Institutional variety as a source of national comparative advantage: the power of the state The Business Environment: International and Comparative Perspectives Lecture 6 9 th February 2016 Frederick Guy Department of Management Birkbeck, University of London

Does the state just establish the rules of the game, or is it an active player? The case of innovation. Mazzucato The state sets rules for firms, but what guides/constrains the state? Biggart & Guillen

Does the state just establish the rules of the game, or is it an active player? The case of innovation. Hall & Soskice: State sets rules of the game for firms – Coordinated market economies: incremental innovation – Liberal market economies: radical innovation CME but with state guidance on innovation? – Japan, ‘developmental state’ LME but with state investment in radical innovation: Mazzucato on the USA

New Growth Theory – ‘new’ in 1990s – increasing returns at the level of countries or clusters education (‘human capital’)  technology  lower costs

Hall & Soskice Varieties of Capitalism Firm-centered explanation for national differences Institutions (outside firms) create (or don’t create) incentives for firms to coordinate Firms then choose what to do

Hall & Soskice: state sets the rules Coordinated market economies – Corporate governance: weak protection for minority shareholders, strong role for strategic investors – Labour markets: strong employment protection and/or unemployment protection Liberal market economies – Corporate governance: strong protection for minority shareholders; transparency + market for corporate control – Labour markets: weak employment protection and weak unemployment protection

…. firms play the game CME: long term perspective on investment, relations with suppliers/customers (relational contracting), and relations with employees; sometimes also cooperation among rivals (industry associations); incremental innovation within this matrix of stable relationships. LME: easy mobilization & demobilization of capital, labour; legalistic / adversarial contracting; risk taking and radical innovation

but Japan? Hall & Soskice CME basically describes northern continental Europe, or more precisely, Germany Japan clearly a CME But path of innovation in post-WWII Japan state guided. See Johnson Comparative Capitalism: The Japanese Difference. California Management Review 35 (4): Similar trajectory followed by other ‘developmental states’, especially South Korea & Taiwan. See Hamilton & Biggart Market, Culture and Authority: A Comparative Analysis of Management and Organization in the Far East. American Journal of Sociology 94 (Supplement):S52-S94.

Incremental innovation as catch up or comparative advantage? Mazzucato discusses incremental innovation in context of Japan, associates incremental innovation with technological catch-up. Standard way of seeing incremental innovation in innovation studies, vs. Hall & Soskice treatment as comparative advantage of certain countries on same level.

Radical innovation and the state Mazzucato: radical innovation requires investments which are (1) very risky (more precisely, with highly uncertain prospects), and (2) take many years to yield results. Firms don’t do that. Government invests (mostly US cases) – Interchangeable parts; steel technology; railways; mass production; semiconductors; computers; internet; pharmaceuticals; nanotechnology…

do not tie the shirt-tails of government to any one firm nimble government that rewards innovation and directs resources over a relatively short time horizon to the companies that show promise either supply-side (DARPA) or demand side & start up interventions (SBIR & orphan drugs). either way, the government has … actively funded the early radical research and created the necessary networks between state agencies and the private sector to allow the commercial development to occur.

Compare Mazzucato’s prescriptions with Rodrik, Dani Industrial Policy for the Twenty-first Century. UNIDO. Rodrik writing in context of developing / emerging markets, not USA/UK… – Subsidize new things only – Limited period of subsidy – Be prepared for failures – if no failures, not taking enough risks

Mazzucatto’s critique of UK policy: – lots of subsidy (mostly tax breaks) for R&D, patents, SMEs – mostly for things which aren’t innovative. – no resources / procedures equivalent to those for radical innovation in USA

Biggart & Guillén South Korea vs Taiwan (also: Spain, Argentina) – Auto industry – Why big companies in South Korea, SMEs in Taiwan? – Why difference in product specialization? Similar starting points: – colonial heritage (Japan, same period) – post-WWII starting point for growth – dictatorships during key growth period, 1960s-1970s – industrial policy: protected markets, export led growth, foster domestic companies – (developmental states, broadly Japanese model)

source: Biggart & Guillén

Why the Korea-Taiwan difference? Difference in comparative advantage But why, given similar initial institutions & histories? Both states led development: strategic choices about industries to promote. Isn’t that ‘coordinated’? Coordination in CME sense, and state guidance: different questions!

State choices, constraints on states S. Korea funnelled credit through big corporate groups (chaebols); mass production Taiwan set up environment favouring SMEs: high skills, clusters. Political choice by leadership Taiwan’s leaders from mainland, less embedded in society than South Korea’s

Next week: clusters relations between firms (adversarial vs. relational, etc) specialization innovation, knowledge spillovers why clusters in a world of instant communication, and fast & cheap transport?