The Growth of Chinese Electronics Firms

Globalization and Organizations

K. Kimura

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137391407
• eBook ISBN: 9781137391063
• Topic: Business
• Subtopic: Business General
• Index: Business

The Growth of Chinese Electronics Firms outlines the way firms grow in China at an organizational level. Kimura uses China's electronics industry as a case study for measuring technology-fuelled growth and provides a way to understand diversified the growth process systematically.

CHAPTER 1

REVIEW AND FRAMEWORK

1.1 INTRODUCTION

Numerous studies on the influence of globalization on developing countries and their firms have already been conducted in international economics and related research fields, and, as we will see in this chapter, a variety of viewpoints have been expressed on this influence. There, however, still remain questions to be answered. One of these questions concerns the growth of indigenous firms in developing countries when there is incomplete technology diffusion.¹ Although technology diffusion from developed countries and their firms to developing countries and their firms has been the focus of several studies, to the best of the author’s knowledge partial diffusion of technology has not been investigated explicitly. This study conducts an in-depth analysis of incomplete technology diffusion because it is more commonly experienced in reality.

Studies on the modern Chinese economy have analyzed the growth of Chinese firms with such a technology gap. These studies have shown that Chinese firms tend to purchase technologically advanced goods and services from outside firms and focus mainly on their marketing. However, existing research has not explicitly considered the influence of foreign firms on the make-or-buy decision of Chinese firms. Consequently, little is known about the rationale underlying Chinese firms’ decision in choosing various organizational structures to tackle competition from foreign firms. Thus, the present research question on the diversification of organizations remains unsolved.

To answer this question, we study the diversification mechanism by integrating the existence of the technology gap into the make-or-buy decision; that is, we study the boundaries of indigenous firms in developing countries. The boundaries of the firm describe the integrated stages which goods and services are produced in-house (Besanko et al., 2009). Firms decide on these boundaries in such a way as to maximize the effect of investment in the integrated stages, as we discuss later. Focusing on the organizational level of the firm enables us to analyze the diversification within the firm.

In this chapter, we review the literature in this area of study and then put out our research question. We then present an analytical framework and the methods to solve the question.

1.2 REVIEW

The ensuing subsections review exsting studies on the influence of developed countries and their firms on the growth of developing countries and their firms, and the influence of those on the growth of Chinese firms.

1.2.1 THE INFLUENCE OF DEVELOPED COUNTRIES ON DEVELOPING COUNTRIES

1.2.1.1 Globalization and Growth: Model Analysis

The influence of globalization on the economic growth in developing countries has long been a subject of study.² It has been studied from various perspectives since the development of endogenous growth theory in the 1980s (Bardhan and Udry, 1999; Jensen and Wong, 1997; Long and Wong, 1997; Todo, 2008), though prior to that it was analyzed mainly using comparative statics (Meier, 1963). Endogenous growth theory explicitly explains technological change as a factor in long-term growth (Acemoglu, 2009; Aghion and Howitt, 2009; Barro and Sala-i-Martin, 2004; Grossman and Helpman, 1991), whereas this phenomenon is not explained in neoclassical growth theory (Solow, 1956). To include technological change, the endogenous growth theory incorporates technological improvements, such as learning-by-doing (LBD), which increase the productivity of research and development (R&D) (Romer, 1986); human capital investment through education (Lucas, 1988); an increase in the variety of new goods (Romer, 1990); and others.

Studies on the relationship between globalization and growth have been advanced by extending endogenous growth theory to open-economy models. On one hand, Grossman and Helpman (1991) showed that international trade between developing and developed countries results in economic growth in developing countries through technology diffusion from developed countries to developing ones. Conversely, openness does not necessarily result in economic growth when technologies do not diffuse for some reason. Young (1991) analyzed the negative effect of globalization. According to his model, LBD leads to the technology gap—in other words, the productivity gap—between developing and developed countries. Developed countries can specialize in manufacturing high-tech products that have room for productivity improvement. On the contrary, developing countries have no other alternative but to manufacture low-tech products that do not have room for productivity improvement. Therefore, globalization prevents the development of high-tech industries in developing countries.

This reveals that technology diffusion determines the impact of globalization on industrialization. The results of trade between countries with varying technological levels (i.e., between a developing country and a developed one) provides results contrary to those produced from international trade between countries with similar technological levels (i.e., between developed countries.)³ Rivera-Batiz and Romer (1991) showed that trade between developed countries can increase the knowledge base available for R&D and can enhance the economic growth of both countries involved. However, their model also suggests that when technologies do not diffuse, trade between a technologically advanced country and one which does not have enough technological capabilities can impede the economic growth of the latter. Thus, varying technological levels create different effects on developing and developed countries.

1.2.1.2 Technology Diffusion

Several studies have been conducted on technology diffusion as an essential growth factor and its positive effect. Mansfield et al. (1982) have argued for the positive effects of technology diffusion. According to the authors, 26 technological items developed in the United States (US) diffused to indigenous firms abroad through US overseas subsidiaries for an average of four years from 1960 to 1978. The diffusion contributed toward decreasing production costs incurred by indigenous firms in the host countries.

Such an effect—that is, the increase in productivity in developing countries through technology diffusion—is also known as the advantage of backwardness. Drawing on the study of the experiences of European countries in the nineteenth century, Gerschenkron (1962) showed that industrialization can occur at an accelerated pace if developing countries succeed in satisfying the preconditions necessary for economic advancement. The preconditions include measures such as intensified investment using banking systems and aggressive interventions by governments to promote industrialization. When developing countries satisfy the preconditions, they can effectively absorb new technologies and attain rapid economic growth. Therefore, Gerschenkron does not describe an automatic diffusion of technology. Moreover, he showed that the development process in developing countries can be different from that in developed countries. This idea is closely linked to our discussion.

In addition to the European cases, in the late twentieth century East Asian economies have also enjoyed the advantage of backwardness. The presence of a variety of preconditions, including the role of governments, has been emphasized in studies concerning the development of East Asia. Amsden (1989) demonstrated that South Korea (Korea) adopted aggressive protectionist policies to their domestic industries, especially large conglomerates (chaebol), and provided opportunities for indigenous firms to absorb technologies from developed countries. In addition to these factors, Fukagawa (1997) focused on the emerging economic agents of labor (labor unions) and financial institutions (especially banks) and showed that Korea’s rapid development was through the absorption of many technologies, particularly from the US and Japan.⁴ Kim (1997) and Kim and Nelson (2000) argued that Korean firms rapidly advanced from the stage of imitation to that of innovation through technology diffusion. In a study on Asian newly industrializing economies (NIEs), Watanabe (1979) found that developing countries can steadily grow when they have social ability, including the existence of abundant skilled labor, entrepreneurial abilities, and governmental administrative abilities. Suehiro (2000) analyzed the case of Thailand with regard to social ability and found that it led to advancement of industrialization in both the government and private sectors. Social ability also has a strong relationship with governments’ involvement in their economies. Similarly, other East Asian emerging economies also satisfied the preconditions and seized the advantage of backwardness.

Technologies can diffuse through not only international trade but also inward foreign direct investment (FDI) (Keller, 2004).⁵ On one hand, imports provide the opportunity for indigenous firms to have exposure to the innovations of, and new products developed by, foreign firms, through which they can expect to gain knowledge of new technologies. On the other hand, exports provide the opportunity for indigenous firms to compete with other aggressive firms in the global market. In the process, indigenous firms can expect to increase their productivity through exports or the so-called learning-by-exporting. Inward FDI also creates opportunities for technology diffusion through the operations of multinational enterprises (MNEs) in host countries. For example, employees who switch their place of employment from MNEs to indigenous firms can spread learning in their new workplaces. Various studies have analyzed international trade and FDI as diffusion channels of technologies.

Transactions and affiliations with foreign firms in developed countries can also become effective channels of technology diffusion. Hobday (1995) revealed that indigenous firms in Asian NIEs—that is, Korea, Taiwan, Hong Kong, and Singapore—acquired technologies through these channels. Moreover, Kawakami and Sturgeon (2011) found that East Asian firms in various industries joined global value chains (GVCs) and received opportunities to learn technologies from leading foreign firms.

In addition, technological obsolescence also can lead to technology diffusion. Based on the lifecycle of products (introduction, growth, maturity, and decline of products), Vernon (1966) hypothesize the product lifecycle (PLC) and that production bases shift to developing countries when products produced in developed countries become obsolete. Krugman (1979) developed a formal model of the hypothesis, according to which new products produced in developed countries can be imitated by developing countries. It showed that patterns of trade in new and existing products between developed and developing countries depend on the speed of new product development by developed countries and the speed of imitation of those new products by developing countries.

The PLC hypothesis has also been employed to analyze the impact of globalization on developing countries. Grossman and Helpman (1991) developed an endogenous growth model to explain the economic growth in developing countries by exemplifying a cat-and-mouse game to elucidate technological progress in developed countries and imitation in developing countries. Antràs (2005) incorporated the PLC hypothesis into the boundaries of the firm. He showed that whether or not manufacturers in developed countries decide to outsource to developing countries depends on the extent of technological obsolescence.

Technologies can diffuse through a variety of channels. However, sometimes they do not diffuse due to various reasons. The first reason is the characteristics of technologies. If technologies are developed through implicit knowledge and know-how, it is difficult to access them by definition. For example, LBD also demonstrates such characteristics. Since technologies that result from LBD can be acquired only through production and business experience, the benefit of LBD is restricted to the learners themselves. In addition, if technologies are protected by patents, then they are virtually restricted from diffusion. Although access to technologies can be easier due to the disclosure of technologies through the patent system, the use of those technologies is regulated and entails high costs in some cases.

The second reason for the inhibition of technology diffusion is closely connected to the ability to absorb new technologies. Backwardness is not the only condition for enjoying technology diffusion; developing countries are also required to accumulate the ability of technology absorption. Keller (1996) indicated that a certain level of R&D investment by indigenous firms is required to increase the ability to absorb technology. Therefore technology diffusion is a conditional phenomenon and globalization cannot be defined as wholly positive or negative.

The third reason corresponds to the degree of the technology gap. The technology gap is an advantage of backwardness for developing countries; however, it can become a disadvantage if the gap is too large to close. Aghion and Griffith (2005) found when technologies possessed by foreign firms are too advanced for indigenous firms to learn, the indigenous firms may not be able to absorb those technologies.

The final reason that inhibits diffusion is related to historical backgrounds. Parente and Prescot (2000), based on their study of India’s textile industry before World War II, stated that labor resistance against the introduction of new technologies often blocks technological progress and decreases income levels. Although many developing countries and their firms have been absorbing technologies, we cannot ignore these preconditions for realizing the advantage of backwardness.

1.2.1.3 Globalization and Growth: Empirical Analysis

Since theoretical considerations have yielded opposing results, empirical analyses have been conducted in the attempt to verify whether globalization has a positive or negative effect. However, it is difficult to draw a conclusion because of methodological limitations.

Although many studies have reported the positive effects of international trade on the economic growth in developing countries, methodological problems also have been pointed out (Harrison and Revenga, 1995; Harrison and Rodríguez-Clare, 2010; Rivera-Batiz and Oliva, 2003). Economic growth rates are generally regressed on a variable of openness; however, researchers are immediately faced with the question of what would be the most appropriate indicator of openness. Some studies used the difference between domestic and international prices; however, the proxy may just reflect macroeconomic situations, such as foreign exchange rates. To deal with the effect of trade policies explicitly, tariffs have been often used; however, there still remains the question of whether tariff revenues or tariff rates should be used. In addition to the indicators relating to trade policies, the ratio of trade amount to GDP has also been used, but its usage may create an endogeneity problem between income of a dependent variable and trade amount of an independent variable.

In addition to studies on the relationship between trade and growth, empirical studies on the relationship between inward FDI and growth have also been increasing; however, the results are ambiguous. Using data on Mexico, Kokko (1994) showed that inward FDI can have a positive effect of technology diffusion. In contrast, Aitken and Harrison (1999) showed that foreign firms have possibilities to dominate markets, as exemplified by the negative market-stealing effect on the productivity of indigenous firms in Venezuela. Also for the Czech Republic, Djankov and Hoekman (2001) showed that inward FDI can have a negative impact on the sales growth of indigenous firms. The volume of microeconometric studies of the relationship has increased since the 1990s, because much of the micro data at the firm- and establishment-levels has become available. For example, Kinoshita (2001), Girma (2005), and Todo (2008) showed that a positive impact of inward FDI on the growth of indigenous firms depends on whether or not indigenous firms have the ability to absorb technology.⁶

1.2.1.4 The Pessimism of Globalization

The pessimism over globalization and the negative influence of globalization have also been a long-standing topic of discussion. The related research branches on the relationship between globalization and growth includes the infant industry argument, structuralism, dependency theory, and so on. Although they are different on various counts, and the main subject of some of the studies is not technology, they implicitly share the perspective that the differences between developing and developed countries are due to insufficient technology. Among the lines of argument to examine pessimism, this book focuses on the infant industry argument because it has been developing for centuries.

An infant industry is defined as a nascent industry in developing countries. Although such an industry might be able to get a comparative advantage in the future, it must be temporarily protected for its low productivity in comparison with the mature industries in developed countries (Krugman et al., 2012).⁷ The concept of the infant industry argument can be traced back to mercantilism in the seventeenth century (Irwin, 1996). Mercantilism, including protective trade, was criticized by Adam Smith, but still the idea of protection has been maintained. When the Industrial Revolution took place in the United Kingdom (UK) in the late eighteenth century, latecomers, such as the US and Germany, realized that protective trade was necessary to deal with the first mover. At first, Hamilton (1791) highlighted the need for customs duties to develop the US’ manufacturing sector.⁸ This is because the UK’s mature firms had significant advantages in both quality and price over the US firms. Also List (1841) explored the need for protective institutions that were necessary to develop Germany’s manufacturing sector.

The infant industry argument is sophisticated in terms of its justification and criteria for protection. Its justifications have been underpinned by the lack of dynamic economies of scale and the lack of spillover externalities (Corden, 1997). Dynamic economies of scale indicate an effect that decreases the average cost along with increasing accumulated production volumes, the so-called experience effect or learning...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Tables
• List of Figures
• Preface
• Acknowledgments
• Introduction
• 1. Review and Framework
• 2. Outlook
• 3. Technology Gap
• 4. Diversification Mechanism
• 5. Model
• 6. Challenge for Overseas Expansion
• Conclusion
• Notes
• References
• Index