I have always been skeptical about taking the mania for S&M business development too far – there are limits to the scope of the projects that they can take on, and on the extent that they can technologically upgrade entire sectors of the economy. Interestingly, this is also the position of Khodorkovsky, as he revealed in an Facebook post last November: “I am for big business. S&M business – these are jobs, comfort, innovation. But economic efficiency, labor productivity, large scale adoption of new technologies – that is big business…”
The most successful countries having a surfeit of large, globally competitive, technologically advanced firms also seems to be a correct observation. I think it is handily explained by the lion’s share of the rewards in the global economy going to the most successful teams in the O-Ring sector (the parts of the economy that involve long series of rather complex tasks). They then pull up the rest of their citizens up with them. O-Ring Theory is by far the simplest and most elegant explanation of this phenomenon I have encountered.
I have mentioned the problem of foreign ownership in Eastern Europe before (Eastern Europe and Its German 1%). This is gradually being resolved, but Thorfinnsson certainly has a point there. In this sense, Russia may have a long-term advantage in that foreign capital plays a much more limited role in its economy (even as its wages are lower than they would have been had it integrated more deeply with the EU).
The roots of this might lie in earlier policy decisions.
Taiwan made the decision to provide substantial support to SMEs early in its development. For a time, this was quite successful. During the 1970s for instance Taiwan clocked 13% annual growth rates. The first recognizable forms of “outsourcing” were ideally suited to this industrial structure. IBM outsourced wire harnesses to Taiwan already in the late 1960s for instance.
South Korea instead has its chaebols–gigantic conglomerates. The South Korean government chose to partner with the chaebols and emphasize their development. Large firms typically have much more capital invested per worker and spend more on R&D and marketing.
See data from this delightful web 1.0 page I found: http://econc10.bu.edu/economic_systems/Country_comparisons/Taiwan_South_Korea.htm
The major differences in South Korea’s and Taiwan’s economic conditions is how South Korea is a big business economy and Taiwan is a small-medium enterprise economy. There are three indicators in determining this conclusion:
1) the production totals of large-scale firms (over 500 employees) as a percentage of national production was 45.3% for South Korea and only 26.8% in Taiwan in 1993.
2) The total sales of corporations in the top 5, 10, and 50 listings as a percentage of GNP was 47.6%, 58.8% and 79.9%(1991) for the South Korean economy, while the numbers were much lower at 17.8%, 23.2% and 36.4% (1990) in Taiwan’s case.
3) Exports of small and medium enterprises as a percentage of total exports, was 37.7% for South Korea and 67.1% for Taiwan in 1987.
These figures are from long before South Korean firms were global leaders (outside of shipbuilding and steel anyway), and this was also before South Korea diverged from Taiwan. In fact, Taiwan was wealthier than South Korea in the late 20th century. Perhaps because its SME-focused development did a better job of mobilizing peasants into the formal sector in the early phase of industrialization:
In 2000, GDP per head in USD in Taiwan is $13,900 and $9,670 in South Korea.
In the early takeoff phase for both countries, the distinction probably did not make a great difference. Both were rapidly industrializing. But as both exhausted catchup industrialization and needed to push the bleeding edge of the technological frontier, South Korea’s huge conglomerates were much better positioned to do so.
State support programs differed early on.
Taiwan’s government focused on providing low cost inputs to SMEs. From memory there was a government program to provide low cost electrical steel and magnetic wire to transformer manufacturers for instance. Transformer manufacturing is low technology and low productivity and always disrupted by new low cost producers.
South Korea instead formed Pohang Iron & Steel Corporation (the application for a World Bank Loan was rejected, which led to Japan quietly financing and providing the technology for the project) and launched its Heavy Chemical Industry drive with the goal of completing a modern, high tech heavy industrial base to provided advanced, low cost intermediate industrial products throughout the economy.
The countries even pursued some similar technology policies in the 1980s. In 1980 the South Korean government ordered Samsung to enter the semiconductor manufacturing industry. In the same year Taiwan established Hsinchu Science Park on the model of Silicon Valley, which ultimately led to TSMC and UMC.
But while today Samsung is the world’s largest semiconductor manufacturer and has substantial microprocessor design expertise which has surpassed Japan, the Taiwanese firms are mere foundries which are completely dependent on foreign designs.
In general one is hard pressed to think of truly rich countries which do not have large, globally competitive firms possessing the most advanced technology (and this also applies to services, not just manufacturing). The big exception here would be Australia, which is easily explained by its large amount of natural resources per head and the vast amounts of foreign capital invested over the past 150 years. This is good to remember whenever people start endlessly praising the supposed glories of small business.
Incidentally, I am somewhat skeptical about the economies of Eastern Europe for this reason. Visegrad and the Baltic States etc. are mere appendages of Western European capital. I don’t see a path for them to fully converge with Western Europe barring Western Europe’s Afro-Islamization dragging their average down (admittedly a depressingly probable outcome).