Early and Late Industrialization - Essay Example

Early’ and ‘late’ industrialization Ever since the first modern industrial revolution in Great Britain in the middle of the 18th century world nations have been trying either to ‘cope up’ or ‘forge ahead’ the industrial development and subsequent economic growth acquired by Great Britain. The ‘early’ industrial revolution found its way to Europe too in the early 19th century. After the Second World War, countries such as Japan, Taiwan, Mexico and South Korea amassed a considerable economic growth through large scale modern industrial enterprises and they are rightly termed as the late industrialized nations. These late industrialized nations assumed the role of learner ‘instead of the inventor & innovator’ as their economic and industrial development resulted through “borrowing and improving technologies which has already [been] developed by experiencing firm in more advanced nations” (Do the theories of ‘late industrialization’ explain national differences in the institutional and organisational characteristic of contemporary business? How do these ideas help to explain variations in economic performance?). However, one can notice that the economic growth of the late industrialist nations have been more rapid as they heavily depended on the successful models of institutional and organizational foundations tested by their forerunners. ‘Catching up’ and ‘forging ahead’ It was the American economist Abramowitz who coined the terms ‘forging ahead’, and ‘catching up’ to refer to the industrial and economic progress achieved by early and late industrial nations. Even though Britain forged ahead in the late 19th century with the new industrial revolution, USA, Germany and Japan caught up and even surpassed Great Britain’s achievements in many respects. According to Shin (1996), “the existence of forerunners has both complementary and competitive aspects to late comers’ development”: the late comers can benefit heavily from the successful models of the forerunners, but “they have to develop facing formidable competition from existing forerunners” (p. 2). The author is of the opinion that there have been only two instances of forging ahead in the modern industrial history-one by Britain in the late eighteenth century and the other by USA during the first half of the 20th century; he believes that the process of ‘catching up had a much greater impact than forging ahead’ in the growth of the world economy (Shin, 1996, p. 2). Corporate Governance and Industrial Growth There is a close link between the nature of corporate governance and the industrial or economic development of a nation. Each country needs to design its own unique system of corporate governance that best suits its resources, culture, history and economic development. As Naciri (2008) makes it clear, “an organization will create more wealth, for itself and for society as whole, by ethnic strategies and good governance, which will bring a reputation of integrity. This is no surprise conclusion, since good governance aims to increase solidity, viability, and competitiveness of the corporations. Moreover, in an increasingly globalized economy, competition is intense and good governance can make a difference, by influencing the way in which national companies are perceived by the foreign investors” (p. 9-10). In fact, the international competition for capital has turned out to be a kind of CG competition. For instance, when one evaluates the corporate governance system of the USA, it is predominantly a market based governance system and such a system takes into account the interests of the stakeholders, employees, customers and suppliers. The banking governance system of the nation, in this respect, plays a pivotal role in the financial market system and monitoring of funds to the nation. It has been identified that “in some banking governance systems, the shareholding can be sometimes enough diffuse, as is the case in Japan and sometimes very concentrated, as in the case of Germany” (Naciri, 2008, p. 12). Thus, it can be concluded that proper legislation with regard to the corporate governance of the nation is a necessary prerequisite for the industrial development of any nation. Late development theories: According to Michael Mann, the author of the book ‘Fascists’, the primary reason why many nations who adopted the late development policy was exploitation by other industrialized nations. “Backward countries feel exploited by developed ones, and so nationalists urged their counties to “stand by ourselves alone’ with economic polices embodying autarchy and protection – which also increased statism” (Mann 2004). There are specific theories developed in relation with this aspect developed by Walt Rostow and Gerschenkron. Rostow “was the first theorist who introduced the theory of ‘modernization’. He has defined there are 5 stages of industrialization that nations need to process sequentially” (Do the theories of ‘late industrialization’ explain national differences in the institutional and organisational characteristic of contemporary business? How do these ideas help to explain variations in economic performance?). The stages are traditional society, pre-conditions for take off, take off stage, drive to maturity, and age of mass consumption. One problem with relation to this topic is that the theory states that all economies whether early or late industrialized nations have to pass through this stage. So the stages are relevant whether the nation is China or the USA. There is also another criticism that this model may be applicable to Western economies and hence not relevant to Asian ones. Alexander Gerschenkron provides a more practical theory when seen in today’s global business environment. The theory states that even though they had the vision, the early developers faced little competition in the process of becoming an industrial power. But late developers had to overcome this competition of the already industrialized nations. “This involves the existence of a strong state bureaucracy which is capable of containing the divergent interest of various conflict coalitions and directing their energies towards a state-defined common national objective” (Iheduru 1996). This could be one of the reasons why many late developers had the concept like the industrial development banks which is discussed in later sections of this paper. Features of late industrialization: According to Gerschenkron, there are several features that are present in the economies of nations that have adopted late industrialization policies. They are basically dependent on technology and the type of industries that have been developed in those economies. They include the size of the industry, the level of technology that is available, and the diversity of industry types that the country has been able to develop (Sundaram, 2005, P. 182). If a country has developed a strong infrastructure with regard to power, coupled with engineering and manufacturing capabilities, it can attract outsourcing and FDI in the manufacturing sector. If the expertise is in the area of software development, the focus will be on this area. India is a strong example in this area. The availability of a large number of engineers and technicians in this sector coupled with the knowledge of English has enabled the country to develop in this area in a phenomenal way. The country now has the presence of a large number of multinationals and competent national players plus the infrastructure in communication technology. The level of late industrialization will also depend on the level of technology available. A country with skills in garment making, but without very little technology will resort to promoting its handloom sector. This sector will develop in a major way in such countries. The diversity of industries is also another factor which will influence industrialization. For example, if a country has large iron ore reserves, but do not have supporting industries like smelting, transportation, and export facilities (in the absence of local demand), the reserves will remain untapped. In such a scenario, even a foreign investor will be reluctant to enter the scene. Unless all the supporting industries that is needed to develop a particular industry is available, industrialization in that sector will jut not happen. The role of FDI in late development: Foreign direct investment plays an important role in late industrialization of nations. This can be verified in the case of Japan. It is a well known fact that the country had phenomenal growth in its manufacturing and electronic sectors ever since its reconstruction after the Second World War. According to Ralph Paprzycki, Kyoji Fukao, “Defeat in World War II was followed by even spectacular progress, with the country registering sustained rates of economic growth unprecedented anywhere in the world” (Paprzycki & Fukao 2008). But what is not known to many people is that Japan had an economic stagnancy starting from the early 1970s and extending to a period of nearly seventeen years. Experts differ on the reasons of why the economy stagnated, with reasons ranging from liquidity trap to poor fiscal policies. The growth rate during this period was an extremely poor one percent compared to its sustained nine percent growth during its developmental years. The authors further state that one of the factors by which the country could emerge from this stagnation was though massive FDI into its economy. Another instance where industrialization by the development of manufacturing industries can be seen is China. The country which followed a closed and highly government controlled economy began opening up its markets to FDI. The country “achieved an impressive economic growth with an average rate over 9% in 1978-2005, the highest in the world in that period. The achievement seems to owe much to the adoption of radical initiatives encouraging inward foreign direct investment (FDI)” (Zhang 2006). Many of the cheap ‘pile it high, sell it cheap’ products available in super stores like Wal-Mart is manufactured in China. The country is also an outsourcing hub for many manufacturers. The role of banks in industrialization: The industrialization process involves more than just expertise and technology. It also needs the financial support to get the required capital to start the industry. Machinery, people, land, buildings, and technology are some of the areas for which large amounts will have to be spent. The development of industrialization in the early days (and present) was largely influenced by the present of lending institutions like banks. “In fact, most of Europe might never have industrialized without the influence of large universal banks that gave national economies the financial support they needed. Policy makers also should rethink the notion that government intervention is the only viable mechanism for promoting large-scale development. Private banks played a large role in Europes growth” (Research News: Stanford GSB 2003). This indicates that finance is an integral part of industrial development and also that private financing agencies can also play a large part in the development of nations. It appears that banking and industry are related in other ways than the one mentioned above. For example, with rapid growth in industrialization in China, the banking sector is growing on this basis. Moreover foreign banks are keen to enter the country to tap the benefits of this increasing growth in the economy. As Min rightly puts it, “A number of giant global banks have bought into Chinese banks - with the biggest single foreign purchase reaching 19.9 per cent. Statistics from the China Banking Regulatory Commission (CBRC) indicate that nine Chinese banks introduced foreign strategic investors. And another nine are in negotiation with potential foreign buyers” (Min 2004). The relationship is symbiotic in that sense because industrialization requires financial assistance after which banks can reap the benefits that arises out of the increased business activity. The same trend is seen in Japan as well with the banking sector growing along with the growth in industrialization and the economy: “Japan’s emergence in recent years as a major financial force in the world economy is fully reflected by the domestic and the international growth of banks. Japanese banks have become the largest in the world” (Kaufman 1992). Even though this situation pertains to the time during the 1980s, the symbiotic relationship between industry, its growth and the banking sector is evident here also. The scenario in Germany is a little different from what is seen in other industrialized nations. It is true that banks played a crucial role in its industrialization after the destruction caused by the Second World War. Banks still continue to play a crucial role in the country. But the difference is that German banks have more control over the institutions they lend to when compared with other countries. This seems to be mainly due to the wide array of services provided by German banks to its customers, giving rise to the term called universal banking. “The banks even expanded their control into "industrial enterprises, which extended far beyond the sphere of financial control into that of entrepreneurial and managerial decisions".  The fact that these German banks often controlled the firms indicates that the banks had significant influence over the evolution of the firm, supporting the argument that the universal banks were at least partially responsible for overall industrial development” (Financial History > Online Discussion > 11/7: Banking around the World...). This level of control mainly through equity participation is not seen to such an extent in early and late industrialized nations. With regard to finance, industrialization needs the support of banking institutions for the required capital. Theorists also argue that when a nation begins its industrialization process, a strong support as stated in the ‘big push’ is required for it to be successful. For large scale industrialization, developing one single sector is not enough. Supporting sectors will have to be financed and developed as well. As mentioned earlier, the development of mining in a resource rich country needs development in transport and processing of the ore as well. Banks can play a crucial role in overall development of the economy through industrialization across a variety of related sectors. The critical factor here is that “banks may act as `catalysts for industrialization provided that they are sufficiently large to mobilize a critical mass of firms, and that they possess sufficient market power to make profits from coordination” (Rin, & Hellmann 2001). Industrial development banks: As a solution to all round developmental funding as per the big push theory, many nations have formed the industrial development bank which can used to fund areas in which privately owned banks are unable or unwilling to invest. According to Eshag, “if essential projects have relatively uncertain or low profit prospects, businessmen would be reluctant to undertake them without some external assistance and would, in any case, find it difficult to raise adequate finance thorough normal commercial channels for this purpose” (Eshag 1993). This is one of the primary ways by which countries with late industrialization have managed to fund their overall development of an industry sector along with its ancillary and supporting industries. Stock markets and industrialization: Raising capital through equity is another method by which industrial development can be achieved. The firms can arrange investment by this method alone or in combination with bank (institutional) finance. The advantage is that payment of interest on loans from banks is avoided. The disadvantage is that firms may not be able to raise the required capital if the IPO is under subscribed. They also need to incorporate as limited liability concerns in order to raise capital. In other words, partnerships, and sole proprietorships, which are also an integral part of the industrialization process, cannot make use of equity capital. But the concept of raising debt free equity is very attractive. The concept of investing in equity by individuals and institutions so that they can earn more than what is provided by depositing in a bank is an advantage. In a good investment the process is advantageous to both the company and the investor. But past experience has shown us that it is advantageous to have both stock options and bank finance as a way of raising capital for industrialization. None of the economies have tried using only one of the above choices for their industrialization, mainly because both exist in the market place. Both have their advantages and disadvantages. Sometimes, potentially unattractive industries may only be able to get finance from banks (owned by governments in most cases). Moreover, non-equity based concerns can only use bank finance as a major source of funding. But in case companies are able to raise equity, this is an excellent option for obtaining debt free capital. In most cases, bank finance will be the source for late industrialised nations because the stock market and equity market will not be as developed an in the early industrialized markets. Conclusion: Level of rate of industrialization is uneven in the world and it can be seen that there are a few nations that have early industrialization. There are also many economies that have become industrialized much later. Later entrants have more challenges especially in the form of competition from those already developed ones. Banks play a crucial role in the early stages of industrialization and even afterwards. The stock market is also an essential part of the raising capital for industrialization. But in some cases, investors may not be keen on investing on some projects that have a long gestation period. Moreover, late entrants need more governmental support for raising finance for such projects. But the late entrants are now posing a challenge to early industrialized nations in many areas. They have certain advantages like cheap labour coupled with availability of cheap but competent workforce. Their rate of growth is also much faster than developed economies. It is only a matter of time (with vision and prudent economic polices) that the latecomers will overtake the early entrants in terms of growth of the economy and level industrialization. Works cited Do the theories of ‘late industrialization’ explain national differences in the institutional and organisational characteristic of contemporary business? How do these ideas help to explain variations in economic performance?, viewed 15 Mar. 09, . Eshag, Éprime 1993, Fiscal and monetary policies and problems in developing countries, Illustrated Edition, Cambridge University Press. Financial History > Online Discussion > 11/7: Banking around the World...viewed 15 Mar. 09, < https://segue1.middlebury.edu/index.php?&action=site&site=econ0477a-f06§ion=14740&page=65342&story=110462&detail=110462 > Iheduru, O Chris 1996, The Political Economy of International Shipping in Developing Countries, University of Delaware Press. Kaufman, George G 1992, Banking Structures in Major Countries, Illustrated Edition, Springer. Mann, Michael 2004, Fascists, Illustrated Edition, Cambridge University Press. 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Shin, Jang-Sup 1996, The Economics of the Latecomers: Catching-up, Technology Transfer and Institutions in Germany, Japan, and South Korea, Illustrated Edition, Routledge. Sundaram, J K 2005, The Pioneers of Development Economics: Great Economists on Development, Zed Books. Zhang, Kevin H 2006, Foreign Direct Investment and Economic Growth in China, Illinois State University, Beijing, China, viewed 15 Mar. 09, < http://faculty.washington.edu/karyiu/confer/beijing06/papers/zhang.pdf >. Read More