as conglomerates while Taiwanese firms have grown as de-verticallized firms with specialization in the key stages of production. Whereas South Korean firms have emerged in the Schumpeterian mould as large firms to internalize R&D operations, Taiwanese firms collaborate with incubation facilities at science parks and R&D labs at universities to support their technological progress.

References

Amsden, Alice. (1989) Asia’s Next Giant: South Korea and Late Industrialization, New York: Oxford University Press.

Chang, Ha-Joon (1994) The Political Economy of Industrial Policy, Basingstoke: Macmillan.

Krugman, Paul. (1994) ‘The Myth of Asia’s Miracle’, Foreign Affairs, 73 (6): 62-78.

Rasiah, Rajah. (2015) ‘Technological Capabilities and Economic Progress’, Celso Furtado Prize Lecture, World Academy of Sciences, Vienna, 20 November.

Rodrik, Dani. (1995) ‘Getting interventions right: how South Korea and Taiwan grew rich.’ Economic Policy, 20 (10): 53-107.

Saxenian, Anna Lee (2006) The New Argonauts: Regional Advantage in a Global Economy, Cambridge: Harvard University Press.

Schumpeter, Joseph Alois. (1934) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Cambridge MA: Harvard University Press.

Schumpeter, Joseph Alois. (1942) Capitalism, Socialism and Democracy, Cambridge MA: Harvard University Press.

Timmer, P. Marcel and Ark, Bart van. (2000) ‘Capital Formation and Productivity Growth in South Korea and Taiwan: Beating Diminishing Returns through Realising the Catch-Up Potential’, Paper prepared for the 26th General Conference of The International Association for Research in Income and Wealth Cracow, Poland, 27 August to 2 September.

Wade, Robert. (1990) Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton: Princeton University Press.

Young, Alwin. (1994) ‘Lessons from the East Asian NICs: A Contrarian View’, European Economic Review, 38(3-4): 964-973.

Note:

1. Rajah Rasia is Professor of International Development, University of Malaya and recipient of the 2014 Celso Furtado Prize for his contribution to the concept, theory, and measurement of technological capabilities, and policy approaches on technological upgrading to stimulate economic development.

From Issue no. 173, April 2016, pp.4-5.

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