La camaradería y el sentimiento de unidad

The general FDI theories were observed in the above section. Among those theories, Vernon’s product life cycle model (refer to section 2.3.2) was elaborated so that it could be applied particularly to the scale-sensitive heavy and chemical industry (HCI). In Vernon’s theory, technology via innovation and product standardisation was the central instrument adopted to encourage plant locations close to major markets where external economies reduce the risks for new producers. In other words, the production technology becomes standardised, so production relocates to regions with lower labour costs.

Stobaugh (1970) attempted to adapt the product cycle model to scale-sensitive HCI by using a case of the petrochemical industry. In his study, he pointed out that the locational change was affected by changing market size rather than technological innovation. He also explained that the industrial plants were initially located at the major market because the market demand could support a plant of minimum viable size, therefore developing countries with smaller markets were effectively served by imports rather than by local production. However, if the market demand in developing countries increased enough to support the minimum volume for viable plant size, then local production could take place in those countries. This diffusion of scale-sensitive plants to emerging economies was motivated by efforts to minimise freight costs.

The income-driven product cycle model was elaborated upon from Stobaugh’s scale-based reformulation of the product cycle by Auty (1984). He formalised the link between competitiveness, the level of economic development in the regional market and the market’s stage of demand growth within the product cycle (Auty, 1993, p. 187). Initially, he explained changing post-war global petrochemicals production by applying the income-driven model, then he applied it to the steel and aluminium industries that were categorised as scale-sensitive heavy industries (Auty, 1984, 1987).

Auty particularly attempted to apply the model at the global level. Due to the different level of economic development, regional markets are at differing stages of the product cycle. If everything else is considered to be constant, he argues that ‘the income-driven product cycle model shows that manufacturers located in large regional markets in the dynamic youthful stage of the product cycle have a competitive advantage over those in regional markets in the pioneer, mature or eclipse stages’ (Auty, 1993, p. 187). The reason is that the mechanism that drives changing locational competitiveness in this model is a growth dynamic or Verdoom effect. Technological change or market size alone cannot motivate transfer of production plants in a particular market whereby manufacturers wish to gain competitive advantages.

In dynamic regional markets, the Verdoom effect improves the competitiveness of manufacturers, but for producers located in the markets of the mature or eclipse stages, their competitive advantages are weakened due to the decrease or absence of the Verdoom effect. Mishimizu and Page (1989) studied productivity trends for a cross- section of developing and developed countries and concluded that there was a positive relationship between the level of economic development and total factor productivity (TFP) change which is consistent with Verdoom effects. They found that the highest

rates of TFP growth occur in high-growth developing countries with export-oriented strategies, such as South Korea, while rates in the industrialised countries are lower.

The Verdoorn effect is explained by the impact of ‘learning by doing’, in other words the greatest productivity gains are to be made in the early stages o f the product cycle, and then they are gradually reduced as markets mature. Another explanation of this effect is a virtuous circle of growth effects (Auty, 1993, p. 188). This shows that the more dynamic and fast-growing markets indicate high income elasticity and a rapid growth in demand, consequently the average age of the plant is low and productivity is high. In these markets, producers can lower the risks of over-capacity and secure trained labour force more effectively, compared with those in slow-growth markets. Auty summarised that the competitive advantage in HCI shifts from those producers in markets in which demand is decelerating, to those in regions of lower per capita income whose markets have crossed the minimum viable plants threshold size and are in the dynamic and youthful stage of the product cycle, as markets grow at different stages in the product cycle.

For the automobile industry, which is a skill-intensive HCI, the competitive advantages can be explained by the locational theory on a global perspective rather than classical one. In classical locational theory, cheap labour has been an advantage due to its contribution to the reduction in operating costs which may be one of the most significant advantages in automobile assembly. A second advantage is a reduction in construction costs. The cost of plant can be cut down to more than one-third of average production costs (Auty, 1993, p. 189). Particularly, in the dynamic markets such as of South Korea and Taiwan, cheap labour is more productive according to Mishimizu and Page’s study. Therefore, cheap productive labour in newly-industrialising countries (NICs) may enhance the potential competitive advantages in the car industry as well as

HCI. Technology innovation, including organisational changes, also increase production flexibility and lower the optimum plant size. This implies that smaller producers in NICs and developing countries can survive due to the plant down-scaling.

However, at the same time, the development of new technology deters NICs’ competitiveness in HCI which can be compounded by their market dynamic advantages. For example, the just-in-time (JIT) system, or new technology in building a painting shop in the automobile industry, slows the loss of industrial country competitiveness, as such countries pass through the mature stage of the product cycle For example, Japanese producers are able to retain sufficient flexibility to reduce production costs, and American producers use innovated technologies in constructing a painting shop which reduces plant minimum viable size. In particular, opportunities for exports from NICs to developed countries are restricted, compared with Western Europe and Japan at similar phases in their product cycles, because lower optimum plant size facilitates the diffusion of HCI, including the automobile industry, to the smaller developing countries which might otherwise have imported from the NICs (Auty, 1993, p. 196).

Overall, in the wide perspectives of the income-driven productive cycle model, government policy emerges as an important variable. It was observed that inappropriate industrial policies, such as inward-oriented policies for HCI in the Latin American and low-income Asian NICs, lacked or gave a negative effect on adequate local demand for the minimum viable plant size. This implies that government policies can affect the diffusion of HCI significantly.