Introduction
Industrialization refers to the sustained structural transformation of a traditional agrarian society to a modern economy driven by high productivity in manufacturing society (Szirmai, Naudé and Alcorta, 2013). Industrialization started in the mid-eighteenth century in Britain and then spread to other European countries and the USA in the nineteenth century. In the twentieth century, Japan, Singapore, Korea, China, and other East Asian Tigers became industrialized (Szirmai, Naudé and Alcorta, 2013). Gerschenkron (1962) used the term rarly industrializers to refer to countries that were first to industrilze such as Britain. He used the term late industrilizers to refer to countries that industrialized after Britain such as Germany and Russia. However, In recent times, early industrializers refer to countries that industrialized in the eighteenth and nineteenth century while late industrializers refers to countries that industrialized in the twentieth century such as Japan, China, Korea, Taiwan and Mexico (Amsden, 1987).
Gerschenkron (1962) as cited by Shin (2013) studied three countries Britain, Germany, and Russia and developed the three-country paradigm. Gerschenkron (1962) categorized the countries into forerunners, moderately backward, and very backward countries. Gerschenkron (1962) as cited by Shin (2013) made six propositions on the industrialization:
A country with a more backward economy was more likely to start its industrialization discontinuously as a sudden spurt and proceed to have sustained high growth of manufacturing output.
A country with a more backward economy was more likely to put more emphasis on its industries having bigger plants and enterprises.
A country with a more backward economy was more likely to place more emphasis on the production of capital goods as opposed to consumer goods.
A country with a more backward economy was more vulnerable to changes in the population consumption levels.
Institutional factors aimed at supplying increased capital and entrepreneurial guidance to upcoming industries played a bigger role in countries that had a more backward economy.
Agriculture was less likely to play a significant role in the industrialization of a country that had a more backward economy.
Gerschenkron’s fifth proposition that institutional factors were different between early industrializers and late industrializers forms the basis of this paper. Specifically, the paper compares policies on organization form, government influence, and the financing of industrialization.
Organization form
Craig (2015) observes that industrialization in late developers occurs in dualistic organization form. Small owner-managed firms co-exist alongside big enterprises. In the early industrialization, the only firms that existed were small firms and they developed their own labor relations.
A comparison between Britain and Japan labor relations helps to illustrate these differences:
Britain enterprises experience high labor turnover with the average employee changing jobs every three to four years (Craig, 2015). In Japan, employees are permanent and usually work for only one company in their lifetime. The labor markets for the early industrializers provide entry to the firm at all levels. The labor markets for the late industrilizers offer limited entry points most of them being lower positions (Craig, 2015).
In Britain, employees receive wages that represent the going market rate. Therefore, wages are a function of the job attributes and not the individual performing the Job. In Japan, wages depend on the employee age, seniority, and merit. Therefore, wages are a function of the jobholder and not the job (Craig, 2015).
In Britain, employees are motivated by individual reward while in Japan employees are expected to be motivated by a shared group interest such as the firm’s prosperity and prestige (Craig, 2015). Employees in Britain like most other employees of early industrializers such as the USA and Germany have high individualism. Employees in Japan and other late industrializers such as China, Korea, and Taiwan have high levels of collectivism. Collectivism is high in countries where the employees exhibit a high preference to work in teams, the subordination of personal aspirations to group aspirations, and a deep emotional attachment to the group. On the other hand, individualism prefers autonomy and the pursuit of personal objectives and low concern for the group Erez (2000). Consequently, the reward structures are different between early industrializers who exhibit a high degree of individualism with most of them adopting a pay for performance approach (Eerz, 2000). However, in the late industrializers, they use group-oriented equality rules to give rewards (Eerz, 2000).
In Britain, social security is the responsibility of the state and the employee while in Japan social security is the responsibility of the company (Craig, 2015). Britain and most of the countries that were early industrializers exhibit a high degree of capitalism whereas some countries such as Japan exhibit paternalism with the employer providing benefits calculated to evoke loyalty from employees. Such a paternalistic employer was common with the small employer of 19th century Britain (Craig, 2015).
In Britain, an individual training is at the expense of either the state or the individual. In Japan, the company provides training with the expectation of benefitting from the employee improved productivity. The early industrializers such as Britain or Germany transitioned smoothly from artisan skills to the present day engineering skills through a continuous apprenticeships system and certifications. Late industrializers had to make a technological leap. Consequently, most late industrializers have to train their own employees to equip them with the requisite skills.
Government influence
Gerschenkron 1962 as cited by Shin (2002) argued that the more backward a country was the greater was the role institutional factors played in its industrialization. A forerunner like Britain, the government did not intervene in the industrialization of Britain as much as the governments of late industrializers such as Japan, Korea, and Germany. However, it is fallacious to claim that the British government played no role in the country becoming industrialized. The British government played an active role in foreign trade, imperial economic relations with colonies, and navigation until 1850 when it liberalized trade (Shafaeddin, 1998).
For the late industrializers, the government was actively involved in all the countries that have successfully industrialized (Arve, 2010). The government was actively involved in the distribution, marketing, and enactment of various polices of import substitution and export promotion. The result was the use of various protectionist policies such as tariffs, industrial barriers, quotas, and subsidies in an effort to move their economies from primary activities to manufacturing (Arve, 2010). In the late-industrializing countries such as Japan, Taiwan, Brazil, Korea, Turkey, and India, governments subsidize firms to artificially lower the cost of production in order to make their products internationally competitive.
Chang (2006) as cited by Arve (2010) argues that protectionism, especially of infant industries, is important in helping a country to successfully industrialize. Chang (2006) as cited by Arve (2010) observes that no country with the exception of Hong Kong has been able to successfully industrialize without the protection of its infant industries. For instance, Britain had to protect its cotton, woolen, and iron products, and later extended the protection to leather, fisheries, and silk. India had a comparative advantage over Britain in silk and cotton and without protection, these industries would have perished. However, after Britain had established a strong industrial base she started following a free trade policy with gradual tariff reduction (Shafaeddin, 1998).
Korea offers an excellent example of extensive use of subsidy, protectionism, and active government involvement. In times of external shocks, the Korean Government has pursued expansionary policies thus boosting aggregate demand. The government is always keen on bailing out financially distressed large-scale firms (Amsden, 1987). Amsden(1987) notes that government is involved in industrialization in five key areas: first, the government owns and controls all the commercial banks. This way, the government has been able to influence the large firms to accumulate capital rather than seek rent (Amsden, 1987). Second, the government limits the number of firms that are allowed to enter into a protected or subsidized industry. In this way, firms are able to grow and achieve economies of scale that are necessary in order for the firm to be competitive internationally. Third, the government has imposed price controls on market-dominating firms in order to avoid abuse of monopoly power (Amsden, 1987). Fourth, the government has imposed controls on repatriation of capital limiting it to no more than $1 million (Amsden, 1987). Fifth, the government uses its taxes to finance investment rather than to provide social services to low-income groups.
Financing
Early industrializers and the late industrializers differ in the way they were financed. Gerschenkron 1962 as cited by Shin (2002) argued that the more backward a country’s economy was, the more likely that it would require institutionalized financing. Gerschenkron 1962 reasoned that backward countries would have to build bigger plant and enterprise in an effort to gain economies of scale and compete with the more established forerunners. Therefore, self-financing, as was the case with forerunners would not be able to meet such huge investment outlays.
In Britain and other forerunners, entrepreneurs self-financed their enterprises from the accumulated wealth. Individual entrepreneurs were the major drivers of industrialization (Shin, 2002). It was sufficient for Britain’s commercial banks to advance only working capital to the industrialists. The forerunners were not hard pressed to build bigger plant and enterprises, and their organization grew organically without the need for huge amounts of finance for starting-up.
Germany, a moderately backward country, had well-established investment banks though lagging the investment banks of Britain. The German investment banks played a critical role in mobilizing scarce financial resources that the industrialists required in order to set up their plants (Shin, 2002). Russia was an extremely backward country with very low standards of honesty and integrity. Fraudulent bankruptcy was a common business practice. Consequently, the private sector was not willing to finance the industrializers and the state had to step in and provide the industrializers with the capital they needed. Late industrializers also had to rely on the institution or the state to finance their plants. Popular examples of institutionalized financing are the keiretsu in Japan and Chaebols in Korea (Shin, 2002). After the government of Korea nationalized all banks in 1962, they channeled all the capital to Chaebols (Emerging Markets Spotlight, 2010). Chaebols are business associations characterized by close-knit commonly family-owned businesses with a highly diversified business structure (Emerging Markets Spotlight, 2010).
The findings support Gerschenkron 1962 second observation that the more backward a country was, the more pressure on building bigger plants and enterprise to give it the capability to compete with the more established firms in the early industrializers.
Conclusion
Early industrializers took different pathways to industrialize than those taken by late industrializers. Amsden (1987) argues that early industrialization of Britain in the 18th century was based on invention and that industrialization in Germany and the USA in the late 19th century was based on innovation that led to new products and processes. The early industrializers gained a competitive advantage by having a constant stream of innovations. However, Amsden (1987) observes that the late industrialization of Japan, South Korea, China, Taiwan, and Mexico were based on learning. The late industrializers were able to industrialize without proprietary innovations. Instead, the late industrializers relied on the developed economies commercialized technology to industrialize (Arve, 2010). Late industrializers did not need to invest heavily in research and development as the forerunners. This is what Gerschenkron 1962 called as the ‘advantage of backwardness’ (Amsden, 1987).
However, since the technology available to the late industrializers is more capital intensive than those of early developers, late industrializers have to make higher investments (Sundram, 2005). In addition, because modern firms also gain a competitive advantage from the presence of other inter-related businesses, late industrializers are under pressure to simultaneously build wider-related industries (Sundram, 2005). Specifically, late industrializers must develop a wide range of heavy industrial sectors to process raw materials and provide intermediate goods to other industries (Sundram, 2005).
In the competitive landscape, early developers enjoy certain advantages over late developers that include: (i) exploitation of economies of scale, that include superior technology and highly trained workforce (ii) access to cheap credit, (iii) excellent infrastructure and, (iv) research and development facilities (Kiely, 2005). The problems of entrepreneurs in the late industrializers are compounded by the fact that local capital in these countries is disposed to seek investment opportunities in the early industrializers (Kiely, 2005).
Differences in key characteristics of national business systems can largely be explained by early or late industrialization. In addition, these differences influence a nation’s competitiveness. There is more need for government intervention in late industrializes than in early industrializers.
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