Long Guoqiang

Research Report No 007, 2003

I. Economic globalization has posed a grave challenge to the traditional industrialization strategies of the developing countries.

Since World War II and especially in the past 20 years, the process of economic globalization, driven by technological progress, has gradually sped up and become an irreversible trend of economic development around the world. While economic globalization has brought great opportunities for the economic development strategies of various countries, it has also posed grave challenges to these strategies, especially to the traditional industrialization road taken by the developing countries. A traditional industrialization road has two components: One component is an import substitute strategy and the other component is an export-oriented strategy. The idea about an import substitute strategy can be traced back to Hamilton in the United States and List in Germany. The main idea was to prevent, through the protection of the domestic market, the domestic newly emerged industries (infant industries) from being eliminated by the powerful competition from the developed countries. A basic prerequisite for this strategy to work is an effective protection of the domestic market by imposing trade barriers. In history, the United States and Germany all introduced an import substitute strategy to a different extent in their catch-up period, which played an important role in promoting their industrialization. After World War II, Latin American countries introduced import substitute strategy, which also played certain roles in their industrialization process. However, as import substitute strategyfended off the pressure from international competition, these countries’ international competitiveness was comparatively lower, even though they had built certain industrial capacities. This state of affairs led to a serious imbalance in their balance of payments, and as a result, numerous currency crises broke out. Since the end of the 1970s, Latin American countries have gradually adjusted their development strategies and abandoned the import substitute strategy.

Some East Asian countries represented by Japan, had successfully implemented export-oriented strategy after World War II. In the countries where an export- oriented strategy was implemented, their governments on the one hand, used "industrial policies" as a tool to support the "pillar industries" so as to increase their international competitiveness and expand their international market; on the other hand, they also used various means to protect their domestic marketsso as to provide as abundant market opportunities to their pillar industries as possible. One of the specific factors that enabled the success of the export-oriented strategyin Japan, the Republic of Korea and other countries was that during the cold war, the United States offered an extremely important market access opportunity for Japanese and Korean products in order to help its allies to develop their economies.

Intensifying the rules governing economic globalization has posed grave challenges to both import substitute and export-oriented strategies. A series of GATT and WTO requirements for lowering tariff rates, removing non-tariff barriers and introducing national treatment have made the developing countries unable to protect their domestic markets with traditional tools. Protecting domestic market was a basic prerequisite for an effective implementation of an import substitute strategy and also an important aspect of an export-oriented strategy. In the meantime, the GATT and WTO rules against subsidies and dumping have imposed powerful restraints on policy measures required by an export-oriented strategy. Besides, with the end of the cold war, political competition was replaced by economic competition which had become the supreme goal of national interests. The United States could no longer unilaterally provide market access opportunities to other developing countries as it did to Japan and the Republic of Korea.

Therefore, some newly emerged countries found it increasingly difficult to implement their industrialization strategies against the background of economic globalization. Some could no longer use their policy tools while others found that the necessary external environment was no longer available. As the traditional industrialization strategies were confronted with grave challenges, a new and effective road to industrialization had to be found.

II. Economic globalization brings new opportunities for the industrialization of the developing countries.

While economic globalization has posed challenges to the traditional industrialization strategies, it also has brought new opportunities for the industrialization of the developing countries.

First, along with faster technological progress, the life cycle of products has been shortened and the risk of the manufacturing industry’s technology loss has become increasingly higher. As a result, some developed countries started moving their traditional industries to foreign countries so as to leave space for the development of new economies. To the developing countries, this transnational movement of industries has brought great opportunities for the development of their own economies.

Second, economic globalization has brought about major changes in business models. The production layout of the transnational corporations has been made more elaborate in order to acquire competitive edges in the increasingly tense international competition. Unlike the industrial division of labor among different countries in the past, the ongoing economic globalization has made it possible for transnational corporations to globally allocate the different links in a product’s production chain in accordance with the principle of minimum cost. In the meantime, transnational corporations have placed growing emphasis on technology development, brand management and marketing networks, and have contracted out their manufacturing activities as much as possible to the cost-effective enterprises in the developing countries through original entrusted manufacturing (OEM). The ensuing changes are that the developing countries are assuming increasingly important positions in the field of manufacturing and are even becoming important assembly and export bases for some high-tech products. Intra-industry trade has taken over inter-industry trade to become an increasingly important driving force for the development of international trade.

Third, in addition to foreign investment, what is more important is that the local industries of the developing countries have also been deeply involved in global division of labor. In the past, the division of labor between the industrialized countries and the developing countries was mainly of a vertical nature because of high-degree trade protection, and inter-industry trade was the main form of international trade. The industrial enterprises in the developing countries could only engage in the traditional industries such as textile and light industries if they did not have strong government support or protection. They had little chances to conduct large-scale export of heavy and chemical industrial products and electromechanical equipment. In order to cope with the pressure from fiercer international competition, transnational corporations have, in addition to moving their production capacities to the developing countries, also heavily relied on outsourcing to maintain their competitiveness in core production links. This has made it possible for the enterprises in the developing countries to introduce technologies, management and standards from transnational corporations, carry out production and operation activities in more industrial sectors and participate in international division of labor in a deeper way. For example, traditionally, making and exporting large commercial aircraft has been the privilege of the developed countries. However, with the deepening of economic globalization and in order to cope with fiercer competition, the American Boeing Company has distributed its manufacturing activities of commercial aircraft among 70 countries and regions. This does not mean that Boeing cannot complete these production activities in the United States. It is simply because this global division of labor is more efficient with lower cost.

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