1.2.1 Problems with the Linear View: The More, the Better?

Many developing countries continue to face difficulty initiating and sustaining economic development, and this situation has been exacerbated by the COVID-19 pandemic, resulting in a larger divergence between rich and poor countries. One important economic development question for latecomer countries is whether they should follow the similar trajectories of present-day rich countries or follow a different path (Lee, Reference Lee2019).

While it would appear to be a fundamental question, economists studying latecomer development have not explored this question adequately and have simply indicated that latecomers should follow the trajectories of forerunners. For example, the policy prescriptions of the Washington Consensus advocate for an immediate and comprehensive liberalization of trade and investment and privatization of state-owned enterprises, given that all rich countries are liberalized economic systems with few publicly owned enterprises. Although this term – Washington Consensus – is now seldom used, even by the World Bank, no workable alternative has been identified.

There is another stream within the development literature that includes the structural transformation school. Scholars in this group tend to offer linear prescriptions and advocate that latecomers should follow a similar path to that of mature economies, meaning they should begin with primary sectors and subsequently develop their manufacturing and service sectors. According to this perspective, latecomers should first achieve an economic structure in which manufacturing constitutes a significant share of the economy. Another example of the linear view would be those who base their policy suggestions on the concept of economic complexity, which holds that latecomers should attempt to enter the same product spaces as advanced economies. This approach, however, does not consider entry barriers to some product spaces.

The early studies on the technological development of latecomers, such as those by Lall (Reference Lall2000) and Hobday (Reference Hobday1995a, Reference Hobday1995b), have observed that latecomers have tried to catch up with advanced countries by assimilating and adapting the incumbents’ obsolete technology. However, in a previous co-authored paper (Lee & Lim, Reference Lee and Lim2001), a colleague and I asserted that latecomers have not always followed advanced countries’ path of technological development; rather, they sometimes skip certain stages or even create their own paths that differ from those of the forerunners. In a previous book (Lee, Reference Lee2019), I suggested an explicit nonlinear alternative centered around the concept of detours and leapfrogging that is responsive to the catch-up paradox of “You cannot catch up if you just keep catching up.” Indeed, once a country reaches the middle-income stage, several barriers to entering high-end sectors and industries emerge that justify the need for latecomers to attempt detours and leapfrogging (Lee, Reference Lee2019; Saviotti & Pyka, Reference Saviotti and Pyka2011). These barriers include restrictions on intellectual property rights, counteractive or protectionist measures by incumbent countries, and the limitation of latecomers’ policy spaces by the World Trade Organization (WTO).

This book attempts to propose an effective alternative to mainstream development thinking by focusing on nonlinearity and multiplicity in pathways for economic development by latecomers, especially those in the middle-income stage. Given that innovation is considered to be both a bottleneck for continued growth beyond the middle-income stage and the solution for the middle-income trap (MIT) (Lee, Reference Lee2013c; World Bank, 2010), this book explores detour paths of economic development pursued by latecomers that rely on the power of innovation, and therefore the title of this book employs the term “innovation–development detours.” Detours are necessitated by the presence of the various barriers latecomers face in their efforts to use innovation to aid development. In my previous work (Lee, Reference Lee2019), I suggested three specific detours as solutions to the obstacles latecomers face when attempting to enhance their innovation capabilities.

The first detour involves adopting imitative innovation under a loose IPR (intellectual property rights) regime in the form of utility models (or petty patents) and trademarks instead of promoting and strengthening regular patent rights. The second detour is directly opposed to the linear view of GVCs (Baldwin, Reference Baldwin2016), which argues that the more participation in GVCs, the better, and rather promotes a GVC-related detour whereby an economy initially learns by participating in GVCs but later reduces its reliance on these chains by building increased domestic value chains and entering high-end segments. Without such a detour, latecomers will remain stuck in low value-added sectors, which is a symptom of the MIT. The third detour involves specializing first in short-cycle technology sectors and products (e.g., IT) and later in long-cycle sectors and segments (e.g., pharmaceuticals). Long-cycle technologies are highly profitable and desirable but also enable existing knowledge to be utilized for a long period of time, thus acting as an entry barrier against latecomers. Therefore, latecomers are advised to first target short-cycle technologies – where entry barriers are low, but growth prospects are high – because high innovation frequency often disrupts the dominance of the incumbent.

This book seeks to offer new insights regarding detours to economic growth that have become more viable in the age of de-globalization, with a focus on non-manufacturing industries, global–local interfaces, and the coevolution of firms and surrounding systems. Regarding the book’s theoretical framework, it applies a Schumpeterian approach, with a focus on the concept of innovation systems, which have been theorized at the national, sectoral, regional, and firm levels (Lundvall, Reference Lundvall1992; Nelson, Reference Nelson1993). This book explores the following three issues, which have been relatively neglected in the existing literature: (1) the possibility of multiple linear and nonlinear pathways for latecomers to upgrade their innovation systems; (2) the importance of strategically managing global–local interfaces and, by extension, the necessity of domestic ownership and knowledge for long-term growth; and (3) the coevolution of firms, in particular domestically owned firms, with several tiers of innovation systems, including national innovation systems (NIS), sectoral innovation systems, regional innovation systems, and even corporate innovation systems (Granstrand, Reference Granstrand2000).

1.2.2 Multiple Pathways and Detours

First, this book applies the innovation systems perspective to the context of latecomer economies and focuses on the possibility of latecomers following multiple nonlinear pathways. The term “nonlinear” implies that latecomers will not necessarily follow the same paths as advanced economies and may not increase the key variables of innovation systems in a linear fashion. This book also intervenes in the longstanding debate on balanced versus imbalanced economic development paths and compares the utility of balanced versus imbalanced NIS for latecomers attempting to achieve sustained economic catch-up. The book also discusses the “trapped NIS” responsible for the catch-up failure that leads to countries becoming caught in the MIT (Lee, Lee, & Lee, Reference Im and Lee2021).

Various NIS have been measured and analyzed in diverse ways. In a previous paper (Lee, Lee, & Lee, Reference Lee, Lee and Lee2021), colleagues and I adopted a definition from Lundvall of NIS as the “elements and relationships which interact in the production, diffusion and use of new and economically useful knowledge” (Lundvall, Reference Lundvall1992). This approach uses the five key variables of knowledge localization, diversity of knowledge portfolio, decentralization of innovators, the cycle time of technologies (CTT), and knowledge combinations (originality). National innovation systems in mature and advanced economies tend to be well balanced, scoring high values for all five variables. Their innovations tend to be strongly based on local knowledge (high knowledge localization) and dispersed over a large number of firms (decentralization) and sectors (technological diversification). They also often specialize in long CTT-based sectors where entry barriers and profitability are high. Therefore, a balanced, catch-up NIS pathway for latecomers may focus on improving in a linear and balanced manner five indices of NIS, such as in the cases of Spain, Ireland, and most recently, Russia and India. Contrastingly, imbalanced catch-up NIS pathways may refer to cases in East Asia. That is, in some East Asian countries, a handful of big businesses rather than a large number of small- and medium-sized enterprises (SMEs) have led specialization in short rather than long CTT while attaining a level of technological diversity and knowledge localization commensurate with advanced economies.

This understanding of the imbalanced catch-up NIS pathway is consistent with the concept of nonlinearity in the sense that latecomers do not follow the path of forerunners (or adopt long CTT and decentralized NIS) but rather forge their own paths and seek out their own niches. Such nonlinearity can be rationalized in terms of the existence of entry barriers in long-CTT sectors and the need for latecomers to concentrate their resources within a few big businesses that successfully enter low barrier-to-entry (short-CTT) sectors and technologies (Lee, Reference Lee2013c; Han & Lee, Reference Han and Lee2022). In short-CTT sectors, “creative destruction” (Schumpeter, Reference Schumpeter1942) occurs more frequently, and therefore, the knowledge base of existing technologies is more quickly destroyed or made obsolete.Footnote ¹ In this sense, short CTT-based sectors have lower barriers to entry because existing technologies owned by incumbents either become quickly outdated or are frequently disrupted. In contrast, the trapped NIS pathway is discussed in terms of its “too early” specialization in long-CTT technologies without achieving substantial commercial success from innovation and failing to sustain economic growth while being stuck in the MIT.

Late latecomers facing higher entry barriers to high-end sectors and technologies may seek diverse entry points in knowledge-intensive IT services or resource-based sectors rather than hard manufacturing by adopting a detour or leapfrogging strategy. Such possibilities are also consistent with the idea of the multiplicity and nonlinearity of development paths. Figure 1.1 summarizes the above discussion on innovation–development detours, which is further explored in Chapter 2. The top of Figure 1.1 features a box of multiple pathways, including imbalanced (short cycle) and balanced (medium cycle) catch-up pathways as well as the imbalanced, trapped pathway. The same box also lists services and resource-based sectors that are alternatives to manufacturing-based catch-up. The potential of these alternative trajectories will be discussed in Chapter 2 with reference to the examples of Chile and Malaysia (resource-based development) and India (IT service-based development).

Figure 1.1 Innovation–development detour

Given that all economies around the world, both developing and developed, have undergone several decades of opening up and globalization, competing successfully in international markets is a crucial factor that determines the fortunes of economies. Due to the lack of stable sources of export earnings and convertible currencies, export competition is vital for latecomer economies to be able to earn dollars to pay for imported capital goods. However, the innovation system literature has been somewhat sluggish in exploring the international dimension of innovation systems and articulating such concepts as global innovation systems (Binz & Truffer, Reference Binz and Truffer2017) in discussions over building technological capabilities.

To address this gap in the literature, this book argues that managing successfully global–local interfaces is a key condition for building up technological capabilities. This is represented by the box on the left marked as “Detour 1: Global–Local–Global” in the middle tier of Figure 1.1. The first term, “global,” indicates that all latecomer economies have been open to global knowledge and know-how in the form of inviting FDI for development. However, they have experienced difficulty leveraging FDI to enhance domestic capabilities in production and innovation. When this dimension of the global–local interface is poorly managed, latecomers often fall into the liberalization trap where local capabilities fail to grow, and MNCs become dominant to command market power in local economies (Bresser-Pereira et al., Reference Bresser-Pereira, Araújo and Peres2020; Rodrik Reference Rodrik2006). Billmeier and Nannicini (Reference Billmeier and Nannicini2013) report many cases of trade liberalization leading to decline or stagnation of economic growth in emerging economies in Latin America or Africa.Footnote ² The worst consequence of this trap is premature de-industrialization and falling into an MIT.

Domestic ownership becomes important during the middle-income stage or later because FDI firms tend to become increasingly reluctant to transfer or sell technology and are prepared to move to other production sites with lower wages. Therefore, the focus should shift from the global to the local, as noted in the box for Detour 1. The success of Taiwan’s catch-up was also supported by the growth of domestic firms (Amsden & Chu, Reference Amsden and Chu2003). Moreover, the spillover effect of FDI does not occur if the host country does not focus on the linkages between FDI and the domestic economy (Chang & Andreoni, Reference Chang and Andreoni2020; Fu et al., Reference Fu, Pietrobelli and Soete2011; Marin & Bell, Reference Marin and Bell2006). These observations are consistent with the so-called “in–out–in again” hypothesis (Lee et al., Reference Lee, Szapiro and Mao2018). That is, it is not sufficient for latecomers to integrate themselves into GVCs by inviting FDI or MNCs at an early stage of development; they must also enhance domestically owned production and innovation capabilities, thereby increasing domestic value added and reducing the backward linkages to GVCs (the share of foreign value added in gross exports). During the final stage, latecomers must utilize their enhanced local capabilities to engage with more GVCs. Therefore, the box for Detour 1 is titled “Global–Local–Global.”

The key message of the box for Detour 1 is that successful catching-up requires meeting the following three conditions: the enactment of public initiatives, including industrial policy, the emergence of domestic ownership, and discipline by world markets. The importance of domestic ownership and knowledge is discussed in Chapter 3, where I apply the GVC framework to several cases, including three IT sectors in Asia (Kim & Lee., 2022), auto sectors in Thailand, Malaysia, China, and South Korea (Lee, Qu & Mao, Reference Lee, Qu and Mao2021), and several resource sectors in Chile and Malaysia (Lebdioui et al., Reference Lebdioui, Lee and Pietrobelli2021). The above studies on IT clusters, auto sectors, and resource sectors are based on separate regional, sectoral, and national innovation systems perspectives; however, in this study, they will be re-interpreted with a new focus on global–local interfaces.

Next, the box titled “Detour 2: SMEs–Big Businesses–SMEs” indicates that although latecomer economies tend to have only SMEs at the initial stage, it is critical to generate and establish big businesses during the catch-up stage. During the final stage, SMEs will emerge and grow, interacting with and following big businesses. It is also necessary for a latecomer to generate more big businesses than is normally expected from an economy of its size as a prerequisite for achieving growth beyond the middle-income stage. My colleagues and I proved this in a previous econometric study (Lee et al., Reference Lee, Kim, Park and Sanidas2013) that used the data of countries at upper-middle and high-income stages, with Korea as the prime example. In addition to big business-friendly Korea, SME-friendly Taiwan was also able to generate eight Global Fortune 500 firms by 2010. This is a considerable feat, considering that the economy had just two or fewer such firms in the 1990s. In contrast, Turkey, South Africa, and Thailand have had either one or no such firms since the 1990s up until now. Interestingly, a study by Beck et al. (Reference Beck, Demirguc-Kunt and Levine2005) funded by the World Bank failed to identify a robust causal link between SME growth and economic growth. Indeed, it only found a positive correlation, which implies that SMEs are not a trigger for growth but rather a result of economic growth.

The importance of big businesses for driving economic growth via large-scale R&D (research and development) has been observed in the United States and Germany during the nineteenth and early twentieth centuries. Whereas young Schumpeter emphasized the role of entrepreneurship primarily in the form of startups and SMEs,Footnote ³ the older Schumpeter (Reference Schumpeter1942) recognized the importance of big businesses (pp. 71–72). One prevailing view in the development literature is that no countries have successfully achieved a high-income economy without generating a relatively sizable manufacturing sector. In particular, this argument has been made by scholars who emphasize structural transformation, such as Szirmai and Verspagen (Reference Szirmai and Verspagen2015). Somewhat breaking with this approach, this book argues that no successful catch-up has ever occurred without generating a certain number of big businesses, which are needed not only to overcome latecomer disadvantages regarding entry barriers at the middle-income stage but also to secure a certain degree of resiliency against crises. This leading role of big businesses is consistent with the nonlinear pattern of increasing rather than decreasing the degree of the concentration of innovation during the catching-up stage in latecomer economies.

Of course, it is important not to apply binary thinking to SMEs and big businesses. That is, the key is not to achieve a large number of startups and SMEs but rather to have them grow quickly into big businesses. If a country is able to generate a certain number of big businesses, it means that a country has been able to grow its SMEs into big businesses either by maintaining a market-friendly economy or engaging in public intervention and promotion. The United States may have succeeded without market intervention; however, latecomer countries, such as Korea, often experience a higher degree of market failure, especially in capital markets, and therefore often require public intervention. When big businesses do emerge in a country, they tend to serve as umbrellas for supplier SMEs while generating many spinoffs. In this sense, the generation of startups and their growth into big businesses depend on the effective coevolution of firms with surrounding institutions and innovation ecosystems.

Thus, Chapter 4 focuses on the issue of coevolution and discusses how firms, in particular privately owned domestic firms, grow faster than foreign-owned firms by exploiting surrounding institutions. This chapter also addresses how the rise of a single core firm can change surrounding regions’ innovation systems. Additionally, as indicated in the box for Detour 2, big businesses are important in terms of their role in overcoming entry barriers by mobilizing resources and competencies, carrying out the R&D necessary for entering high-end sectors, ensuring resiliency against external disruptions, and serving as an umbrella for SMEs. These four roles will be elaborated further in Chapter 5 (Innovation–Development Detour in South Korea).

In summary, in this emerging era of de-globalization, exploring innovation–development detours according to the aspects outlined above is particularly relevant. This is a nontechnical book that draws upon new and existing empirical evidence from my own research and that of other scholars.

1.3.1 The Possibility of Non-Manufacturing-Based Development

In Chapter 2, I first provide an overview of the history of economic growth in diverse economies. Next, I group economies into several clusters according to the diversity of NIS, followed by a discussion of multiple pathways for emerging economies. Then, I discuss the potential of non-manufacturing-based development as a solution to the MIT. More specifically, Chapter 2 discusses Chile and Malaysia as examples of resource-based development and India as an example of IT service-based development.

The per capita incomes of Chile and Malaysia have recently exceeded 40% of that of the United States; this is despite the fact that both countries used to belong to the group of imbalanced and trapped countries. Chapter 2 demonstrates that both Chile and Malaysia have sustained their economic growth not because of manufacturing but rather because of the success of several leading resource-based sectors – petroleum, rubber, and palm oil in Malaysia and salmon, fruit, wine, and wood-based products in Chile (Lebdioui et al., Reference Lebdioui, Lee and Pietrobelli2021). To determine which sectors are responsible for growth beyond the MIT, I compare the contributions of different sectors to export performance, including their share of national exports, trade balance, and revealed comparative advantage over time. I focus on export performance because, in the Global South, it is a more important binding factor for economic growth than trade openness measured by the trade-to-GDP ratio (Ramanayake & Lee, Reference Ramanayake and Lee2015). Developing countries must earn hard currency via exports to purchase the imported capital goods that are required for investments and sustained economic growth. Without strong exports, developing countries cannot free themselves from the balance of payment deficit problem, which is a chronic problem in the Global South. Furthermore, I present evidence demonstrating that a progressive downstream value addition has taken place in the exports of these sectors in Malaysia and Chile.

These examples of successful catch-up through specialization in resource-based sectors support this book’s argument that latecomers should identify low barrier-to-entry sectors within the international division of labor. For many resource-rich emerging economies, such resource-based sectors represent low barrier-to-entry sectors. Achieving growth by relying on domestically available resources makes more sense in the post-pandemic era when countries are seeking a more resilient model of development that is less constrained by the risks of GVC disruption.

Chapter 2 discusses the case of India, which also belongs to the group of balanced and gradual catching-up economies. India is not yet a high-income economy. However, considering its increasingly faster rate of economic growth and balanced (between short and long CTT) industrial structure, it will likely soon emerge as a fast catching-up economy. India is also quite different from other trapped economies on account of its high level of technological diversification. I also discuss India’s patent portfolio to show that whereas India previously pursued imbalanced specialization into two long-cycle technologies (drugs and chemicals), since the 2000s its economy has become more balanced as a result of increased strength in IT services. The share of the patents from computer and communication technologies rose from less than 15% of total US patents registered by India in the early 2000s to over 60% by the mid-2010s. In this way, India has become a more balanced, medium-cycle, tech-based NIS, and, at the same time, it has steadily increased its level of technological diversification.

1.3.2 From the Global–Local Interfaces to Domestic Ownership and Knowledge

Chapter 3 argues that successful catch-up by latecomers is possible only when they strategically manage the global–local interface to promote domestically owned firms, which serve as the basis for additional domestic value added and jobs. Specifically, the following three conditions are prerequisites for success: (1) the enactment of public initiatives, including industrial policy, (2) the emergence of domestic ownership, and (3) discipline by world markets. To elaborate on these three conditions, I draw on three examples: three regions specializing in the same IT sector in Asia (Kim & Lee, Reference Kim and Lee2022), auto sectors in four countries (Lee, Qu, & Mao, Reference Lee, Qu and Mao2021), and several resource sectors in Chile and Malaysia (Lebdioui et al., Reference Lebdioui, Lee and Pietrobelli2021).

The first case study examines the short CTT-based IT sector in Taipei, Shenzhen, and Penang. I contrast their different paths to development, such as fast catch-up in Shenzhen and slow catch-up in Penang. These deviant pathways are explained with reference to the various patterns of firm ownership in each region. For example, I compare the emergence of strong domestic firm ownership in Shenzhen with the persistent dominance by MNCs in Penang.

Second, using the example of various auto sectors in Asia, the book argues that domestic ownership and knowledge should be subject to global market discipline. For instance, the auto industry in Malaysia, which is led by Proton, used to be mostly domestically owned and tightly regulated; however, it was not export-oriented and lacked global market discipline. Consequently, it failed to be competitive in markets. In contrast, the auto sector in Thailand achieved mixed success that has been limited in terms of domestic value added due to a lack of domestic ownership. In the end, success depends on whether domestically owned enterprises grow to become successful exporters in global markets.

Third, I discuss how the emergence and growth of several resource sectors in Chile (wine, fruit, and wood products) and Malaysia (palm oil, rubber, and petroleum products) into leading export engines enabled the success of economic catch-up beyond the middle-income stage in both countries. I also show that their emergence and growth did not occur spontaneously but rather as a result of policy interventions by the government. These examples also illustrate that successful catch-up by latecomers can be not based on manufacturing but on resource-based sectors; indeed, for both countries, resource-based sectors drove economic growth beyond the middle-income stage. After South Korea and Taiwan, Chile and Malaysia may be the first economies to successfully escape the MIT.

1.3.3 The Coevolution of Firms with Sectoral, Regional, and National Systems

In contrast to the majority of studies, which tend to study a single innovative system in isolation, this book explores the interactions between various innovative systems. More specifically, this book focuses on the interactions between corporate innovation systems and sectoral, regional, and national innovation systems. In Chapter 4, I study these interactions to outline the importance of firms, in particular big businesses, as the ultimate drivers of economic catch-up in the latecomer context. Thus, the focus is on how the growth of (domestic) firms drives the development of sectors, regions, and nations.

The overarching theme of this book is alternative pathways for latecomers for catch-up development, and one way of exploring this theme at the firm level is to ask whether latecomers use similar or different technologies from incumbent firms to catch up and forge ahead. Using similar technologies implies that latecomers simply attempt to imitate forerunners, whereas using different technologies indicates that latecomers pursue new technologies and take different technological paths from incumbents. Accordingly, Chapter 4 explores the paths of latecomer firms striving to catch up with incumbent firms. Specifically, Section 1.2 of Chapter 4 addresses the question of whether latecomer firms can catch up with and eventually overtake incumbent firms by merely imitating incumbents or whether they must go beyond imitation by initiating their own technological innovations that differ from those of incumbents. I seek answers to these questions by examining three cases of latecomer firms overtaking incumbent firms – that is, Samsung overtaking Sony, Hyundai Motors overtaking Mitsubishi Motors, and Huawei overtaking Ericsson.Footnote ⁴

Section 1.3 of Chapter 4 deals with the coevolution of firms and surrounding institutions in the context of post-reform China, where firms with diverse ownership have emerged and formed an ideal setting for examining the interactions between firm ownership and institutions. This section also explores the specificities of the post-reform Chinese experience, such as privately owned enterprises (POEs) catching up with foreign-owned enterprises (FOEs) and state-owned enterprises (SOEs) via POEs’ more effective exploitation of the surrounding institutional development, as I discussed in a co-authored paper, Lee and Lee (Reference Lee and Lee2022). Although the initial productivity of POEs was lower than that of FOEs when institutional development was low, POEs eventually caught up with FOEs because institutions have improved over time and have been more effectively utilized by POEs than FOEs. The implication is that although private firms cannot prosper without sound institutions, institutional development may be useless without the existence of domestically owned private firms (rather than FOEs) that can benefit from this institutional development.

Next, I analyze the region of Hsinchu in Taiwan to show that the region’s long-term trajectory has been strongly influenced by the rise of leading big businesses, such as Taiwan Semiconductor Manufacturing Company (TSMC), in Hsinchu City (Wong & Lee, Reference Wong and Lee2021). Hsinchu used to be characterized as a Marshallian industrial district with an equal distribution of differently sized firms and diverse sectors. However, with the growth of the core firm TSMC, the region has steadily come to resemble a hub-and-spoke industrial district with increasing centralization in the distribution of firms and innovations.

Finally, the match between the micro and macro dimensions of innovation will be discussed with reference to the changes in the corporate innovation systems of Korean firms. Korean firms used to behave like typical catching-up firms (e.g., firms that prioritize growth over profitability, borrow and invest heavily, and specialize in short-cycle technologies); however, Korean firms have undergone radical changes in their behavioral patterns, which shows that their behaviors are converging with those of mature firms in advanced economies such as the United States (Im & Lee, Reference Im and Lee2021). They now prioritize profitability and dividend payments over sales growth and re-investment; they are also moving into long CTT-based sectors, such as bio-medicals. This shift from catching up to convergence at the firm level mirrors the macro-level convergence of South Korea with respect to Anglo-American economic systems in terms of the slowing down of employment and growth and rising inequality. Such changes in firms have been driven by the post-1997 crisis reforms imposed by the International Monetary Fund (IMF) as a condition for receiving emergency loans, which forced Korean firms to adopt corporate governance measures typical of shareholder capitalism in the United States and the United Kingdom.