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7 Technology, economics, and late industrialization

Jorge Katz

Lights and shadows of conventional neoclassical growth theory
Alternative theoretical routes
Import substitution industrialization in the 1960s and 1970s
The 1980s: Towards a new socio-economic and technological scenario
Concluding remarks

Public policies to induce changes in the organization of production or in patterns of international trade have now become quite common even in nations that otherwise support free market principles. Such policies normally involve efforts to restructure individual firms and industries, as well as to encourage more flexible forms of automation, new patterns of subcontracting and market organization, etc.

It would be helpful if there were satisfactory theoretical tools for approaching the problems that these policies are trying to tackle, such as the sources of innovation, dynamic comparative advantage, and productivity growth. Unfortunately, the social sciences are some way from offering a comprehensive body of theory on these questions. On the one hand, almost all of the issues raised by technological change, innovation, and production organization are interdisciplinary by nature, i.e. they involve knowledge concerning economic as well as engineering, organizational, institutional, or educational aspects and hence demand a high degree of interaction between specialists of different disciplines. Instead of this interaction, however, each discipline tends to develop a self-contained body of principles and analytical tools with which to look at any one specific question. This fragmentation usually results in only partially satisfactory answers and incomplete descriptions of reality.

On the other hand, and even if we confine ourselves to the more limited area of one particular discipline - say, economics - it is by no means obvious that we can use the same theoretical models to describe the complexities and idiosyncracies of societies of extremely disparate degrees of maturity and economic development. The organization of production at the individual company level, the spread of markets, their functioning and their degree of imperfection, the nature and behaviour of regulatory institutions, etc., vary considerably across nations and it is hard indeed to accept that one single model could be used equally well to understand the process of innovation and technological change of societies that differ substantially as regards major aspects of social organization.

In view of this, it is somewhat surprising that much of current thinking among professional economists still takes place under standard neoclassical assumptions of perfect market functioning, equilibrium, and profit maximization [35], and that different forms of market failure - externalities, "public goods," etc. - have so far received comparatively little attention. Both in the realm of theory and in the design and implementation of public policies, this neglect has certainly had strong adverse implications.

Finally, a similar argument to the previous one - but this time of an inter-temporal nature - can be advanced if we concentrate simply on the economics of technological change, innovation, and production organization in countries of "late industrialization," which we can imagine to be at a somewhat similar level of economic development. A major structural "break" can be identified in the growth process and in the regulatory regime of many developing countries around the mid-1970s. This break came about as a consequence of the dramatic change of circumstances that occurred in the global political economy in the early 1970s, and particularly after the debt crisis of the early 1980s, which forced many of these countries into a complex structural adjustment effort. It is now evident that these efforts have had a major impact on the rate and nature of technological change and innovation, and indeed on the overall development process of many developing nations. As in our previous example - that of the comparison between countries of differing degrees of maturity and economic development - it is by no means obvious that the same model that could help us to understand the development process and the technological and innovative performance of countries of "late industrialization" in the 1960s and 1970s could be used equally well to examine these same aspects in the 1980s.

On the contrary, the propensity to save and the rate of new capital formation, the inflow of foreign manufacturing investment, and, indeed, entrepreneurial dynamism and business behaviour in general all seem to have changed quite dramatically in recent years compared with the immediate post-war period. These changes had a major and as yet very imperfectly understood - impact upon the economic and social performance of many developing nations.

As a response to the deficiencies of neoclassical growth models, an alternative set of theoretical ideas stemming from Schumpeter began to be developed by a number of academic economists during the 1970s and 1980s. Notions of disequilibrium, imperfect information, "bounded rationality," "evolutionary sequences," etc., have gradually found their way into the technical change and growth literature through the pioneering work of scholars such as R. Nelson, S. Winter, C. Freeman, N. Rosenberg, G. Dosi, and others [13].

It is interesting to note that much of this new strand of "evolutionary economics" comes from English-speaking social scientists who draw their basic inspiration from both a critical appraisal of conventional neoclassical ideas as well as from stylized observations of how contemporary firms, markets, and institutions behave in mature capitalist societies. There are various reasons for believing that, a priori, their theoretical constructions cannot adequately capture the highly idiosyncratic industrial and social organization of countries such as Argentina or Brazil. It is typical of these developing nations that they face a highly unstable and volatile macroeconomic situation that has adversely affected the process of expectations formation, entrepreneurial dynamism, and capital accumulation, encouraging entrepreneurs to prefer opportunistic and rent-seeking activities rather than technological and innovative efforts. Yet the neo-Schumpeterian scholars have not found it necessary to deal with these matters when thinking about industrialized countries. Their models and theories cannot easily be reconciled with the kind of socio-economic environment to be found in many developing countries.

Lights and shadows of conventional neoclassical growth theory

The main body of neoclassical growth theory - and its empirical uses in growth accounting exercises - was presented in the professional literature in the late 1950s and throughout the 1960s. Few authors were as influential as MIT's Robert Solow, who in 1988 received a Nobel Prize in recognition of his path-breaking contributions in this field. He reminds us in his Nobel lecture [33] that what came to be known later as the basic neoclassical growth model started from a certain dissatisfaction with the Harrod-Domar growth model, in which the rate of growth of the economy depends upon three exogenous parameters: the rate of savings, the rate of population growth, and the capital/output ratio. The ultimate question the model is trying to answer is whether or not decentralized market mechanisms could lead the economy to a stable growth path undisturbed by labour shortages, on the one hand, or by high unemployment, on the other.

The Harrod-Domar answer to this question is relatively simple: although in theory there are situations in which the capital stock increases at the same rate as the labour force, allowing for "steady state" expansion, the chances of actually achieving such a growth path are small. Entrepreneur expectations determining savings and investment play a major role in this respect.

In the basic Harrod-Domar presentation, production functions are rigid and there is no room for capital/labour substitution in response to changes in relative factor prices. This is precisely Solow's point of departure when he specifies a model that admits a certain degree of technological flexibility that was absent in the Harrod-Domar formulation. In Solow's model, the rate of technical progress plays a major role as a determinant of the equilibrium growth rate attained by the economy. Technical change, however, is exogenous to the system. It falls like manna from heaven.

In order to deal with questions of technical change and productivity growth at this level of abstraction, the neoclassical model needs to make a number of stringent assumptions concerning the behaviour of economic agents. In particular, it has to postulate a well-defined relationship between short- and long-term scenarios in order to make the idea of dynamic equilibrium possible to sustain. The likelihood of disequilibrium is eliminated from neoclassical growth models through an elegant - but "ultimately unacceptable," to use Solow's words - simplification. Solow himself explains the case as follows:

The idea is to imagine that the economy is populated by a single immortal consumer, or by a number of identical immortal consumers. The immortality itself is not a problem. Each consumer could be replaced by a dynasty each member of which treats his or her successors as extensions of himself or herself. But no shortsightedness can be allowed. He or she is supposed to solve an infinite time utility function. The next step is harder to swallow in conjunction with the first. For this consumer every firm is just a transparent instrumentality, an intermediary, a device for carrying out inter-temporal optimization subject only to technological constraints and initial endowments. Thus, any kind of market failure is ruled out from the beginning....

I find none of this convincing. The markets for goods and labour look to me like imperfect pieces of social machinery with important institutional peculiarities. They do not seem to behave at all like transparent and frictionless mechanisms for converting the consumption and leisure desires of households into production and employment decisions. [33, pp. 310-311]

Prior to the mid-1960s, the neoclassical growth model lacked any endogenous theory of technical change. New production techniques, new product designs, etc., arrived stochastically from heaven. Kennedy [20] and Ahmad [1] tried to specify technological change as an endogenous "search" process, i.e. as yet one more economic activity performed by economic agents, and for this purpose imagined the existence of an "innovation possibility frontier," which they defined as an ex ante description of all of the labour - and capital-saving technological innovations available to the firm. With perfect knowledge of such options and free access to the required know-how, the entrepreneur is assumed to choose between "search" options exclusively on the basis of relative factor prices.

The problem with this specification of technological behaviour is that it is entirely devoid of the component of uncertainty and risk that normally underlies the very notion of innovation. As Nordhaus pointed out some years later [28], we are bound to assume that the firm knows in advance the complete set of innovative options, as well as the results of each one of them. Now, if this is so, the obvious question is, Why carry out the search efforts in the first place if there is no uncertainty to resolve?

In spite of these drawbacks, neoclassical growth models provided an interesting set of instruments for "growth accounting" exercises. The measurement of the "residual," i.e. that fraction of the observed rate of total factor productivity growth that is not accounted for by the expansion of capital and labour conventionally measured - and its ex post "explanation" in terms of better education, better machines, structural change - captured the attention of numerous economists in those years. Denison's work is probably the best known of these studies and accurately reflects the spirit of that time [11].

In spite of the fact that neoclassical growth models and growth accounting exercises served to illuminate important aspects of the development process, such as the role of capital/labour substitution or of human capital improvement through education and health, they none the less provide an oversimplified view of how an economy actually operates. On the one hand, they are based on highly unrealistic assumptions concerning (a) the nature and behaviour of firms, (b) the role of market imperfections, (c) the complexities of the institutional structure underlying the operation of the economy, etc. Equilibrium, perfect information, profit maximization, costless and timeless access to technological know-how, a very elementary institutional scenario, etc., appear as central features of the neoclassical growth metaphor [25] and are rather difficult to accept.

It is precisely on account of these assumptions that many academic economists have in recent years felt that they needed to proceed along a different route if they were to understand technological change and innovation. In the following section I review some of these newly emerging theoretical efforts.

Alternative theoretical routes

Over the last decade there has been a revival of heterodox thinking in the field of technical change and innovation. Factors other than the price mechanism, imperfect markets, disequilibrium, behaviour under conditions of imperfect information, "learning sequences," "technological trajectories," and similar concepts are central features of a newly emerging theoretical paradigm.

Some of these new ideas are intellectually rooted in Schumpeter's work, particularly in his Capitalism, Socialism and Democracy [29], where he writes:

The first objectionable concept in the model is that of competition. For many years economists only thought in terms of price competition. This idea refers to a scenario of given conditions in which production methods and, even more particularly, the forms of industrial organization are invariable. Nevertheless, in the reality of capitalism and, in contrast to what happens in textbook models, this is not the type of competition that matters the most. Competition via new products, new technologies, new sources of supply, new ways of organizing the production process, etc. are more important. This competition presents a decided advantage in terms of costs or quality over what went before. It doesn't matter if competition in the conventional sense of prices works better or worse. The powerful force that expands production and reduces long term prices comes from another source.

These ideas simultaneously enrich and add to the complexity of the economist's professional tool-box. Imperfect information, uncertainty, and disequilibrium allow for behavioural differences among firms [25], as well as for innovative leads and lags and endogenous changes in market structure. Technological learning can differ from company to company as a function of how much a given firm spends on R&D activities, but also as a function of the quality of its research and engineering staff, or of its luck in the "search" for new technology. It now becomes possible to postulate models of "adaptive" behaviour in which we do not have to assume that the firm has complete ex ante knowledge of all of its future technological possibilities, nor that its only objective function is that of maximizing profits [31]. The door is now open to organizational and behavioural models of the firm of the sort advanced by authors such as March and Cyert [23], Williamson, and others [21].

Once the idea of regular and predictable behaviour inherent in the neoclassical logic is abandoned, the notion of evolutionary performance can be introduced [26]. Current behaviour is strongly influenced by the recent past, and this past includes not just the individual company's history but also that of the market and of the macro and institutional environment in which any given actor operates. A certain "biological" flavour is imparted to these models by the evolutionary mechanism that underlies the dynamics of firm behaviour and of market structure.

A number of academic economists have pursued this promising line of work in recent years (e.g. Boyer [7], Clark and Juma [9], Silberberg et al. [30]). It is important to realize, however, that most of their ideas are inspired by stylized observations of what is at present going on in developed industrial societies in relation to changes in the organization of production at the individual firm level, in market organization, and subcontracting practices, and in the behaviour of regulatory institutions, etc. In each one of these areas industrialized countries are currently undergoing major structural transformations that are gradually being captured by the stylized growth models with which economists operate.

It is by no means obvious, however, that such models could successfully be used to throw new light upon the complex socioeconomic and institutional environment of countries that came late to industrialization, such as Argentina, Brazil, Mexico, India, and China. Both during the period of import substitution industrialization in the 1960s and 1970s and also during the 1980s, these countries exhibited patterns of social and production organization quite unlike those prevailing in more mature industrial societies.

Import substitution industrialization in the 1960s and 1970s

Policies to promote import substitution industrialization started in many developing nations in the 1930s and 1940s as a consequence of the breakup of the gold standard. Needless to say, these efforts began under extremely unfavourable conditions as regards lack of skilled manpower and markets (particularly the absence of capital markets that could adequately finance long-term capital formation), institutional fragility, etc.

Such features, combined with a small domestic market and an inward-oriented import substitution strategy that aimed at that point to cater only for local consumers, underlay the creation of a highly idiosyncratic industrial sector whose structure and performance have not been well understood by development economists and social scientists in general. I first review some of the main features of the industrial structure that developed at that point before proceeding with an examination of the impact of the import substitution industrialization process upon domestic technological capabilities, as well as upon the functioning of the national system of innovation.

The following features could be observed in the industrialization process. First, foreign manufacturing investment rapidly acquired a leading role within the newly emerging production structure. Domestic subsidiaries of large multinational companies brought along with them new product designs, production processes, and organization technologies that acted as a training ground for local human resources. These technological transfers from abroad had both positive and negative consequences for the receiving societies. On the one hand, they significantly affected local production practices by disseminating quality control standards, patterns of subcontracting, models of production organization, etc., largely unknown to local firms. On the other hand, however, their arrival pre-empted the "technological path" industrial firms were to follow thereafter, establishing the new consumption, production, and industrial organization paradigm within which the development process was to take place. In consequence, domestic technological capabilities grew up within the limits imposed by this paradigm.

It is important to note, however, that several authors (e.g. Amsden [2]) have recently argued that Korea has followed an alternative strategy in this respect: foreign manufacturing capital was not allowed to play a major role in the early stages of the industrialization process and was invited to participate only in more recent times, when the country had a competitive domestic industry already in operation.

Secondly, the newly created manufacturing facilities had highly idiosyncratic features as regards size of plant, degree of vertical integration, range of product "mix," etc. Locally established plants were seldom much bigger than, say, one-tenth the size of comparable production units operating in industrialized countries. Because of the immaturity of the local industrial structure, the degree of vertical integration of these companies was much greater than the one prevailing in more developed societies. As a result of the small size of the local market, their output mix was significantly more diverse than in similar firms in industrialized countries.

Lastly, market organization and performance, as well as regulatory institutions, also evolved along highly individual lines, hardly comparable to those exhibited by more developed industrial societies. Oligopolistic and monopolistic situations and a high rate of external protection prevented market forces and competition from adequately performing their disciplinary role. Government failure turned out to be at least as important as a source of difficulties as market failure itself.

The development of domestic technological capabilities took place within the limits imposed by this "inward-looking" process of growth. Industrial firms were forced to supply themselves with a significant amount of "in-house" engineering and technological knowledge on the basis of which to adapt to the local environment both products and production technologies transferred from abroad. These domestic engineering and technological efforts had the purpose of adapting product designs to the preferences of local consumers and production processes to a different set of raw materials, a much smaller scale of operation, and a different pattern of work automation, etc. Thus, local R&D efforts in developing countries started as an endogenous answer to signals coming from the particular industrial organization and institutional environment in which the industrialization process took place. These signals were clearly different from those received by engineers and technicians working for comparable firms and industries in more mature industrial societies, and therefore the local technological trajectory was bound to be different from the one followed by somewhat similar companies and industries in industrialized countries.

On the other hand, the other parts of the national innovation system - i.e. universities, public R&D laboratories, etc. - remained rather isolated from the industrialization process and confined themselves to more basic research ventures carried out for the sake of scientific knowledge rather than for the development of production technology. In other words, the national innovation system grew up as a fragmented and heterogeneous network of agencies and institutions that maintained only a very weak connection with the emerging industrialization process. As far as industry is concerned, the lion's share of the national technological search efforts were of the adaptive type? seldom carried out with the purpose of attaining "state of the art" production technology.

The determinants of firms' R&D efforts

Various different micro and macro forces influenced the technological search strategy followed by local firms during the import substitution industrialization period. Consider first those forces that are strictly firm-specific. No two factories in the world are exactly alike and each one tends to develop its own particular bottlenecks, intersectoral imbalances, etc. Troubleshooting activities are normally undertaken by technical-assistance-to-production personnel with a view to keeping the available facilities running smoothly. In the course of carrying out their tasks, troubleshooters generate a steady flow of incremental technical and engineering knowledge concerning product design, process technology, etc., that is normally not "new" at the world level but is certainly "new" for the firm in its particular circumstances [15].

A second set of forces influencing the individual firm's technological search efforts is related to the market's competitive climate. Markets are dynamic institutions whose structure and competitive atmosphere normally change through time, pari passu with the entry of new competitors, the introduction of new products, etc. Monopolistic market situations have been shown to induce capacity-stretching technological search efforts [24], i.e. engineering activities intended to extract more output from a given set of machines, whereas imperfect and oligopolistic competition have been shown to induce engineers and technicians to search for quality improvements as well as for product differentiation opportunities [161. Whereas in the former case process engineering R&D activities have usually been more prominent, in the latter product design efforts tend to be given higher priority.

A third set of forces affecting technological behaviour relates to macroeconomic variables such as the exchange rate, interest rates, the effective degree of protection, wage rates, etc., i.e. macroeconomic "prices" pertaining to the economy as a whole. The level of uncertainty also belongs in this category. All of these forces are macroeconomic in nature and do not affect one particular firm or industry but instead cut across the overall production structure. Available empirical evidence [8] indicates, for example, that engineering efforts in the field of production organization - such as, for example, time and motion studies, plant layout balancing efforts, etc. - were undertaken by metalworking firms operating in Argentina after capital markets were deregulated in the late 1970s and the rate of interest became highly positive. Companies tried in this way to cut down on idle time and inventories, and used their engineering personnel for the purpose.

Lastly, a fourth set of variables influencing individual firm technological strategy has to do with the company's perception of - and capacity to decode - what is going on at the world's technological frontiers in its particular field of activity. World trade fairs, scientific and technological publications, patent files, information from equipment suppliers, etc., normally act as diffusion channels through which technical and engineering knowledge are disseminated. Plant engineers and technicians are frequently exposed to such information and carry out R&D efforts in order to adapt the knowledge to their particular needs.

I am now in a position to summarize briefly my argument concerning the determinants of the individual firm's technological search strategy during the period of import substitution industrialization: rather than being exogenous to the firm - as the neoclassical model assumes - technological change resulted from in-house adaptive R&D and engineering efforts carried out by plant technical personnel. These efforts produced a steady flow of incremental units of technical information concerning product design, production processes, and production planning and organization. In their search for better ways of doing things, engineers responded, on the one hand, to signals that were localized and firm-specific and, on the other, to forces emerging from the competitive atmosphere of the market, the macroeconomic scenario, and the firm's perception as to how the state of the art was changing at the world level in their specific field of activity.

Not all of the variables mentioned above had the same weight and importance throughout the period, nor did they play a similar role in each and every country. In the early stages of the import substitution industrialization process - i.e. in the immediate post-war years intra-plant technical matters and questions related to the competitive atmosphere in which firms operated seem to have played a major role as determinants of in-house R&D and engineering efforts. These variables, however, became much less significant during the course of the 1970s and 1980s, when the level of uncertainty and the degree of macroeconomic turbulence became much more noticeable in most of the third world [16].

It is also important to note that companies very seldom expanded their R&D commitments beyond the adaptive stage, trying to develop more permanent and "state of the art" technological capabilities [10]. Nor did they search for a more intimate relationship with other agents and institutions of the national innovation system - i.e. universities, public R&D laboratories, etc. - which thus remained isolated from the industrialization process.

Technological search efforts, productivity growth, and dynamic comparative advantages

Engineering and technical capabilities did not develop all at the same time within any given company. Available empirical evidence suggests that efforts to increase in-house technological capabilities passed through several phases associated with the absorption of different types of qualified human resources.

Product development capabilities appeared first in the early postwar period. Since the war cut off supplies from traditional capital goods producers, many small family metalworking enterprises started local production of goods such as lathes, electric motors, harvesters, etc., in the late 1940s and 1950s, particularly in Argentina [16] and Brazil [27]. Quite frequently, local capital goods were outmoded versions of US or European machines that were successfully copied locally through some kind of reverse engineering effort. Local firms usually began domestic production on the basis of second-hand machinery, with a casual plant layout and with very little in the way of production planning and organization. Under such circumstances, product design capabilities tended to develop first, followed later by production and process engineering capabilities, and much further along the line - perhaps as much later as 10 or 15 years [18] - by production planning and organization skills.

Firms seem to have proceeded from the simpler to the more complex technological tasks. These last usually demanded a greater degree of technological sophistication on the part of the local engineering team. In the course of this evolutionary sequence from simple to more complex technological search efforts, firms gradually learned to operate pilot plants, to build prototypes and other forms of experimental equipment. The accumulation of skills naturally took time: in many cases as much as 10 years were needed in order to develop in-house capabilities in product design, process engineering, production planning and organization [16].

Economists have long been interested in the relationship between in-house engineering efforts and total factor productivity growth. As early as the 1940s, Lundberg reported that although no new investment was made in the Horndal Ironworks in Sweden for some 15 years, productivity rose on average at a rate of 2 per cent per annum [32].

Arrow's article [3] on the economic implications of learning by doing presented a theoretical model in which he identifies the endogenous nature of the learning process. The article opened the way for a long series of empirical studies on the "learning curve" that appeared in the industrial economics literature throughout the 1960s. However, more than just accumulated experience is needed; a whole host of "minor" technological improvements - some of them embodied in the existing capital stock, others more disembodied and related to production organization - find their way into the company's daily routine.

A micro study carried out in the early 1960s by Hollander at the DuPont Rayon plants in the USA [15] showed that the bulk of cost-reducing improvements introduced by these firms throughout three decades came from "plant personnel attached to the Technical Assistance to Production groups, which played the most important role in the development of minor technical changes. Such groups were intimately linked with current operations and their function was to keep existing processes 'out of trouble'" (p. 196).

A number of case-studies carried out by economists and engineers in countries of "late industrialization," such as Argentina, Brazil, Mexico, or India, confirm the fact that in developing countries, too, in-house R&D and engineering activities constitute the major explanatory variable in total factor productivity growth. As one of these studies pointed out:

We are now in a position to summarize the various factors that underlie this company's growth performance. Three different sets of growth-inducing forces have been hereby identified:

The first - and quantitatively the more important - is associated with technological changes generated by the firm's engineering team itself. It includes: increases in operational speed and improvements in product quality. On the whole these are 'disembodied, technical changes which were incorporated in the existing - albeit slightly modified - capital equipment. 35% of the observed changes in labour productivity were achieved through the first of the above mentioned set of changes and 30% through the second. This means that close to two thirds of what happened in terms of labour productivity growth between 1941 and 1967 can be accounted for by this group of explanatory forces.

The second set of technological changes affecting labour productivity also originated in intra-firm engineering efforts - concerns the sphere of production organization and, more particularly, the company's degree of vertical integration and its use of subcontractors.

Finally, the third set of forces bringing about productivity growth includes a number of technological changes originated outside the firm. We are mostly referring to technological changes embodied in the new capital equipment imported second hand from the US. [17, p. 208]

Similar results have been reported by many other economists who studied the technological behaviour of manufacturing firms in developing countries [22, 6, 10, 24, 12].

In addition to the evidence presented so far, two further points can be made in support of the suggestion that adaptive R&D and engineering efforts exerted a major influence upon productivity growth in developing countries. On the one hand - and given the fact that not every firm followed the same technological search strategy or had identical success in terms of productivity growth - we should a priori expect market shares and industrial structure to change as a consequence of inter-firm differences in attitudes to and results of in-house engineering and R&D activities, i.e. as a result of forces endogenous to the market.

On the other hand, and considering that there are large inter-industry differences in the rate at which the world's technological frontier moves over time, we find strong grounds a priori to expect that in those cases where a rapid rate of technological learning and productivity growth on the part of the local firm obtained simultaneously with a low rate of expansion of the world's technological frontier, the local firm would be able gradually to catch up with the international technological frontier, achieving growing competitiveness in both domestic and foreign markets.

This was what probably happened in many of the success stories of Brazilian, Mexican, Indian, or Korean firms, which did increasingly well on the export side throughout the 1970s. The exports were not exclusively of technologically sophisticated industrial goods but also involved pure technology in the form of licensing agreements, complete manufacturing plants sold on a turnkey basis to entrepreneurs from other developing countries [22], and infrastructure projects such as roads, pipelines, or airport facilities etc [18].

Thus in the 1970s, the development of domestic technological capabilities seems to have been associated with a gradual change in dynamic comparative advantages and in the degree of internationalization of locally based companies in many developing countries.

A "catching up" model of this sort underlies much of the professional thinking concerning the case of Japan and, more recently, Korea. Economists have not as yet accepted that the case of many Brazilian, Mexican, Indian, or Argentinian firms that have built up substantial export capabilities in the 1970s could be regarded in a similar way.

We have so far examined some of the technological and organizational consequences of the import substitution industrialization process for many developing nations during the 1960s and 1970s. Obviously there are large inter-country differences: why Korean or, to a lesser extent, Brazilian firms have been more outward-looking and aggressive [10], whereas their Argentine or Mexican counterparts remained significantly less dynamic and did not expand their technological and export commitments as much as the others remains an interesting and still unresolved question for future investigation. Other aspects of the national system of innovation, such as the role of educational or R&D policies and institutions, as well as the impact of implicit and explicit government industrial policies, are surely major explanatory factors in the observed inter-country differences.

There are important institutional, ideological, and political reasons why the national system of innovation has worked better in certain environments than in others, and therefore why the impact of the import substitution industrialization efforts on the development of domestic technological capabilities has been dramatically different across nations.

In spite of the positive achievements mentioned above - i.e. significant gains in productivity and export capabilities, expansion of the local engineering and technological capabilities, etc. - the import substitution industrialization process largely failed to develop a world class manufacturing sector. In fact, a significant number of the newly created firms and industries found it increasingly difficult to compete both locally and internationally, particularly in the late 1970s and early 1980s, when the rapid diffusion of microprocessors and microelectronic technologies opened up the way for an entirely new generation of product designs and production processes that in a matter of just a few years gained wide acceptance in world markets for consumer durables and capital goods. New product designs gradually incorporated digital and numerical control devices, miniaturization, and other features that many producers in developing countries could not incorporate quickly into their locally produced electro-mechanical versions of roughly comparable products.

Concurrently with these changes - and with the debt crisis that took on dramatic proportions in the early 1980s - the macroeconomic scenario facing many developing nations turned out to be highly uncertain and turbulent. The rapid deterioration of fiscal and external accounts and the drastic curtailing of external financing forced many countries to introduce major changes in public policy. Throughout the decade, many developing countries implemented an orthodox and market-oriented policy package that included opening up the economy to foreign competition, de-regulating markets, privatizing public enterprises, etc. Such policy packages - which in many cases had to be enforced through the intervention of the army and with a considerable amount of social repression - gradually induced substantial changes in the structure of the economy as well as in the performance of markets and institutions. The rate and nature of technological change and innovation and the functioning of the national system of innovation are also changing as part of this socio-economic transformation.

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