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Strategic Coupling

East Asian Industrial Transformation in the New Global Economy

Henry Wai-chung Yeung

Cornell University Press

Ithaca and London

To Weiyu, Kay, and Lucas—for accompanying me throughout this long march

Contents

List of Tables

List of Figures

Preface and Acknowledgments

Abbreviations

1.  East Asian Development in the New Global Economy

2.  Transformation of State-Firm Relations in the 1980s and the 1990s

3.  Strategic Coupling

4.  Strategic Partnership in Global Electronics

5.  Industrial Specialization and Market Leadership in Marine Engineering and Semiconductors

6.  Emergence of East Asian Lead Firms

7.  Beyond the Developmental State

Appendix

Notes

References

Index

Tables

1.1  Key macroeconomic indicators on South Korea

1.2  Key macroeconomic indicators on Taiwan

1.3  Key macroeconomic indicators on Singapore

3.1  The role of East Asian economies in global production networks measured by value of total trade in intermediate manufactured goods

3.2  East Asian domestic business groups in Businessweek’s Emerging Market 200 and Global 1000

3.3  Foreign ownership and control of commercial banks in South Korea

3.4  Economic significance of the top 100 business groups in Taiwan

3.5  Summary of divestments and holdings by Temasek Holdings in Singapore

4.1  The electronics industry in South Korea, Taiwan, and Singapore

4.2  The global production network of personal computers by the mid-1990s

4.3  Shipments and market shares of notebook ODM manufacturers from Taiwan

4.4  World’s top ten largest providers of electronics manufacturing services by revenue

5.1  World’s top shipbuilding production and firms by country and ship order by country

5.2  Singapore’s marine industry by activity

5.3  World’s top ten semiconductor firms by revenue

5.4  World’s top ten semiconductor foundries by revenue and market share

5.5  USPTO patent statistics of leading semiconductor firms and research institutions from South Korea, Taiwan, and Singapore

5.6  International technology linkages of leading firms in Taiwan’s semiconductor industry

5.7  World’s top twenty-five fabless semiconductor firms

5.8  Number of USPTO patents in DRAM products by South Korean and Japanese firms

6.1  Leading airlines from Taiwan, South Korea, and Singapore

7.1  Strategic coupling with global production networks and trajectories of economic development in East Asia

7.2  Mechanisms of strategic coupling and firm-specific initiatives in industrial transformation

7.3  Strategies and histories of state developmentalism in comparative perspective

Figures

2.1  The developmental state and its relationships with domestic firms

3.1  From embedded autonomy to strategic coupling: the evolutionary dynamics of the state-firm-global production networks assemblage

3.2  Conceptual framework for analyzing the strategic coupling of East Asian firms with global production networks

5.1  World completions of shipbuilding by country

Preface and Acknowledgments

This book has taken me a very long time to write. But I have learned a great deal from the scholarship by writing it, and I am much happier with the work in this final form. It reflects my personal journey through East Asian development, first as a beneficiary, then as a student, and now an analyst. Growing up as a teenager in Hong Kong and Singapore during their formative decade of the 1980s, I experienced firsthand this transformative development in two of the four East Asian tiger economies. Still, I benefited much more than just being someone living in these rapidly developing city-states. I had the fortune of studying them as well!

My first encounter with the developmental state literature was in late 1992 when I embarked on my doctoral research under the supervision of Peter Dicken at the University of Manchester, England. Thanks to Peter’s insightful knowledge of the then-emerging field of searching for the miraculous East Asian developmental model, I had the early advantage of reading writers who have since become giants in this field of the political economy of East Asian development. Looking at my well-worn copy of Robert Wade’s Governing the Market (1990)—bought at the university bookstore in Manchester in March 1993—evokes in me a strong reminiscence of the early excitement as a keen student of East Asian industrial transformation. Then I read with intense interest all the other classics, such as Chalmers Johnson’s MITI and the Japanese Economic Miracle (1982), Frederic Deyo’s The Political Economy of the New Asian Industrialism (1987), Alice Amsden’s Asia’s Next Giant (1989), Stephan Haggard’s Pathways from the Periphery (1990), and so on. Here, I pay tribute to all these thinkers for laying the solid intellectual foundation on which this book is predicated.

Since this early period of my interest in the East Asian developmental state, I have consistently followed this rapidly growing literature after my return to the National University of Singapore in 1995. Collectively, this enormous developmental state literature has prompted a heated debate on the role of the state in governing the market by getting the prices wrong and by promoting selective domestic firms as national champions. Authors in this literature have argued forcefully and demonstrated empirically that state-directed initiatives through industrial policy and credit allocation led these East Asian economies to industrialize rapidly, catching up with advanced industrialized economies in North America and Western Europe. As more books, book chapters, and journal articles were published in the second half of the 1990s and throughout the 2000s on this state-led industrial transformation, I began to witness at the same time a new dynamic mechanism of economic development at work in East Asia that went beyond this domestic statist force.

Since 2004, my research into the leading domestic firms in Singapore, Taiwan, and South Korea has pointed to a new direction of theorizing industrial transformation in an increasing interconnected world economy. Instead of being driven primarily by their home states, these national firms have taken over the leadership of industrial transformation through their dynamic articulation into complex global production networks—this is the mechanism of strategic coupling that forms the core focus of this book. Conceived as a major contribution to this debate on the changing role and continuity of the state in East Asian economies, this book aims to reshape the ways in which we understand the political economy of economic development and evolutionary state-firm relations in these three East Asian economies. I argue that the developmental statist approach to industrial transformation and economic development in these East Asian economies has often ignored the complex and dynamic coevolutionary nature of state-firm relations within the changing context of economic globalization. This work thus brings together the bottom-up approach in the developmental state literature with the more top-down perspective in the recent social science literature on global production networks and global value chains.

The theoretical and empirical research underpinning this book clearly benefits from my longstanding collaboration with different colleagues. My theoretical work on global production networks has its deep roots in the Manchester school originating in the early 2000s. I thank Peter Dicken, Jeffrey Henderson, Neil Coe, Martin Hess, and Jennifer Johns for their comradeship and support. Neil Coe, in particular, has recently rejoined my department, and our collaboration in this research has since deepened and led to our coauthored work Global Production Networks published in 2015 and our jointly directed Global Production Networks Centre (GPN@NUS). Philip Kelly, Weidong Liu, and Kris Olds are also my early partners in crime in this endeavor toward understanding complex production networks in the global economy.

My empirical work on the three East Asian economies has its origin in a major research project starting in 2004. I am very grateful to the more than one hundred top executives and senior government officials who acceded to our personal interview requests and shared generously their knowledge of East Asian development. The promise of anonymity means that I cannot name any of them here. My two NUS collaborators in this project, Yong-Sook Lee and Jang-Sup Shin, have made fundamental contributions to my empirical analysis in this book. I am most indebted to their role in collecting the interview data on domestic firms and state institutions in South Korea. Our outstanding research assistant, Angela Leung, deserves a special commendation for her dedicated assistance throughout the several years of fieldwork in all three economies (plus Hong Kong). Liu Yi, my former Ph.D. student, also helped compile some of the statistics used in the book.

In Taiwan, Jinn-Yuh Hsu (National Taiwan University) and Tain-Jy Chen (Chung-Hua Institution for Economic Research) were very kind in hosting my multiple visits to Taipei and were most generous with their time and resources. Jinn-Yuh, Bruce Tan, Daniel Yang, Sue-Ching Jou, and their graduate students in NTU Geography kept me well entertained and in good spirits during extended field trips. All this empirical work would not have been possible without the sustained financial support of the National University of Singapore over the past ten years. In the second half of 2006, I spent several months of sabbatical leave in Hong Kong and Japan during which more empirical data were collected. I thank Eric Ramstetter at the International Centre for the Study of East Asian Development in Kitakyushu, Japan, and George Lin at the University of Hong Kong for their strong friendship and support in securing me generous visiting professorships in both institutions.

Translating this protracted theoretical and empirical research into an actual book has been a Herculean task that necessitates a whole new set of benefactors. The writing of this book started in 2010 when I was on the NUS Humanities and Social Sciences Faculty Research Fellowship for one semester. The book proposal was written in November 2012 when I was on the Residency Fellowship at the Rockefeller Foundation’s beautiful Bellagio Study and Conference Center in Italy. I thank Kishore Mahbubani for nominating me to the foundation and Catherine Weaver and Eric Sheppard for their careful reading and constructive comments on my book proposal. Other fellow academic residents at the Bellagio Center offered very useful suggestions and stimulating discussions: Laurie Brand, Ruth Fincher, Helga Leitner, Valerie Preston, Anne Salmond, and Michael Webber. Pilar Palaciá, the Bellagio Center’s managing director, and her dedicated team provided the most amazing hospitality that made Villa Serbelloni’s tranquility and serenity just so heavenly for all of us. Working on my manuscript in the villa’s private study overlooking the magnificent Lake Como was simply a once-a-lifetime experience. The finalization of the entire manuscript for first submission was completed during my sabbatical leave at the School of Geosciences, University of Sydney, Australia, in 2013. I thank the University of Sydney for its visiting professorship appointment that enabled this crucial preparation, and my two wonderful hosts, Jeffrey Neilson and Bill Pritchard. An extended discussion with John Mathews over coffee in Potts Point was most fruitful.

Publishing this book with one of the world’s top university presses and its renowned book series is a dream that has indeed come true by the time you read this! Four individuals are positively implicated in this process, and I am forever grateful to them. First and foremost, I am immensely grateful to Peter Katzenstein for spending a significant chunk of his invaluable time to read different submissions of my manuscript and for offering critical and yet extraordinarily productive comments. His penetrating insights into theory, analysis, and readership are unparalleled and have certainly made the book much stronger. With the usual caveats, I can only hope this version befits in a modest way his prestigious Cornell Studies in Political Economy series that has already made enormous contributions to the developmental state literature over the past thirty years. Roger Haydon, my executive editor at Cornell University Press, is really a gem to work with. His generous support and sustained encouragement have kept this project on track. I thank him and Peter for their exceptional responsiveness, great patience, and steadfast commitment to this work. Finally, I thank Dan Breznitz and an anonymous reader for their interventions at the critical stages of this manuscript publication. Dan was very kind with his candid advice on manuscript publishing and introduction to Cornell. The detailed and constructive comments from the reader were highly useful to my revisions.

The broad ideas in this manuscript have been presented as lectures and preliminary papers in different occasions since 2006: the Asia Pacific Viewpoint Lecture at the International Geographical Union Regional Congress in Brisbane, Australia (2006); the Norma Wilkinson Lecture at the University of Reading, England (2007); Birkbeck College, University of London (2007); annual meetings of the Association of American Geographers in Boston (2008) and Las Vegas (2009); annual conferences of the Regional Studies Association in Leuven, Belgium (2009) and Pécs, Hungary (2010); Asia Centre of Seoul National University, South Korea (2009); the DIME Workshop in Utrecht, the Netherlands (2009); University College Dublin, Ireland (2010); McGill University, Canada (2011); the Jeremiah Lecture, University of Oregon (2011); the LSE-NUS Public Lecture, the London School of Economics and Political Science (2012); National University of Ireland, Maynooth (2012); Academy of International Business (UK and Ireland) Conference at the University of Liverpool Management School, England (2012); Third Global Lecture, University of Copenhagen, Denmark (2012); the Institute of Australian Geographers Conference 2013, Perth; and the Regional Science Policy and Practice Lecture at the North American Regional Science Council Conference, Washington, DC (2014).

I thank all commentators of my lectures and/or papers in these venues; their inputs were critical to my manuscript preparation. In particular, helpful and constructive comments were received in various ways and formats from these scholars: Stephanie Barrientos, Ron Boschma, Peter Buckley, Mark Casson, Riccardo Crescenzi, Fred Deyo, Mike Dowdle, Niels Fold, Michele Ford, Doug Fuller, David Gerber, Gary Gereffi, Alexandra Hughes, Simona Iammarino, Bob Jessop, Andrew Jones, David Levi-Faur, Imelda Maher, Matthew Mahutga, Franco Malerba, Andrea Morrison, Ram Mudambi, Alexander Murphy, Warwick Murray, Khalid Nadvi, Rajneesh Narula, Jeffrey Neilson, Sean O’Riain, Sam Ock Park, Mario Davide Parrilli, Stefano Ponte, Jessie Poon, Bill Pritchard, Roberta Rabellotti, Michael Storper, Timothy Sturgeon, Ngai-Ling Sum, Linda Weiss, and Chun Yang. Several of my former coeditors at the Review of International Political Economy also contributed to my ideas in this book: Walden Bello, Mark Blyth, Juliet Johnson, Eric Helleiner, Len Seabrooke, and Catherine Weaver.

Back in NUS Geography, two former department heads—Victor Savage and Shirlena Huang—were particularly supportive of this project during their tenure. Past and current members and distinguished visitors of the Politics, Economies, and Space (PEAS) research group were very helpful in discussing earlier drafts of some chapters. I am grateful to comments and suggestions from Neil Brenner, Tim Bunnell, Chen Rui, Neil Coe, Stuart Elden, Jim Glassman, Carl Grundy-Warr, Lily Kong, Karen Lai, Liu Yi, Harvey Neo, Bae-Gyoon Park, Jamie Peck, Eric Sheppard, James Sidaway, Aidan Wong, Chih-Yuan Woon, Godfrey Yeung, and Zhang Jun. I thank Jun for lending me several key developmental state books on a long-term basis from his extended private collection. Other Singapore-based scholars were also helpful with their ideas and suggestions for this work: Sea-Jin Chang, Andrew Delios, Natasha Hamilton-Hart, Baogang He, Teck Hua Ho, Hong Liu, Ishtiaq Mahmood, Ted Tschang, Lai Si Tsui-Auch, and Poh Kam Wong. In revising the manuscript, I received particularly useful comments and suggestions from two key members of our GPN@NUS research team: Kurtuluş Gemici and Soo Yeon Kim. Kurtuluş’s generosity in guiding me through the social mechanisms literature in sociology must be acknowledged here.

At the end of the day, my family members in Hong Kong and Singapore have provided the unwavering support that makes this work worthy of its weight and wait. My parents and my brother and his family in Hong Kong always cheered me up during the different phases of my fieldwork in Hong Kong (and when I traveled to/from Taipei). At home, my wife and two children have been most patient with me during this long march. It is to their love, joy, and companionship that I dedicate this work.

Abbreviations

Chapter 1

East Asian Development in the New Global Economy

When the late Steve Jobs introduced the first iPhone to the world on January 9, 2007, he claimed that the revolutionary product was literally five years ahead of any other mobile phone.¹ He was exactly right. It would take Samsung Electronics, South Korea’s largest chaebol, or conglomerate, until the first quarter of 2012 to overtake Apple Inc. as the world’s largest smartphone vendor.² As a key supplier of iPhone’s core components, such as semiconductors and display panels, Samsung also ousted Nokia, a longtime market leader in mobile phones from Finland, to become the world’s largest mobile phone vendor. By March 2015, Apple had shipped more than 700 million iPhones since it was first released on June 29, 2007. In contrast, Samsung sold more than 837 million phones in total (including 607 million smartphones) to end users worldwide during the 2013–2014 period alone.³

By all accounts, Apple and Samsung have attained phenomenal achievements in the modern electronics industry. We now have a better understanding of the factors underlying their accomplishments. In particular, Apple’s success is predicated on the world-class manufacturing and organizational capabilities of its strategic partners in East Asia. These national firms in South Korea, Taiwan, and Singapore have assumed industrial leadership since the 1990s, and they are the main analytical focus of this book. The existing literature on the political economy of East Asian industrial transformation shows that domestic developmental states provided the initial political and institutional bases for the emergence of these firms. Subsequently, I shall argue, these East Asian firms have developed strategic alliances with lead firms in global production networks and taken advantage of the new opportunities involved in these national-global articulations. Organizationally fragmented and spatially dispersed production networks constitute a new form of economic structure, one that underpins today’s complex global economy and its uneven developmental outcomes.

A New York Times report in January 2012 tells this story succinctly. When US president Barack Obama asked Steve Jobs, What would it take to make iPhones in the United States? Jobs replied, Those jobs aren’t coming back!⁵ The task of assembling more than 700 million iPhones went to Foxconn Technology’s industrial cluster located in the city of Shenzhen in southern China. The same report points to the immense scale of manufacturing operations and supply chain flexibility orchestrated by Foxconn. Apple’s own executives conceded that switching from Foxconn would be time-consuming and costly.⁶ Foxconn’s parent company is Taiwan’s Hon Hai Precision Industry, a family-owned electronics manufacturing service provider that happens to be the world’s largest, with an annual turnover of US$135 billion and a market capitalization of US$45 billion at the end of 2014. Since its strategic partnership as the manufacturer of Apple’s iPhones and, more recently, iPads, Hon Hai saw its revenues grow by more than 75 percent between 2008 and 2011, and its net profits increase from US$1.8 billion in 2008 to US$2.6 billion in 2011 and US$4.2 billion in 2014.⁷ More important, Hon Hai is not the only East Asian firm to have benefited from the unprecedented success of smartphones. Other high-tech firms in the region are making semiconductors, memory chips, display panels, camera modules, and other parts that go into each smartphone.⁸

This anecdote about three industry leaders—Apple, Hon Hai, and Samsung—and their global production of the now ubiquitous iPhone tells us something significant about the evolutionary dynamics of East Asian firms, their developmental states, and the increasingly complex global networks of production. It showcases the enormous success of industrial transformation in these East Asian economies and the rapid growth of their national firms, defined as private or state-linked firms headquartered in and controlled by nationals from these economies. Not surprisingly, Taiwan’s Hon Hai and South Korea’s Samsung have become the largest industrial firms in their domestic economies.

Their success in the global information and communications technology (ICT) industry also underscores the longstanding track record of state-led industrial policy in promoting the industry since the 1970s. A huge yet diverse literature explains why and how various state initiatives can account for successful economic development.⁹ Starting as a sugar and wool producer in the early 1950s, Samsung Electronics became one of the poster boys and a major beneficiary of the developmental state in South Korea. It certainly owes much of its initial success in semiconductors in the late 1980s to the relentless efforts of the South Korean state in promoting an export-oriented electronics industry. Since the late 1980s, however, these national firms have grown out of their home states or become globally competitive through their own initiatives. They are no longer dependent on state support. At the same time, the efficacy of the developmental state in steering industrialization has had to change in tandem with changing domestic politics and with new opportunities associated with economic globalization. The state’s role has evolved, and it now provides new and more indirect types of support for national firms competing in the global economy.

As a result of this new development in the global economy, there is a significant lacuna in the existing scholarship on East Asian industrial transformation. This gap emanates in part from the primary analytical focus in earlier studies on state capacity and their variations across different national economies. In that literature, state types and institutional capacities, the independent variable, are used to explain the pace and pattern of industrialization and, more broadly, economic development.¹⁰ According to Peter Evans (1995, 12), the efficacy of a developmental state hinges on its embedded autonomy—embedded sufficiently in the domestic private sector to understand its needs and aspirations, yet autonomous enough from the same domestic elites to avoid their rent-seeking behavior and other social pressures. National firms, as part of the dependent variable of industrialization, tend to be read as outcomes of state action: these firms and their home economies were successful because during their formative decades, particularly during the 1960s and the 1970s, the developmental state cajoled private capital to perform competitively in the global export market. Their high growth in subsequent decades was therefore a direct consequence of strong state capacity: export-oriented industrial policy manifested itself in the growing competitiveness of national champions.¹¹

What has happened to these national champions and their new siblings since the early 1990s? How do they survive and compete without direct financial support from their domestic states, which are no longer as developmental as they used to be? What is the nature of state presence in this changing reconfiguration of state-firm relations? These are the key questions to be addressed in this book.¹²

A New Political Economy Approach to East Asian Industrial Transformation

This book is primarily concerned with the coevolutionary dynamics of states and firms in shaping industrial transformation, and the role of domestic and international processes in mediating these effects. I go beyond a statecentric view of industrial transformation to consider the interaction between domestic states and national firms in a world economy characterized by deep global economic integration. My aim is to show how the previously one-sided relationship between developmental states and their national firms has changed over time in favor of firms that work with extranational actors embedded in global production networks. In the classic developmental state period of the 1960s and the 1970s, domestic firms were driven primarily by state intervention; now, domestic firms join global networks and their strategy is facilitated by new state functions and industrial or sectoral support.

Revisit for a moment our opening vignette: Hon Hai’s runaway success has less to do with direct policy intervention from the Taiwanese state than with its strategic positioning as a manufacturing partner for global lead firms and its world-class production and organizational capabilities. Its participation in global production networks extends beyond the territorial reach of any developmental state.¹³ Similarly, Samsung’s success in the global semiconductor and telecommunication handsets industries today cannot be attributed only to domestic state policies.¹⁴ These leading East Asian firms serve as important conduits through which their home economies become part of the new global economy. Their success is evident not only in their enormous size measured in domestic sales or assets (a common legacy of state-directed development). More important, these East Asian firms have emerged as world leaders in their market segments and in industries that are highly globalized. The conventional wisdom of an all-powerful developmental state steering economic growth and picking winners must be reframed in order to take into account these new forces and processes associated with economic globalization and cross-border production.

My main theoretical contribution in this book is expressed in the concept of strategic coupling.¹⁵ I use this concept to argue for a recasting of the dominant statecentric view of industrial transformation in South Korea, Taiwan, and Singapore.¹⁶ By strategic, I afford greater analytical significance to firm-specific initiatives, such as technological innovation, capability building, international market development, and so on. By coupling, I refer to the dynamic relational process through which national firms decouple partially from domestic political-economic structures—developmental states or associated institutions—over time and couple with lead firms in global production networks. As a midrange concept that connects opportunities in the global economy (as embodied in global production networks) to development outcomes in national economies (e.g., the rise of domestic firms in different industries) through firm-specific initiatives, strategic coupling helps us understand industrial transformation and, ultimately, national economic development in an increasingly integrated global economy.¹⁷

We saw earlier how strategic coupling works in the articulation of Hon Hai and Samsung into Apple’s global production network. Premised on the perspective of global production networks (GPN), this new political economy approach requires a reworking of the developmental state thesis and the reconsideration of both the micro and the macro—national firms and developmental states. Adding to this micro-macro link is the changing context of the global economy—the emergence of new forms of economic organization, such as global production networks and global value chains. This book thus seeks to bridge the conceptual gap between the bottom-up analysis of the states role in national development (conventional developmental state studies) and the top-down analysis of global industries and national economic development (global value chain studies).¹⁸

To a limited extent, this need to focus on national firms in understanding industrial transformation has been pointed out by some prominent scholars. In his influential book Innovation in East Asia published in the same year as Evans’s Embedded Autonomy, Michael Hobday (1995, 2) notes that "The dominance of the market versus state debate has left little room for the study of the technology strategies of East Asian firms. The central competition question of how companies acquired and ‘learned’ technology is almost untouched in the literature on East Asian industrialization. This is a serious oversight as firms are the locus of competition, exports, wealth creation, innovation and productivity growth in East Asia as elsewhere."¹⁹

The growing importance of East Asian firms in global production networks has been accentuated by the demise of both Japan-led regional integration and developmental state-led industrialization. The old flying geese pattern in which Japan provided the technological leadership is no longer the integrating force for East Asia because, as Boyer et al. (2012, 334–35) note, standardization and modularization, allied with unprecedented FDI [foreign direct investment] mobility, have created large production networks. Those networks have, in quite a few industries, disconnected the previous specialization of each national economy. This reconfiguration of production has compelled scholars of economic development to go beyond domestic political-economic dynamics and alliances within individual economies.

My analytical approach elucidates the reconfiguration of state-firm relations in the three East Asian economies since the early 1990s through two sets of evolutionary dynamics. The first set is the evolving political-economic dynamics in the state-firm-GPN assemblage. The second refers to a complementary set of coupling processes through which East Asian firms achieve dominance in different global industries: strategic partnership, industrial market specialization, and (re)positioning as global lead firms. Two important caveats are necessary. First, this book is not so much concerned with the political origins and choices of national economic development and its divergent trajectories.²⁰ While I will briefly describe the new kinds of economic policies and institutions appropriate for a more globalized context, my analysis may appear relatively thin on the state (e.g., domestic political change) and its institutions (e.g., business associations, public-private institutions).

Second, my argument about evolutionary state-firm relations in these East Asian economies does not imply a zero-sum relationship in which state power declines because of the rise of national firms. Instead, I show that the strategic coupling of these national firms with global production networks cannot be exclusively attributed to state power. During the same historical period that national firms moved outward, starting in the late 1980s, the developmental state itself underwent significant political transformations that led to a relative decline in its internal cohesiveness and bureaucratic rationality. In this coevolutionary transition in state-firm relations, the strategic coupling of winners (national champions) with global lead firms means that these winners no longer necessarily owe their new competitive advantages to direct steering by their home developmental state.

Developmental States in a Globalizing Context

A brief reprise of the developmental state in the three East Asian economies is necessary here to set the baseline for my contemporary analysis of the evolving state-firm-GPN assemblage. Historically, successful industrial transformation in a national economy takes place through a process of catch-up in some, but not all, sectors. As Malerba and Nelson’s (2011) study of six high-tech industries shows, South Korea and Taiwan have attained premier positions in semiconductors, and South Korea in automobiles and telecommunication equipment. Like many other indicators of economic achievements by latecomer economies, these measurements of industrial attainment typically mask the important role of such economic institutions as national firms; we need to probe below the level of the developmental state and its political choices.

Moreover, a major gap remains in the developmental state literature because we know relatively little about how East Asian firms are articulated into global production networks and become major players in their respective industries on a global scale.²¹ This lack of understanding of the evolutionary dynamics and emergence of East Asian firms reflects the general underestimation, particularly in the mainstream debates on the role of state and market in East Asian development during the past three decades, of the importance of firms as a key actor in the articulation of domestic economies into the global economy. The existing literature has been much more concerned with the transformations and adjustments of domestic institutions in economic governance. There is insufficient attention to the complex interplay between the competitive dynamics in these global industries and the coupling processes of East Asian firms.

While contemporary thought on the central role of the state in economic development has a long intellectual pedigree dating back to the mercantilist period at the dawn of modern capitalism (Hirschman 1958; Gerschenkron 1962), the role of East Asia in this developmental state debate is indeed central and reciprocal. To Bello (2009, 180), If there is one theory or approach that might be said to be uniquely associated with the region, it is the theory of the developmental state. Indeed, one can say that theoretical innovation and empirical work in IPE [international political economy] in East Asia has been largely driven by the developmental state debate. Based on the successful experience of the state in guiding economic development in Japan and, later, South Korea, Taiwan, and Singapore, leading proponents of the developmental state thesis have consistently argued that deliberate state interventions via active industrial policy and selective financial support have enabled state-sanctioned domestic firms, known as national champions, to overcome their latercomer disadvantages and to achieve economies of scale in domestic and international competition.²²

Indeed, many innovative policy instruments were effectively deployed by the developmental state to provide organized help to private entrepreneurs.²³ Instead of pursuing market-based price mechanism, the developmental state intentionally distorted the market by getting the prices wrong, to use the term made famous by Amsden (1989, 13–14; 2007, 87) and Wade (1990, 32), in order to induce private entrepreneurs to participate in the state-led industrialization program. Interventionist policy instruments included trade and foreign exchange controls, selective allocation of credits, export and tax incentives, public enterprises, and other subsidies. Industrial policy was sectoral or firm specific in order to target the development of selective industries and/or national firms, to promote their efficiency and productivity growth, and to overcome initial coordination failures in the domestic market.

In return, these entrepreneurs were subject to stringent performance and standards monitoring by state agencies. Amsden (1989, 94; also 2001) thus argues strongly that what lay behind successful postwar industrialization was a monitored system of controls on subsidies. Neither import substitution nor export-led growth was a free-for-all. In many cases, especially that of Korea and Taiwan, exporting was made a condition for domestic protection. If these entrepreneurs were not forthcoming or capable enough, the state took on the role of entrepreneurs and readily stepped in with the establishment of state-owned enterprises that socialized the market or the industry in the hands of the public sector. This direct state involvement in the domestic economy was most significant in Taiwan during the 1950s and in Singapore during the 1960s.²⁴ If necessary, and urgently so in the case of Singapore, the state also opened its arms to embrace foreign capital to industrialize the nation. By the late 1960s and the early 1970s, all three developmental states had actively pursued sectoral industrial policy to promote export-oriented industrialization.

In order to fund this highly selective industrialization program, the direct control and allocation of financial resources became a necessary condition for the developmental state to incentivize private entrepreneurs and to engage in large state-led industrial projects.²⁵ Through a combination of control mechanisms during the 1960s and the 1970s, such as the strategic manipulation of geopolitics to rally American aid and support, the nationalization of financial institutions (e.g., military control over the Bank of Korea after 1964), and the rationing of policy loans and export credits to targeted industries and firms, the developmental state in South Korea managed the race to the swift, in the words of Woo (1991), and developed a strong competitive position and exports in several major industries, such as shipbuilding, chemicals, machineries, and later, electronics.

Table 1.1 shows that between 1960 and 1980, South Korea’s manufacturing sector and exports grew very rapidly at respectively more than 34 percentand 41 percent per annum. From about 9 percent of its GDP in 1960, the manufacturing sector became the largest contributor to GDP at 21.9 percent in 1980, and rose further still to more than 25 percent of GDP in the 2000s. Its annual GDP growth rates during the 1960s and the 1970s were very high at 27 percent and 30 percent during these successive decades. The massive state-led financing of industrialization is also evident in the high annual growth rate at 33.3 percent of gross fixed capital formation during the 1970–1980 period. As the developmental state’s role in financing industrialization changed over time, this annual growth rate subsequently declined to 10 percent in the 1990s and 6.3 percent in the 2000s.

In Taiwan, the Kuomintang (KMT) state pursued a dual financial structure through various policies and measures. Through the provision of credit by state-controlled banks, the formal financial market supported Taiwan’s industrialization program led by large firms and state-owned enterprises (SOEs). While covering a wide range of sectors, these SOEs were concentrated in what Wade (1988, 47) calls the commanding heights of petroleum refining, petrochemicals, steel and other basic metals, shipbuilding, heavy machinery, transport equipment, fertilizer—in addition to the normal electricity, gas, water, railway and telephone utilities. Wu (2005, 41–43) describes the creation of a huge public sector during the 1950s when SOEs accounted for 50 percent or more of industrial production and the average share of the public sector in gross fixed capital formation between 1951 and 1980 was 30.9 percent.²⁶

As shown in table 1.2, this fixed capital formation increased quite dramatically at the annual rate of 16.8 percent in the 1960s and 25 percent in the 1970s. To finance its import-substitution industrialization program in light industry, heavy industry, and machinery, the state controlled all banks during the 1950s through the Bank of Taiwan and a system of complex interlocking shareholdings of all other banks. By the early 1960s, the state was able to pursue financial policies to stabilize the economy by reducing interest rates in both the state-owned and privately organized financial markets. This led to an improvement in the availability of financial resources for the Third Four-Year Plan (1961–1964) and the subsequent successful export-oriented industrialization drive by small- and medium-sized enterprises during the 1970s (Wu 2005, 180–81).

More important, this direct control of the financial sector by the central bank greatly encouraged domestic savings that could be used to finance economic development. Still, compared to South Korea, Taiwan’s average annual GDP growth and manufacturing development during the 1960s and the 1970s were relatively less impressive at the 10–15 percent range, as indicated in table 1.2. The heavy role of SOEs and the bifurcated banking system were apparently less conducive to rapid industrialization, setting an important and yet contrasting stage for the subsequent articulation of Taiwanese ICT firms into global production networks.

Prior to its self-rule in 1959, on the other hand, the city-state of Singapore had already benefited enormously from an almost one and a half century–long experience as a strategic entrepôt