Chapter 5.Stages of Growth
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Transcript of 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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