capital, technology and entrepreneurial capability

Capital, Technology and Entrepreneurial Capability

Are poor countries poor, be-cause they lack capital and

technology?

Capital• LDCs need to build factories and at-

tain machinery in order to start mod-ern manufacturing activities.

• Capital is essential but poor develop-ing economies could not have accu-mulated sufficient amount of capital.

• Investment savings gap : little saving may not afford necessary investment .

Mobilization of Capital• Domestic capital - Forced saving by increasing money

supply (Development inflation)• Foreign capital - Foreign direct investments (FDIs) :

Foreigners’ initiatives (build, own and operate factories).

- Foreign loans : Local firms’ initiatives.

Foreign Exchanges• LDCs must import machinery and fa-

cility from advanced countries to build their own factories.

• They must also license modern tech-nology and pay royalties.

• Foreign exchanges are needed in or-der to pay for import of machinery-facility and royalty on licensed tech-nology.

Foreign Exchanges Gap• Export of agricultural products and nat-

ural resources may provide needed for-eign exchanges.

• East Asian countries were not endowed with abundant natural resources.

• Foreign exchanges gap : everlasting shortage of foreign exchanges.

• FDI eases the foreign exchanges prob-lem.

Technology from the Perspective of Developing Economies

• R&D develops candidate commodities in the laboratory. : PhDs and MAs

• Design specifies candidate commodity into reproducible content in large scale at profit (product design), and its pro-duction process (process design) : MAs, BEs with plant experiences

• Production Management controls ac-tual production works. : BEs

Continued • Processing - Assembly carries out

task of actual production : techni-cians, skilled workers with long expe-riences.

How to assimilate technol-ogy?

• Manufacturing begins from a given Design, and actual factory operation needs Production Management and Processing-Assembly.

• Developing economies buy Design and invite foreign masters for PM and PA.

• Local engineers and workers are at-tached to these masters as trainees.

Continued • When local trainees acquire necessary

know-how, then the entire factory is operated by only local workforce. Inde-pendence in technology? No!

• Design is the next stage, and foreign donor becomes increasingly uncoopera-tive.

• Reverse Engineering begins. • Samsung’s story.

Factor Accumulationor Technological Progress?

• Krugman’s criticism : no improvement of total factor productivity was found in the growth of East Asian economies.

• Growth accounting : capital, labor, tech.• The stage of absorbing technology may

demonstrate no improvement of total fac-tor productivity, even though the absorp-tion is going on successfully.

Worldly Renowned Compa-nies

• Apple, MS, Intel, GE, Dupont, Pfizers, Siemens, Volkswagen, Toyota, Sony, Nokia, Alstom, Nestlee, Samsung, Hyundai, LG...

• Are any of these renowned manufac-turers from poor countries?

• High paying good jobs are provided by good companies.

Good Jobs, Good Companies • People of poor countries are poor, be-

cause their jobs do not pay good.• Poor countries are poor, because they

do not carry many good companies.• Good companies command sufficient

amount of capital, advanced technol-ogy, and successful marketing at profit.

• A goal of economic development is to retain as many good companies.

Entrepreneurial Capability• A good entrepreneur is able to raise

needed capital.• A good entrepreneur is able to li-

cense technology and recruit skilled workforce.

• A good entrepreneur is able to mar-ket his products at profit successfully.

• So a good entrepreneur makes a good company.

Development Strategy on Entrepreneurial Capability

• Poor countries are poor, because they lack entrepreneurial talents!

• Development strategy must focus on fostering and hosting as many supe-rior entrepreneurial talents as possi-ble.

• Then what is the basic nature of en-trepreneurial talent?

The Nature of Production Works• The nature of work in agrarian

epoch : autarchic work where each individual produces what he wants.

• The work in social division of labor produces what other people need.

• Any work which does not satisfy other people’s need is simply useless and wastes resources.

Directing and Directed La-bor

• Directing labor decides what and how to produce.

• Directed labor undertakes what the directing labor has decided.

• The distinction is not so meaningful in agrarian epoch, but it becomes very important in social division of labor, since directing labor often fails.

Theory of Economic Development - Schumpeter

• … distinctions between directing and directed labor and … , the directing labor is clearly in a governing posi-tion in contrast to …the executing la-bor … If, therefore, an independent individual produces on his own ac-count and also does executing work, then he splits, …, into two individu-als, namely a director and a worker in the ordinary sense.

Karl Marx and Joseph Schumpeter

• Marx lived in the incipience of Indus-trial Age, and viewed that only physi-cal labor, i.e., the directed labor, pro-duces value.

• Schumpeter saw how poor directing labor wastes resources and fails as In-dustrialism developed further.

• Schumpeter was born at the year 1883, when Marx died.

Entrepreneurial Talent as Directing Labor

• Entrepreneurs take charge of direct-ing labor in business operation, while employees undertake directed labor.

• Entrepreneur must choose right item to produce, employ right manpower, and manage business efficiently.

• If entrepreneur fails, then hard toiling works of employees will never get paid.

How to Attain Good Entrepreneurial Talents?

• “Poor countries are poor, because they lack good entrepreneurial capa-bilities” implies that successful eco-nomic development must build up good entrepreneurial capabilities.

• Economic catch-up begins from both inviting proven foreign talents and seeking for indigenous potential to foster.

Inviting Foreign Talents• Foreign direct investment is a most stan-

dard form of inviting foreign entrepreneur-ial talents.

• MNCs bring their own capital and technol-ogy, and sell the products to their mar-kets. But home market or local market?

• MNCs provide local workforce with jobs and experiences in modern manufactur-ing.

Benefits of FDI• FDI provides (good-paying) jobs.• FDI solves not only gaps of invest-

ment-savings and foreign exchanges, but also technology licensing and marketing.

• MNCs encourage their local employees to produce certain parts-components at low cost, transferring entrepreneur-ial know-how.

Deficiencies of FDI• But all the benefits remain in the in-

terest of not host country but MNCs.• FDI may preempt local market

against emergence of local firms.• Hosting country must prepare herself

to address these deficiencies, by right selection of industrial cate-gories for FDI.

Fostering Indigenous Talents• How to find promising potential?• Substantial amount of subsidies is

needed to foster promising potential.• Provision of subsidies to yet unproven

potential will inevitably give rise to a good possibility of rampant rent-seek-ing and corruption.

• Corruption scandals, public discontent.

Performance Based Criterion• Performance of subsidy recipients

must be closely monitored.• Monitored performance must be

rightly reflected in the decision of con-tinuing subsidies.

• Failures in either monitoring or subsidy decision or both will lead to wasting resources and promoting corruption.

Bureaucrats Incentives• Monitoring and decision of continuing sub-

sidies are in the hands of bureaucrats.• System must be made transparent so that

each failure or success is always account-able to certain bureaucrat.

• Promotion for success, demotion for fail-ure.

• Transparent and accountable governance minimizes rent-seeking and corruption.

Government Officials and Private Entrepreneurs

• Government bureaucrats must break the bottle-necks against mobilizing domestic capital, inducing foreign capi-tal, and upgrading technology.

• Private entrepreneurs actually mobilize domestic capital, induce foreign capi-tal, and upgrade technology.

• Entrepreneurs are main actors, while bureaucrats are supporters in catch-up.