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 natural resources may provide needed foreign 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 production 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. In-dependence in technology? No!

• Design is the next stage, and foreign donor becomes increasingly uncooper-ative.

• 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, produces value.

• Schumpeter saw how poor directing labor wastes resources and fails as Industrialism 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 entrepre-neurial talents.

• MNCs bring their own capital and tech-nology, and sell the products to their markets. But home market or local mar-ket?

• 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 employ-ees to produce certain parts-compo-nents at low cost, transferring entre-preneurial 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 discon-tent.

Performance Based Criterion

• Performance of subsidy recipients must be closely monitored.

• Monitored performance must be rightly reflected in the decision of continuing subsidies.

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

Bureaucrats Incentives

• Monitoring and decision of continuing subsidies 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.