International Industrial Development Strategies

This article will focus on international industrial development strategies. Industrial development strategies, the foundation of national policies and economic policies world wide, help strengthen the economies of developing countries and economies in transition. This article will provide an overview and analysis of the relationship between industrial development strategies, economic globalization, and emerging markets as well as a brief discussion of the international support for industrial development strategies. Issues related to the relationship between industrial development strategy and technological development will be described.

Keywords Developing Countries; Economic Globalization; Economic Policy; Emerging Markets; Industrial Development Strategy; National policy

Business & Public Policy > International Industrial Development Strategies

Overview

Economic development policies are created and implemented to strengthen national economies. One of the most important types of economic development policy used by national governments throughout the world is the industrial development policy or strategy. Industrial development strategy is developed and implemented by national governments to make their nation more productive and competitive in world markets. Industrial development strategy encompasses the attempt by national government to establish a cohesive, uniform set of policies crafted to enhance overall economic performance (Jenkin, 2007). Industrial development policy refers to a process in which a country’s public and private sectors work together to analyze the economic health of their country and develop new economic activities and solutions (Rodrik, 2004). According to Driscoll and Behrman, there are three main types of industrial development strategies and policies:

• Industrial development strategies that encourage general growth but trust the market and other economic forces to guide its implementation.
• Industrial development strategies that seek to stimulate industrialization by governmental efforts including general tax, fiscal, and monetary policies as well as support for product research and design (R& D).
• Industrial development strategies that promote specific industrial sectors including influencing decision making of companies and government willingness to make investments in research, design, and production (Driscoll & Behrman, 1984).

Government efforts to target particular business sectors and industries and subsidize them through a range of economic instruments (such as directed credit, subsidies, and tax incentives) usually fail to strengthen the national economy due to the limited scope of the endeavor and the dynamic force and speed of change in foreign markets. Successful industrial development policy is usually not targeted at particular industries but rather targeted at business practices in general, the public-private partnerships, and information-channels that facilitate the development of new rapid, efficient, and profitable production practices (Rodrik, 2006).

Industrial development strategy and policy is based on the assumption that the public sector can significantly influence the economy through policies and strategies. Since the advent of modern trade relationships, national governments throughout the world have shaped and protected their national economies through rules and regulations about import, export, and manufacturing. For example, in the late nineteenth century, the Canadian government developed an industrial development strategy that included tariff protections and the construction of the transcontinental railway. Industrial development strategies are always part of a country's efforts to develop an integrated and strong national economy.

Governments create industrial policy as part of an overall national or regional development strategy. Industrial policy can include a wide range of support measures such as investment incentives, tax-holiday programs, education, training, research support, and support for small and medium-sized enterprises (SME). Common industrial policy focuses on supply-side incentive programs (such as export incentive programs, support for export marketing, rebate provisions, and duty drawbacks for imported inputs, medium-term loan finance, and accelerated depreciation programs) to encourage broad-based manufacturing development (Roberts, 2001).

The following sections, including the foundations of industrial development strategies and economic globalization and industrial development strategies, provide an overview and analysis of the global practice of industrial development strategy. These sections will serve as an introduction to a discussion of international support for industrial development strategies world-wide. Issues related to the relationship between industrial development strategy and technological development will be described.

Foundations of Industrial Development Strategies

The public sector's efforts at comprehensive industrial policy are increasingly formalized in governments. For example, Canada, since the 1960s, has developed "specialized federal departments or agencies, designed to improve the government's management of the economy, deal with emerging technologies, or help industry expand in foreign markets (including the Departments of Employment and Immigration, Communications, Regional Economic Expansion, the Ministry of State for Science and Technology and the Export Development Corporation)" (Jenkin, 2007, ¶14). In addition, South Korea, since the 1960s, has formalized its nation's industrial policy to include the Ministry of Commerce and Industry (MCI), the National Investment Fund (NIF), and the Tax Exemption and Reduction Control Law (Mah, 2007). Industrial strategy and policy has become a ubiquitous feature of nearly all industrialized and developing countries (Economic Structure and Context, 2012).

Despite the increased formalization and specification within individual national governments and countries, industrial development strategy, as a model for economic development, is based on shared approaches, objectives, and assumptions. Industrial policy in industrialized and developing countries is often similar but the stakes can be quite different. Industrial development policies tend to be integrated approaches including diverse tactics including investment, trade, technology, human-resource, and small and medium-sized enterprises (SME) development policies (Kim, 2005). Developing countries use targeted combinations of the following incentives and initiatives to promote economic development (Tower, 1986):

• Trade policy
• Administered prices
• Regulations on the allocation of credit and interest rates
• Government provision and pricing infrastructure
• Investment codes which provide tax benefits in exchange for a certain level of performance
• Labor market intervention

These incentives and initiatives are intended to produce the following benefits:

• Raise employment
• Improve the balance of payments
• Promote investment in particular regions or sectors
• Foster economic growth
• Promote diversification out of agriculture

Rodrik points out the following key assumptions and principles that support and guide the use of industrial development policy in developing countries:

• Rapidly growing countries are those with large manufacturing sectors.
• Growth accelerations are associated with structural changes in the direction of manufacturing.
• Countries that promote exports of more technologically sophisticated goods grow faster.
• Countries with a broad-based manufacturing sector are more likely to take advantage of new opportunities than one that has limited production abilities and resources.
• Manufacturing capabilities are not wholly determined by factor endowments such as existing amounts of labor and natural resources (Rodrik, 2006).

This last principle is one of the most important principles of industrial development strategy. This principle acknowledges that manufacturing capabilities, necessary for economic development, will be influenced by multiple factors including geography, factor endowments, and industrial policy. Well-conceived industrial development policy has the potential to help poor countries overcome the problem of poor natural resources or lack of sufficient labor. For example, the economies' of China and India became economically strong and competitive in the global market in large part because of their respective abilities to adopt and adapt to high technology production activities rather than their civilian labor advantage. Clearly, factor endowments, policy, and geography all play a role in shaping production capabilities and success. Ultimately, product and production diversification is one of the main controllable variables of economic development. Countries that successfully compete in the global market usually develop industrial strategies that enlarge an economy's productive capabilities and increase the range of manufactured goods produced within and exported out of their country.

Economic Globalization & Industrial Development Strategies

Throughout modern history, economic growth has been associated with and linked to the expansion of industrial activities. The Industrial Revolution of the eighteenth and nineteenth centuries throughout Europe and the United States created strong national economies as a result of mass production methods and the birth of the factory model. Industrial development, with an associated diversified manufacturing base, is known to be an engine of economic growth and development. In the twenty-first century, economic globalization has made export manufacturing an increasingly valuable activity for developing countries. The world markets provide an insatiable demand for a wide range of manufactured products exported from developing countries (Rodrik, 2006).

Industrial development policy has become a ubiquitous part of countries' respective national policies worldwide in large part because of the increase in international trade. International trade, which refers to the buying and selling of goods or services across country borders, is the engine of economic globalization. In the late twentieth century, industrialized nations, with manufacturing firms and sectors oriented towards the domestic market, worked to create outward, export-oriented manufacturing sectors. Developing nations with small or no manufacturing bases worked to develop diverse, foreign-market oriented manufacturing bases. Governments throughout the world help the private sector of their countries develop the manufacturing capabilities necessary for global competitiveness and addresses trade rules and regulations that may negatively impact successful and profitable business ventures in global markets (Jenkin, 2006).

Global markets are characterized by an increasing mobility in capital, research and design processes, production facilities, customers, and regulators. Global markets, created through socio-economic changes, political revolutions, and new Internet and communication technology, have no national borders. The modern trend of globalization, and resulting shifts from centralized to market economies in much of the world, has created opportunities for increased trade, investment, business partnerships, and access to once closed global markets. Economic environments around the world are changing because of the forces of globalization. Globalization is characterized by the permeability of the traditional boundaries of nations, cultures, and economic markets.

Globalization creates a turbulent global socio-political environment characterized by competing political actors, shifting power relations, and politically-driven changes in national economies around the world. Businesses work to find opportunity and profit in the political and economic changes. The political turbulence and upheaval has resulted in a move from centralized economies to a decentralized global economy and has created numerous emerging markets. These emerging markets refer to the capital markets of developing countries that have chosen to liberalize their financial markets in order to increase capital flows with nonresidents and increase foreign investment. Ultimately, comprehensive industrial development policy is required for national economies and corporations to profit from the internationalization of business practices in global markets (Roberts, 2001).

Applications

International Support for Industrial Development Strategies

The modern trend of globalization, and resulting shifts from centralized to market economies in much of the world, has created both a need and opportunity for economic development in developing countries and regions of the world. International development organizations, national governments, and corporations are coming together to focus on building frameworks for private-sector development as the basis for achieving sustainable economic growth. Industrial development strategy in developing nations is created by national and international institutions to strengthen the national economy as a means of alleviating poverty and its related conditions. Combating global poverty is a goal that unites international development organizations and national governments around the world.

While contemporary forms of economic development are focused primarily on strengthening national economies and eradicating extreme poverty and related conditions, formal economic development has been in existence, in some form, since the end of WWII. The modern era of aid to developing countries began in the 1940s as World War II ended. Developing countries, found primarily in Africa, Asia, and Latin America, are characterized by low per capita income, widespread poverty, and low capital formation. After WWII, world leaders and governing bodies put structures into place, such as the World Bank, United Nations, World Trade Organization, and International Monetary Fund, to prevent the economic depressions and instability that characterized the years following World War I.

One of the most influential international organizations currently working to facilitate and promote industrial economic strategy in developing countries is the United Nations Industrial Development Organization (UNIDO). UNIDO, established in 1996, is a specialized agency of the United Nations responsible for promoting industrialization throughout the developing world. UNIDO, and the UN in general, with 172 Member Nations, is committed to helping developing countries and countries with economies in transition in their fight against economic marginalization in the global marketplace. UNIDO, as described in their mission statement, "mobilizes knowledge, skills, information and technology to promote productive employment, a competitive economy and a sound environment" (UNIDO Overview, 2006).

The program objectives and goals of UNIDO, as described in the Business Plan on the Future Role and Functions of UNIDO, supported by the seventh session of the General Conference in 1997, include two main objectives: First, UNIDO will work to strengthen industrial capacities of developing countries. Second, UNIDO will promote cleaner and sustainable industrial development in developing countries. UNIDO has two main institutional functions or roles including working as a global forum and technical cooperation agency:

• Global forum: UNIDO, as a general forum, generates and disseminates knowledge relating to industrial matters and provides a platform for the various actors in the public and private sectors, civil society organizations and the policy- making community in general to enhance cooperation, establish dialogue and develop partnerships.
• Technical cooperation agency: UNIDO, as a technical cooperation agency, designs and implements programs to support the industrial development efforts of its client nations (UNIDO Overview, 2006).

UNIDO has eight service modules that provide services to institutions and industries in developing countries. The institutions and industries of developing countries and countries with economies in transition face challenges in the following areas:

• Industrial governance and statistics: UNIDO assists developing countries and economies in transition to monitor, benchmark, and analyze their industrial performance and capabilities.
• Investment and technology promotion: UNIDO addresses government and market failures in an effort to alleviate some of the problems faced by developing countries in mobilizing domestic investment, foreign investment, and modern technologies.
• Industrial competitiveness and trade: UNIDO seeks to strengthen the capacity of developing countries to raise their productivity so that they can compete in the global market.
• Private sector development: UNIDO supports the formulation and implementation of overall industrial strategies conducive to strengthening private sector development.
• Agro-industry: UNIDO serves to strengthen agro-industrial linkages in order to raise productivity and increase the potential for promoting economic growth and employment.
• Sustainable energy and climate change: UNIDO provides access to modern energy services for the poor through rural energy for productive use with emphasis on renewable energy projects.
• Montreal protocol: UNIDO provides services, including policy, strategy, and program design, institutional support, and technical assistance, to address the issue of ozone depletion caused by industry.
• Environmental management: UNIDO provides services related to cleaner and sustainable production, water management, persistent organic pollutants, and persistent toxic substances (UNIDO Overview, 2006).

While these eight service modules characterize and summarize the work of UNIDO in developing countries, the goals and focus of the eight service modules describe issues concerning the environment, technology, public-private partnerships, and sustainability, that are relevant to all countries as they develop their nation-specific industrial policy and work toward economic stability.

Issues

Industrial Strategy & Technological Development

While all countries have industrial policies and strategies, countries with transitional or developing economies have the potential, possibly even more than industrialized countries, to make extremely large gains in economic strength and vitality as a result of effective industrial strategy. Effective industrial development strategy is increasingly connected to a country's technological development abilities. Technological development, as an integral part of a corporation's research and design process (R & D), is heavily influenced by changes in corporate business practices and the development of global markets. Factors in the emerging global markets that influence technological development include increases in the pace of development, labor productivity, and competition. In addition, technological development in global markets is influenced by changes in corporate governance practices.

Countries with developing or transitional economies are increasingly basing their industrial development strategies on latecomer strategies. Latecomer strategies refer to the strategies that developing nations, that lack resources for product research and design, use when they arrive late on the world industrial scene and benefit from, and borrow, the research and design conducted by the private sector in industrialized nations. These developing nations, behind the industrialized nations in technological and production resources, develop targeted policy efforts that facilitate the rapid adoption of production methods for products that are in-demand in global markets. Developing countries that produce a product developed at the expense of another country can often sell said product cheaper and faster than the original firms that actually developed the technology. Some particularly economically successful and savvy nations develop public-private partnership agencies or organizations that combine the technological resources of industrialized nations and the economic goals and objectives of developing nations. Examples of countries with public R&D "technology capture institutions" include South Africa (CSIR), Australia (the CSIRO), Hong Kong (ASTRI), Taiwan (ITRI), and Singapore (A*STAR) (Mathews, 2007).

The following example of Taiwan illustrates how a country can go from developing to developed in a relatively short time as a result of effective industrial development strategies. Taiwan's industrial development strategies, including the Taiwanese Industrial Technology Research Institute (ITRI), local clustering of production resources and facilities, and global production networks, have allowed Taiwan to grow to become the world's third largest producer of information products (Chen, 2002). Taiwan, from the 1950s through the 1970s, was characterized as a developing country that exported unskilled-labor-intensive goods and raw materials to developed countries. Taiwan, since the mid-1980s, has become a significantly more developed country and exporter of capital-intensive goods to the global market (Tung, 2000). By 2012, Taiwan was an important development partner with China and the United States, doing R&D for Silicone Valley high tech companies and working to facilitate international industrial standards (Chen, 2012).

Ultimately, industrial development strategies in developing countries create improved economic conditions and large shifts in culture and society. Poor countries, with effective industrial development policies, often start to produce goods that richer, more developed counttries are already producing and consuming. Poor countries take advantage of the research and design done in the wealthier countries and, in a sense, save research dollars. This convergence in productivity levels between poor and rich countries becomes an impetus for economic growth in developing countries (Rodrik, 2006). This savings by poor countries on the expense of research and design allows them to maximize profit and use available resources to build and expand production facilities. The production of goods in developing countries intended for export to and consumption in wealthier countries creates economic, as well as cultural, globalization.

Conclusion

In the final analysis, effective industrial development strategy, as part of a nation's overall economic policy and national policy, must be comprehensive and responsive to the resources and goals of the country in which the strategy is developed. Ultimately, industrial development strategies, including trade policy, administered prices, regulations on the allocation of credit and interest rates, government provision and pricing infrastructure, investment codes which provide tax and other benefits in exchange for certain accomplishments, and labor market intervention, will produce the following benefits: raise employment, improve the balance of payments, promote investment in particular regions or sectors, foster economic growth, and promote diversification out of agriculture (Tower, 1986).

Terms & Concepts

Developing Countries: Countries characterized by an underdeveloped industrial base, low per capita income, and widespread poverty.

Economic Development: Programs and strategies aimed at promoting growth in a part or whole of an economy.

Economic Policy: The actions, including setting interest rates, managing the deficit, and regulating the labor market, that national governments take in the economic field to guide and shape their national economy.

Emerging Markets: The capital markets of developing countries that have chosen to liberalize their financial markes in order to increase capital flows with nonresidents and increase foreign investment.

Globalization: A process of economic and cultural integration around the world caused by changes in technology, commerce, and politics.

Industrial development strategy: Policies and initiatives developed and implemented by national governments to make their nation more productive and competitive in world markets.

International trade: The buying and selling of goods or services across country borders.

National Policy: Broad actions or guidelines established by the federal government to promote national objectives.

Private Sector: All enterprises that are outside of government control including micro, small, medium, and large enterprises.

Public Sector: The economic and administrative enterprises of a local, regional, or national government.

Small and Medium-Sized Enterprises (SME): The term (abbreviation) most often used by development agencies and governments to describe both informal and formal small businesses.

Supply-Side: An economic theory that asserts that increased availability of money for investment, achieved through means such as tax reduction, and will increase productivity and economic activity throughout the economic system.

The World Bank: An international economic development assistance organization that was founded in 1944.

Bibliography

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Suggested Reading

Baer, W., & Salehi, H. (1999). The state and industry in the development process: How universal is the Evans vision? Oxford Development Studies, 27, 385. Retrieved May 08, 2007, from EBSCO Online Database Business Source Complete. database. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=2392363&site=ehost-live

Carlsson, B., & Ellasson, G. (2003). Industrial dynamics and endogenous growth. Industry & Innovation, 10, 435-455. Retrieved May 08, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=11763352&site=ehost-live

Thompson, P. (2007). Founder quality and firm performance: Implications for local development strategies. Australian Economic Review, 40, 97-105. Retrieved May 08, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24410111&site=ehost-live