 Thank you. I'm based at the Institute for Development Policy and Management at the University of Manchester. And my talk is on really trying to learn from the East Asian experience. Now we've heard a lot of East Asia, I think, and when we're talking about Africa, East Asia always comes up as a comparable success story. But I think it's worth revisiting and my reasons are as follows. I know you're all aware that there is an increasing trend of the industrialization, not just in the third world countries but also in advanced economies. And there's a great debate as to whether this is desirable or not. But I think there's a compelling case, especially for developing countries, to keep manufacturing going and keep manufacturing alive and make difficult investments in manufacturing. And I think that's what the UNU wider conference has been all about. I mean, Danny Roderick, John Page, John Sutton, they've all made a very strong case for industrialization, particularly in building a strong manufacturing base. So we really need to think ambitiously about how to build productive capacity in Africa. The problem with industrial development literature is that much of the discussion has been on industrial policy, particularly trade policy, but also technology policy. And the emphasis has been on FDI as a source of technology transfer, spillover, and so forth. And these discussions have taken the form of state versus market debate, which you're all probably very familiar with. The neo-liberals would argue that you need market-friendly policies to attract as much FDI as possible. And this is the whole doing business report by the World Bank and so on. The critiques of this approach, particularly state interventionists, would say this is a very minimal approach. It's a do-no-harm approach, but it's not how you catch up with more developed countries. And in order to catch up, you need to make strategic investments. So you need not only protectionist trade policy if it comes to that. You also need subsidies and you also need a very selective approach to inducing and ensuring that FDI actually translates to economic growth. Now my view on these debates is that it's run its course. I think there's now a fair amount of understanding that yes, markets can be efficient allocating mechanisms of resources, but then especially in the catch-up phase, the state really needs to play an active role in coordinating economic activity. So the motivation behind this research, this paper that I'm about to present, is about, well, let's think about different theoretic lens out there to look at industrialization. And let's go beyond specific policy, talking about what policies are appropriate, because ultimately that's very context specific. To thinking about more ambitiously what are the structural conditions that are required to build a strong manufacturing base, and how does one, after building these institutions, enable these institutions to be flexible enough to shift so that the firms can actually upgrade with upgrading of institutions. So that's really the motivation behind this paper. Now which makes a question, I said I wanted to bring new theory, new concepts with it. Which makes a question, well what theory then? Since I think really the 1980s when there's a rediscovery of institutions and the part of development studies community, the new institutional theory has developed significantly and made a lot of leeways. Now institutional theory of the firm has really written the way of these theoretical advancement. And in a nutshell, it's basically two theories that have come together, or two bodies of literature that have come together. One body is the comparative political economy, also known as comparative capitalism literature. The other side is the strategic management literature. Now the comparative political economy have been very good at looking at institutions, particularly national level institutions, why they differ across countries, how they differ, what kind of impact this has for economic growth. Whereas strategic management literature has been very good at understanding the firm and the dynamic firm capabilities. How firms are able to build a capacity to learn and to upgrade as they develop. So bringing these two literatures, institutional theory of the firm tries to explain how national level institutions enable firms to develop and grow. For this set of literature, two area of focus is the financial system and labor relations. And that's because financial capital and labor are two of the greatest inputs when we're talking about firms. So anything that affects the behavior of the financial capital, which is the financial system, and anything that affects the behavior of the workers or the labor, which has to do with industrial relations, labor market, what else? Industrial relations, labor market, skills in training and development. These are all clusters of institutions that institutional theory of the firm looks at. The key concepts here is that these institutional arrangements in the financial system, in the labor relations, have to coordinate and in some ways complement one another in order to enable firms to actually benefit from these institutions and on that basis build their firm capabilities. Now the key thesis is that the leading firms, the good, the successful leading firms of any national economy actually learn to bundle these institutions and make use of them to build their core competence. And they describe two dominant ways of doing so. One is the liberal or Anglo-Saxon way, and the other is non-liberal or organized or coordinated way, which is associated with the way Europeans manage their political economy, particularly the northern European economies, Germany, also Japan. And I'll explain this bit more as I go along. Now the theory is a theory in development, and I'm not going to provide a whole critique of the institutional theory of the firm here, but where it concerns this particular paper and you as someone interested in development is that these theories have been, these theories actually emerged from a very advanced setting. Looking at leading firms in advanced economies, in particular the US, UK, Germany and Scandinavia, and perhaps Japan a little. So they emerge from these country contexts, they've been tested over and over again in these contexts, but no one's talking about developing countries or catch up economies. And for that the theory has to have more rigor. So one way of thinking, very easy way of thinking about it is to start thinking about view of institutions, not as that which coheres, complements and are always compatible, but a theoretic tool that can help us to look at incoherence, incompatibility, and think about how did successful countries manage this incompatibility rather than just shelving it under the table and not looking at massive pictures of empirical reality in developing countries. The level of innovation has to shift focus as well. They've been interested in looking at research based, really high end of innovation, whether that's radical innovation that enables exploratory learning or incremental innovation that encourages exploitative learning. But we really need to shift to look at search based innovation, innovation by imitation and how absurdive and adaptive capabilities are built because these are the capabilities that developing countries need to build their base and upgrade and take advantage of foreign direct investment. It also needs, the theory needs to be more rigorous and understanding the dynamics change as well because they're looking at stable institutions, they look at on path incremental changes, small changes here and there. But many of the developed countries when they do change, it requires structural adjustment, it requires structural transformation. So it has to be rigorous enough to encompass both path shifting change as well as on path incremental. Now I'm not going to resolve all the problems that institutional theory has, that wasn't the purpose of the paper, but it's to highlight that these are the elements that one should look out for when one is applying institutional theory of the firm to look at, for instance, East Asia and how it has developed. So I used comparative historical analysis to look at this. I felt that East Asia was a very rich setting to be exploring the issue of firm capabilities and although we've heard a lot about East Asia in terms of the state versus market lens, well what does East Asia offer in terms of the institutional theory of the firm? If we were to apply different set of theoretic lens, does it reveal something different that we overlooked? So that was what I did. I applied institutional theory of the firm, its key thesis and concepts and prostrace the institutional development of the financial system and labor relations in the three countries that I looked at, Japan, South Korea and Taiwan, over four or five decades. I tried to see how their financial system, how their labor relations developed and at what point, or if ever, their systems actually co-evolved and complemented one another as the literature suggests that it should if it's a successful economy. And I wanted by doing this to derive a structuralist, I suppose interpretation, well structural institutional interpretation without being too structuralist and to think about how structurally endogenous firm capabilities can be built and upgraded. Taking into consideration that for catch-up economies there might not be those conditions that are set out in advanced economies and some of what's required is substituting strategies, not to mimic the conditions really, but try to substitute in an innovative way and experiment with ways of substituting. One of the things that I also was interested in looking at is the notion of upgrading structural inertia because the theory states that once you get competitive in a certain field, then you get locked into that success and it's about breaking that negative lock-in because once the firm stops being successful doing what it does, having done what it did before, we're all creatures of habit, how do you unlock the structural inertia? And in many ways I think this is the question that we need to answer when we're looking at the middle income trap problem. A lot of firms in for instance Thailand, Malaysia and so forth have never really jumped from the middle income status to high income status. There are only two countries in the world that have managed this. Do you know who they are? The hint is in the presentation. Well actually South Korea and Taiwan. Well Singapore, yes, but Singapore and I was talking to a colleague from Singapore there. Singapore and Hong Kong are city states so we tend to leave that out because although they do have some manufacturing base, it's not as big or strong as I suppose you would see in South Korea and Taiwan. So South Korea and Taiwan are the two countries that actually have historically, looking at the world history, that have actually managed from a catch-up status to high income, coming from low income to middle income to high income. But structural inertia is another element that I wanted to study in this research. So what does Japan tell me when I prostrate their institutions? Well Japan is often compared with Germany as having an incremental innovation capacity. I mean really good with exploitative firm capabilities associated with quality manufacturing that they're making really good at R&D and incremental innovation. And it's not surprising that Japan is so good at a lot of things that Germany is good at and if we think about transportation, heavy machine tools, these are all incremental innovation industries that Germany excels in and so does Japan. And it's not so surprising because there was a transfer of institutions from Germany to Japan in the 19th century. Japanese heavily imported the German institutions including the financial system and including in some ways the labor relations. By financial system, I mean the kind of universal banks that you find Germany, you find in Japan. They call it principal banking system but it's a relational banking system where banks actually have a long term relationship with the firms that they're lending to and do have some say in a way I suppose in the board, directors would help to advise the CEO for instance. So banks actually do have some say in the way the firms are managed and so on. So they're able to, because they understand the firm dynamics what they're going through, the business cycles, the industry and so forth, they are able to be quite patient in their nature as opposed to impatient, which you find in Anglo-American economies that are more stock market based. So Japan has a financial system that encourages patient capital. It also has a labor relations system that is micro corporatist in the way that Japan has been relatively successful in incorporating labor into their development paradigm and I'll say this when I look at South Korea and Taiwan that the other two countries have been less successful where labor relations are concerned and that has path dependent effects. Now because the Japanese have been quite good in incorporating labor and that has to do with the fact that they didn't refer to authoritarianism but maintained continuous development in deepening democracy, there is a lot of workers' commitment at the firm level. So they're not guaranteed the kind of rights that German labor unions at industry level enjoy like co-determination for instance where German labor representative actually sits on the board of corporations. But there are certain guarantees at the firm level for instance the notion of lifelong pay, the seniority-based system for instance that all ties people to the firm so that their destinies are tied to the firm. This enables workers to be willing to make investment in firm specific skills that might not be marketable elsewhere but knowing that they have employment with this firm for a prolonged period of time they're willing to make that investment. So with these two conditions patient capital and labor commitment the management learned to bundle these institutions and create a setting where they can actually experiment with long-term strategies and that to large degree explains why they're good at incremental innovation. They have labor and capital that they are willing to go with the trust of management to experiment and fail and learn from failure and then improve and so forth. Now it's a very stable system that I describe and in some ways the stability although it served them very well and continues to in large degree serve them well the implication is that there's a sense of structure in Russia in Japanese firms and it's no secret that Japan's been under recession for the last two decades now and haven't been able to change very much and if you look at a lot of their institutional reforms there's nothing really shifting about it. They do play around with a lot of macroeconomic policies and so forth but there's really no structural transformation that really changes any of these institutions. So in some ways there are victims of their own success at one point it was very successful it is no longer and they need to shift but they're not able to. South Korea presents a different challenge. It imported a lot of Japanese institutions and it mimicked a lot of Japanese institutions but it never really reaches that incremental innovation capacity that Japanese enjoy although they've been very good at nurturing their absorptive capabilities and that has to do with labor relations the fact that the state was able to control the banks and make it patient and the state was able to some degree control the labor and keep the wages down therefore making again a commit to the firm but because there's no social compromise between capital and labor this is resting in a very volatile institutional setting so the state coordination of the finance and the labor relations system although in some ways had its advantages because ultimately institutional complementary depends on co-evolution of two institutional arrangements and underpinning that is the capital labor relations the social compromise which the Korean state bypassed it never could attain the kind of incremental innovation capacity that Japan had and in 1997 with IMF and structural adjustment and so on it makes a radical shift to a neoliberal sort of institutions a neoliberal model of capitalism and it's not surprising that you see Korean firms doing so well now in radical innovation industries competing directly with firms in Anglo-American countries firms who are really competing in same institutional conditions and are bundling institutions in the same way to serve their core competence Taiwan is a particularly different case in the sense that this Taiwanese government the Kuomintang when it went to Taiwan had enormous state capacity but very little capitalistic industrial base so what it did was it started controlling firms directly so you see a lot of state-owned enterprises not enough the private sector and in some ways it's a benign neglect in the sense that SMEs in Taiwan have learned to be very flexible and gain adaptive capabilities because there's no patient capital because there is no labor commitment what they're dealing with is inpatient capital and what they're dealing with is labor market flexibility so they're very good at adapting which is why they're very good suppliers for major cooperation in the US, UK and Germany and Japan and South Korea now but again unless you make the kind of investment that I suppose Japan and South Korea makes in building the industry base and looking and incorporating SMEs in the financial system and labor relations the outcome is really at really at adaptive capability level at the moment now the Taiwanese government is trying to build up clusters and so forth enabling SMEs to be better inserted into global value change and upgrade within but ultimately this is a dependent market economy in the sense that it very much depends on the lead firms of advanced economies now I've summarized the three pathways that they've taken and I think in the interest of time I'll just wrap up so the fine things is that building endogenous firm capabilities looking through institutional theory lens requires more than just industrial policy technology policy, trade policies and that institutional conditions do matter in the way it shapes different types of capabilities and I just want to end by a quote by Tomer Johnson who is a very well read person a Japanologist of political economies and he once stated that Japan's unique labor relations and innovative managerial techniques the staples of western journalism of the Japanese economy may actually be insignificant and even counterproductive because they're missing from Korea and Taiwan with no noticeable effect on economic performance they are missing in Taiwan and South Korea but it doesn't have a noticeable effect it has significant impact on the way firm of these two countries have developed and will continue to develop in the future thank you