Constructing a Ladder for Growth: Policy, Markets, and Industrial Upgrading in China. (April 2016)

• Record Type: Journal Article
• Authors: Brandt, Loren; Thun, Eric
• Is Part Of: World development. Volume 80(2016)
• Page Start: 78
• Page End: 95
• Publication Date: 2016-04
• Subjects: indigenous innovation -- industrial upgrading -- technology transfer -- quality ladders -- emerging markets -- China; Economic history -- 1990- -- Periodicals; Economic assistance -- Developing countries -- Periodicals; 330.9
• DOI: 10.1016/j.worlddev.2015.11.001
• Languages: English
• ISSNs: 0305-750X

Abstract

Highlights: Each segment of the quality ladder plays a critical role in the development process. Low-end segments help incubate capabilities; higher-end segments offer upgrading incentives. Multiple market segments must be present to provide the steps up the quality ladder. Robust differences exist among Chinese firms in sectors with similar upgrading potential. Differences are (possibly unintended) effect of policy on the structure of the quality ladder. Summary: Indigenous firms in developing countries with large domestic markets have unique advantages: the low end provides "natural" protection from foreign competition, while higher-end segments provide incentives for foreign firms to localize activities and develop channels for future capability building. Paradoxically, in their eagerness to support development efforts of local firms, states often nullify these advantages and limit the opportunities and capabilities that local firms can leverage in the upgrading process. Using the case studies of three large industrial sectors in China that faced similar prospects but had widely different outcomes, this paper develops a framework for understanding how policy shapes the growth and segmentation of markets, and thus the opportunity for industrial upgrading of indigenous firms. The cases show how restrictive demand- and supply-side policies often inadvertently limited the opportunities for upgrading through their effect on the availability of know-how, inputs, and resources required for industrial upgrading (the supply side), and through their effect on the incentives for upgrading (the demand side). Given that each segment is a crucial rung on the development ladder, industrial upgrading efforts stall when state policy inadvertently knocks out rungs on the development ladder.