Industrial & Technology Policy: Lessons for Late-Industrializing Economies

1. How the Advanced Western Nations Developed
Technologically, and Implications for Late‐
Industrializing Economies
Poh Kam WONG
Professor, NUS Business School
Professor (by courtesy), Lee Kuan Yew School of Public
Policy, National University of Singapore
Ver 1, 2009

2. © Wong Poh Kam
Core Issues
How Britain emerged from the industrial revolution as a leading
industrial technological power
How other European nations became strong technologically
How the US became the leading technological nation after
WWII
How late‐comer economies like Japan, Korea, Taiwan ,
Singapore and Finland had achieved rapid industrial and
technological catch‐up
Implications for other late‐industrializing economies

3. © Wong Poh Kam
Current Rhetoric vs. Historical Facts
Prevailing policy prescriptions by Western scholars typically
emphasize the desirability of laissez faire policy, particularly
trade liberalization, and argue against the adoption of any
industrial policy
Implicit assumption is that the Western nations have achieved
their more advanced economic development status today by
adopting such policies in the past
But the actual historical facts show otherwise
o Britain promoted free‐trade only after she has acquired significant
technological capabilities in key manufacturing industries (textiles,
machineries)
o USA had been amongst the most highly protectionist nations in the
world up to the second world war
o State interventionist roles had been significant among most
Western European nations, although actual policies varied

4. © Wong Poh Kam
Historical Development of British Industrial Capability
(see Chang, 2002 for more details)
Before the mid‐nineteenth century, Britain was a producer of raw
wool and relied on technology from the “Lowland countries”
(Belgium/the Netherlands)
In 1721, the British government embarked on a deliberate
mercantile policy to promote domestic manufacturing and
discourage export of raw materials, through a combination of
industrial and trade policies (e.g. tax on raw wool export and
import of manufactured goods, reduction of raw material import
duties & drawbacks for manufacturers, export subsidies, etc)
This deliberate “industrial policy” heralded the start of the
industrial revolution in Britain in the mid‐eighteenth century &
continued for a century
Britain only started to promote free‐trade from 1846 with the
repeal of Corn Law and the subsequent unilateral tariff reduction
in 1860, after she has established a strong technological lead in
key industries; even then, policies to discourage manufacturing in
overseas colonies continued long after that

5. © Wong Poh Kam
Historical Development of other European nations
(see Chang, 2002 for more details)
From the mid‐18th century, although Germany implemented
lower level of tariff protection than Britain, the German
(Prussian) state intervened actively to promote domestic
technological capability in a wide range of industries,
particularly through state investment in infrastructure and
training, state‐supported espionage and poaching of skilled
workers from abroad. These policies were continued well into
the mid‐19th century to secure German technological
leadership, particularly in iron & steel and chemical industries
Contrary to most conventional account, France did not embark
on a strong “dirigiste” state role until after WWII. This may have
accounted for the lower industrial development of France
before WWII, and its accelerated catch‐up after WWII
Likewise, Sweden pursued a strong state intervention role in
industrial development, particularly through state investment in
R&D, education, acquisition of foreign technologies, promotion
of public‐private partnership and a high‐wage policy

6. © Wong Poh Kam
The Historical Rise of the US
The role of government in developing & protecting indigenous
industry already dominated the political agenda of the US when
it was still a British colony; indeed, the emerging local industrial
capitalist class was a major driver for independence from Britain
The policy shift to stronger promotion of local industries
accelerated after 1776, especially after 1812 with the war with
Britain that resulted in significant increase in tariff rates for most
manufactured goods
The Civil War (1861‐5) was fought between the Northern and
Southern states not just over the slavery issue, but also over the
demand by the Northern states to maintain high protection of
industries
USA had remained the most protectionist nation among
industrial economies right up to WWII, when it had become the
leading industrial superpower. It is only in the post WWII period
that USA began to liberalize trade

7. © Wong Poh Kam
The Historical Rise of the US
Several major Federal and state policies helped sustain rapid
technological capability development in the US in the pre‐ and
post‐ WWII periods:
o The “Land‐Grant” system created a state‐based university
education system that not only significantly raised S&T manpower
supply, but also encouraged R&D collaboration to serve practical
local (particularly agricultural) needs
o The adoption of the anti‐trust legislation in the early 1900s led to
the growth of multi‐product conglomerates and the rise of
oligopolistic industrial structure, which in turn stimulated the
development of corporate R&D labs
o The significant growth of Federal funding for defense R&D arising
from the war efforts for WWII (and to a smaller extent WWI) was
sustained after the war, and greatly increased industrial R&D
capability among private enterprises and universities through the
contract R&D system; The success of defense technology also
boosted Federal funding for “basic science” at universities

8. © Wong Poh Kam
The Historical Rise of the US
o To overcome the reluctance of traditional banking institutions to
lend to risky, small businesses, the Federal government created the
Small Business Investment Companies (SBICs) in 1958 to channel
public co‐funding to fund managers to provide investment capital
to small businesses. This laid the foundation for the subsequent
emergence of the private venture capital (VC) industry model,
which in turn spurred the phenomenon of technological
commercialization through start‐ups. Subsequent Federal policy to
allow public pension funds to invest in VC firms also helped.
o The passage by the Congress of the Bayh‐Dole Act in 1980, which
allow universities and public research institutes to own the IP
created from Federal R&D grants, provided strong incentives for
them to commercialize their R&D results.
o Likewise, the passage by the Congress of the SBIR grant scheme in
1982, which mandates that a certain % of the Federal R&D funding
be allocated to support commercialization activities of small
businesses, increased the rate technology commercialization via
high‐tech spin‐offs

9. © Wong Poh Kam
The Historical Rise of the US
o The US also benefited from a net inflow of highly talented scientists
and engineers in the pre‐ and post‐WWII period. Many of the top
scientists and engineers who worked on developing military
technologies for the war efforts were foreign born.
o The early and extensive development of the university system also
attracted a big inflow of talented students from around the world,
and a relatively generous immigration policy allowed many of them
to stay on to work in the US.
o In more recent years, the private universities in the US have built up
significant financial endowment, and with greater flexibility than
their counterpart universities in Europe and Asia which are still
predominantly publicly‐funded, were able to attract top talents
away from foreign universities
o The early leadership of the US in developing the venture capital
model , particularly its concentration in Silicon Valley, further
attracted many talented technology entrepreneurs to move to the
US to pursue their start‐up activities

10. © Wong Poh Kam
Experience of Late‐industrializing economies that have achieved
rapid industrial and technological catch‐up
Among the late‐industrializing economies, the few that had
been relatively successful – Japan, Korea, Taiwan & Singapore in
Asia, and Finland and Ireland in Europe – had all pursued
significant state interventionist industrial and trade policies,
albeit in different ways, rather than the laissez‐faire, free‐trade
policy now being prescribed for developing countries
Japan started on its industrial development only in 1868 with
the Meiji Restoration, much later than the western nations.
Korea, Taiwan & Singapore have started the industrial catch‐up
process even later in the 1960s. The active implementation of
industrial and technology policies have contributed significantly
to their rapid catch‐up, even though mistakes were made (see
e.g. Wong & Ng, 2001, Wade 1990, Woo‐Cumings 1999)
The evidence thus suggests that technological capability
development in the past was not the result of a laissez‐faire,
free‐trade approach, but significant state policy intervention

11. © Wong Poh Kam
Lessons for other Late‐industrializing economies?
The argument for “free‐trade” is based on the theory of static
comparative advantage, i.e. it assumes that the trading nations
involved are contented to stay at their current state of resource
endowments and capabilities
But the aspiration of many lower‐income, late‐industrializing
economies is not to stay as such, but to move up to more
advanced level of capabilities, i.e. they should be concerned
with dynamic comparative advantage
By exhorting the state in late‐comer countries to adopt laissez‐
faire and free‐trade, and by enforcing international rules that
constrain their ability to pursue strategic industrial/trade
policies, the advanced countries can be seen as “kicking away
the ladder” (Chang, 2002) that they themselves used earlier to
gain their current advanced technological positions

12. © Wong Poh Kam
References
Chang, Ha Joon (2002), Kicking Away the Ladder: Development
Strategy in Historical Perspective, Anthem Press
Greene, J. Megan(2008), The Origins of the Developmental State
in Taiwan: Science Policy and the Quest for Modernization,
Harvard University Press
Wade, Robert (1990), Governing the Market: Economic Theory
and the Role of Government in East Asian Industrialization,
Princeton University Press
Wong, Poh Kam and C.Y. Ng (eds.) (2001), Industrial Policy,
Innovation and Economic Growth: The Experience of Japan and
the Asian NIEs, Singapore University Press
Woo‐Cumings, Meredith (ed.) (1999), The Developmental State,
Cornell University Press