Early or Late Industrialization - Term Paper Example

Early’ or ‘Late’ Industrialization 0. Introduction Many countries have progressed on their own when it comes to issues of industrialization. In the past several decades, other countries have used the concept of industrialization and this has varied from region to region, nation to nation (Foss 1997: 2). Different kinds of business systems exist in the world; each has its own unique characteristics among the countries that have adopted it (Harm, 2005). The concept of ‘early’ or ‘late’ industrialization has been applied to the description of two main types of business systems that exist in developed and developing countries (Foss 1997: 2). This concept has been used to explain the key institutional and organizational differences among countries in particular. For example, it is clearly established fact that UK was the first country to achieve industrial revolution in different period. This was followed by the USA (Foss 1997: 3). In the late twentieth century, Germany, Japan and China implemented their process of industrialization to an extent that they realized a dramatic economic change and performance (Harm, 2005). This essay aims compare the institutional and organizational characteristics on national business systems from a comparative point of view through the use of the late development theory. This will be achieved by clearly discussing the key issues displayed in the theory of industrialization. The main areas to compare in these papers will be United States, Japan, Britain, Germany, and China. The first objective of the comparison is to establish the major differences of national business systems. The paper will also introduce a debate on these countries with regard to their long-term national competitiveness with aim of assessing the effectiveness of industrialization. 2.0. Major Differences in National Business Systems and Institutions Companies in different parts of the world are organized in many distinctive ways. This organization normally characterizes the stability that they achieve as the business patterns and organizations are normally focused on during rapid external political-economic changes (Foss 1997: 8). Thus, these social and organizational structures form the business systems that are expected to be stable. Whitely (2003:13) regards business systems as unique configurations in market relations, which are institutionalized as ways of organizing economic activities in a country. Thus, business systems are characterized by the ways of structuring market economies that are long-term in nature (Foss 1997: 8). An example of certain powerful changes that such systems are expected to endure are the internationalization and globalization, which have limited effects on business systems (Foss 1997: 8). The need to establish differences in business systems across the world are triggered an example of the economic organization that is currently witnessed in the East-Asian economies, which as well has appeared in several empirical researches. Many empirical analyses including those done by Whitley have shown how Japan is configured differently in the market (Whitley, 2003). The studies also show how these configurations have given these countries a mechanism to shape their pre-industrial institutions (Foss 1997: 9). The firms’ internal structures are actually interrelated (Robert, 2007). With this in mind, it is clear that the major differences in business systems lays in distinct characteristics they posses. For example, business systems are characterized by the different ways of organizing and coordinating transactions in a manner that what results are organized structures in the market (Whitley, 2003). Different types and levels of specialization also characterize them. This is illustrated in the manner in which they prefer different skills and activities. Moreover, business systems are different in their degree of separation between ownership and control or alternatively, the mode of corporate governance (Whitley, 2003). Most importantly, they are also different in the formulation of principles that determine their routines through the relations with authority as well as professions (Whitley, 2003). In other words, business systems are mostly rooted contextually different institutions with regard to nations and regions. In this, the first distinction lies in the background institutions (the norms and values) and proximate institutions (the government of the day). This can also be formal or informal (Sluyterman, 2009). This form of embededness brings about diversity in business systems. Business systems are also compared by the nature of the firms (Sluyterman, 2009). Another factor of comparison is the connections that they form with each other in the industry market (Sluyterman, 2009). In addition to that is how coordination and control is done within the firms. The factors that mark the major differences in business systems clearly bring out the fact that no business system is actually superior than the other (Whitley, 2003). Taking business systems in Asia as an example, there is a fact that the business systems present in this region are rooted in the social contexts of their daily lives (Sluyterman, 2009). In simple terms, they stick toothier old ways that have become difficult to break. The systems are characterized by the role of the interim networks (Sluyterman, 2009). They also excessively rely on personal relationships while doing business as opposed to countries in the West like USA. In Asia, there is also a strong government intervention in business and the economy at large (Sluyterman, 2009). Thus, the Asian business systems are those mosaic political economies. There above example thus lead us to the different types of business systems namely: regulatory, dominant, developmental, business corporatists and inclusive corporatist’s national business systems (Sluyterman, 2009). In bringing a clear difference between two types of business systems, the regulatory states normally focus on the creation of new clear rules (Sluyterman, 2009). In this regard, the process of decision-making and coordination of economic issues is decentralized. The variation in these states also exists in the manner in which employers and unions organize their principles to integrate with the national associations (Sluyterman, 2009). Developmental states are active in the coordination of economic development by structuring incentives and providing financial support (Sluyterman, 2009). They also organize the markets to enable new industries to join. They also encourage specific companies to invest in particular technologies. 3.0. The Key Issues in Late Development Theory A contribution given by the late development theory can be well described by looking at Gerschenkron, Porter and Rostow’s ideas and contributions. Rostow had the belief that a country had specific stages to follow in order to reach maturity (Michael et al, 2003). Where they started does not matter but the speed of the development process has an impact in the overall outcome. However, his ideas were criticized, as they looked very simple and unrealistic. Porter on the hand argued that all economies go through the same stages of development, which is characterized by management capabilities (Michael et al, 2003). His ideas were criticized for lack of analysis. The late development theory through this contributor has it that those countries that started their industrialization process late had some advantages. These countries, which have been, describe in this theory as economically backward, have the need to close the gap that has been created between them and the developed countries because of knowledge and practices adopted by the advanced nations (Michael et al, 2003). One key issue in the late development theory is that if the economically backward countries can succeed in solving these problems, then there would a reward for the late comers into the industrialization process (Michael et al, 2003). The reward in this case would be a more rapid growth characterized by a decisive spurt in industrialization. A tension between the promise of economic development and the reality of stagnation would be seen arising (Michael et al, 2003). The good thing with such a tension is that it will motivate institutional innovation and a search for the solution to the problems these countries encounter would be found to have a sustained growth. Another key issue is that the government has a key role to play on the filling of the gap. The process of filling the gap would create institutions that would provide a conducive environment for the late industrializers to grow (Michael et al, 2003). The proponents of this theory argue that the more a country is backward the greater the success with which capital would be channeled to the nascent industries. Gerschenkron argues in the theory that lack of fund is not a barrier to development as many economists believe (Sluyterman, 2009). Instead, he reasons that the pressure of economic development from within the late starter would lead to the creation of institutions that would eventually raise funds into the industry (Michael et al, 2003). This can be seen through the investment banks in France and Germany. The idea is that if the pressure builds and the conditions are difficult, the state would step in by creating or promoting the financial intermediaries or using state agencies to finance and operate directly (Peter, 2001). An example is Russia, which is a state that experienced late development. In this country, the government directly supported all the capital-intensive industries financially. This encouraged the formation of large enterprises operating on an enormous scale (Dore, 2003). The problem that emerged was not of capital but entrepreneurship. The idea here is that entrepreneurs who are known to be risk takers and people with ability to identify new opportunities for profit are very scarce in developing country (Sluyterman, 2009). The government thus can only provide a source of organizational expertise and the funding. However, the state can as well involve itself in the creation of new skills (Sluyterman, 2009). In summary, most of the developed countries can attribute their success to the accumulation of capital by private entrepreneurs while late industrializers like Germany had theirs through investment banks (Geppert et al, 2002). The economically backward countries thus are those that had harder and more complex process with regard to industrialization (Sluyterman, 2009). 4.0. Mechanisms That Contribute to Differences in National Business Systems One of the mechanisms that bring about differences in the national business systems over time is the extent to which the state gets involved in the coordination and steering of economic development. If the state is more actively involved, the country will have a more distinct institutional framework for governing economic actors (Lazonick, 2007). This gives birth to either developmental business systems or regulatory business systems. Another factor that leads to the distinctiveness in business systems is their active encouragement and structuring of independent intermediary associations representing the interests of different groups that in the end become involved in policy formulation and implementation (Lazonick, 2007). In regulatory states, this is left to individual firms and union groups. In developmental ones, the policies are standardized to allow some state control (Lazonick, 2007). 5.0. The Conceptual Links between Key Institutional Differences and LD Theory The LD theory looks at the late industrializers as learners who actually follow the process of catch up in order to close the gap between them and the developed countries. In connection to the institutional differences, the timing that these countries have on industrialization largely determines their growth rates and patterns thus influencing the nations’ institutions and organizations. The LD theory also explains the nature of the different business systems. For example, the role of the state would determine how fast a country would industrially grow. The theory states that those countries that had late industrialization were able to realize success especially when the governments in those countries got involved in controlling the markets and providing the necessary financial support. Their involvement links the business systems that would eventually emerge with the LD theory. Thirdly, the presence of entrepreneurs in such countries would propel industrial development especially when they are able to take risks. The LD theory states that certain developed countries were able to achieve industrialization because there were private entrepreneurs who were able to take risks and invest. The government also gave them convenient atmosphere to invest thus leading to growth in the key sectors of the economy. This kind of a working would actually affect the kind of business system that the particular country would have. 6.0. The Role of the Links in a Globalised/ developed economies like Japan and Germany What links the LD theory and the national business systems is the role of the state, the contribution of banks/shareholding, vertical linkages and business groups. Each of these can be widely discussed to establish the manner in which they influence structures in countries like Japan and Germany. 6.1. The Role Of The State The intervention of the state has in several ways affected the construction of business systems in Asia as well as Germany. A country like Japan has the role of the state established economic planning agencies, pursuit of strategic industrial policy and promotion of national champions (Yeung 2000: 408). This has been achieved after the state has helped in shaping national development trajectories. Thus, the national business systems in Japan are private and are strongly encouraged by loans, grants and subsidies from the state (Yeung 2000: 408). The state also provides these national champions with tax holidays, import protection and monopoly rights. Thus, a strong business relation has been created by this strong involvement of the state (Yeung 2000: 408). This was a similar case in Germany where the government was largely contributing to the rise in the GDP for industries to grow (Jakob, 2007) 6.2. The Role of Banks versus Shareholding: Impact of 2008 Crisis? As opposed to the USA, Japanese governance system gives stakeholders a slim role in the governance of their firms (Westney 1996: 03). The top management of the companies are mostly made up of current and former managers while the position of the director is widely contested (Westney 1996: 03). This means that there is no external representation. The act of shareholding in Japan is composed of institutional shareholders of two kinds: portfolio shareholders (trust banks and insurance companies) and relational investors (firm’s lead bank and affiliated firms) (Westney 1996: 03). None of these two has an active role in monitoring the management of the firm. Thus, the separation of control and ownership seen in most Japanese firms is done together with coordination that focuses much on decision making at operational level (Westney 1996: 03). Looking at the 2008 financial crisis, countries like China got minimal effects as it was reasoned that it had a closed capital account and an insulated banking sector that largely relied on deposits thus not getting exposed to the western financial instruments (Schmidt 2009: 1). In the USA was the failure of the Lehman that was the fifth-largest bank in the country with over twenty thousand employees (Hoffman 2011: 22). On Germany, the financial conditions went down tremendously in the stock market (Funk 2012: 15). The capital bonds increased in 2007 and jumped after the breakdown of the Lehman brothers; non-financial companies suffered increased premiums with lower credit ratings (Hoffman 2011: 22). This means that the availability of credits for such firms in Germany was not stable (Hoffman 2011: 22). 6.3. Business Groups And Vertical Linkages The enrolment of most business systems into globalization has created a quantitative number of linkages established by economic actors, Asian business systems are not an exception. This lead to an understanding of the dominant forms of business systems in such regions as Asia (Westney 1996: 08). Most firms in Japan as an example have had extensive networks of subsidiaries and affiliated firms thus extending their reach both horizontally and vertically (Westney 1996: 08). Each leading company in Japan sits at the top of a group that bears a name like Toyota group or Toray group. In the auto and electronics, industry exists the vertical group known as keiretsu structure (Westney 1996: 08). The interest of such a vertical group in Japan came when the Western businesspersons had difficulties penetrating the Japanese market for industrial goods and in listing Japanese firms as their competitors (Westney 1996: 08). With no more tariffs, the Japanese market was still complicated to them in terms of vertical sourcing relationships in which Japanese firms hand both inside and outside suppliers for inputs (Westney 1996: 08). 6.4. How These Elements Affect the Operations of Firms in Developed Economies: China Business networks have a big influence in the Chinese business systems. Personal relationships are a very important mechanism that has affected the characteristics of firms and even their financial nature (Pan 2010: 05). It is a mechanism mostly used to encourage cooperative strategies in Chinese business networks although they vary in importance with regard to geographical changes. Even though the Chinese families in Hong Kong are diverse, they are commonly linked by cultural factors (Pan 2010: 05). While the Chinese business systems are largely rooted on personalized business networks, their counterparts in the west like Germany tend to enter into cooperative relationships with business strategies as the main base (Pan 2010: 05). 6.5. The 1990s Watershed The early stages of industrial development are not only important but also mark the future of a industrialized country. In the 1960s, the national business systems were stable as most of them were in their initial stages. Other factors other than the LD theory like globalization adversely affected the stability of these business systems especially in the 1990s. China has since managed to boom because it managed to protect its capital markets from the foreign ones. In other words, it had a closed capital account and an insulated banking sector that largely relied on deposits thus not getting exposed to the western financial instruments (Schmidt 2009: 1). 7.0. Conclusion Whether late or early industrialization, the LD theory tries to bridge a gap between the developed and developing countries by bringing in the concept of catching up. The argument that if these developing countries can solve the problems they have then they can speedily realize industrialization to the level of other developed countries. The role of the state as well as banking institutions has been seen to propel greatly the rate of industrialization in the developing countries. Late industrializers like Germany and Russian have actually demonstrated that the presence of entrepreneurs who are able to take risks can as well play a role in their growth. Alternatively, the LD theory passes a concept that lack of fund cannot be an excuse for lack of development. Instead, there is need for developing countries to form crucial institutions and set them in place to finance the industrial growth. Thus, countries like China who have managed to protect their markets and industries should be emulated. References Foss, N.J. (1997). Understanding Business Systems: An Essay on the Economics and Sociology of Economic Organization. Department of Industrial Economics and Strategy; Copenhagen Business School. Funk, L. (2012). The German Economy During The Financial And Economic Crisis Since 2008/2009. Konrad-Adenauer-Stiftung e.V., Sankt Augustin/Berlin. Harm G. Schröter, (2005). Americanization of the European Economy. A compact survey of American economic influence in Europe since the 1880s (Dordrecht: Springer), 10-11. Hoffman, D. (2011). The impact of the financial crisis in Brazil and Germany: A comparative analysis of distinct developments. 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