Institutions, Politics, and Developmental Divergence

Variation in automotive industrial performance across seven East Asian countries reflects differences in firm competencies, but those differences are largely cross-national: common national environments are central influences on firms’ incentives to develop competencies. Factors emphasized in neoclassical accounts, such as market size, macroeconomic policy, and openness to foreign investment, are weak predictors of cross-national variation. Extensive development requires measures that facilitate capital mobilization and allocation, such as sector-specific FDI incentives and specialized infrastructure. Successful intensive growth cases are distinguished by effective sectoral institutes for collective training, testing, and research. Three sets of pressures push political leaders to pursue the long-term development of institutions: claims on resources (security threats and domestic pressures for welfare improvement) in the absence of easily accessible resources to satisfy such needs. These arguments are consistent with but go well beyond other prominent approaches to development: national innovation systems, global value chains, and developmental states.

Taiwan

iTaiwan’s automotive development strongly supports the proposition that capable institutions are crucial to helping firms in developing countries undertake industrial upgrading. Research institutes, testing and certification centers, training programs, industry associations, and government-supported corporate alliances have flourished for decades. Though modest in size and little known abroad, Taiwan’s leading auto companies export high-quality cars, design and engineer their own models, invest abroad, and export a wide variety of auto parts and car electronics. The success of Taiwanese firms is all the more striking in light of Taiwan’s small and stagnant domestic market. The government embarked on a course of gradual liberalization in the 1980s. Yet it never relinquished the goal of fostering domestically -owned companies capable of making their own vehicles, and simultaneously supported the activities of small and medium-sized firms that have achieved striking success in exporting automotive parts, especially bumpers, body panels, and other accessories for the after-sales market.

Malaysia

Malaysia presents a key test of seeking to promote intensive growth without crafting the necessary institutions. Prime Minister Mahathir’s “Look East” policy of the 1980s sought to emulate Japan and Korea by building an integrated automotive industry—that is, it embarked on a quest for intensive development. Although the quality of Malaysia’s governance institutions is often praised, Mahathir and his successors granted the national champion auto assembler Proton unconditional protection to enable it to sustain an inefficient supply chain that favored ethnic Malay producers. The country failed to build in a timely manner appropriate industry-specific institutions such as university courses in automotive engineering, and an automotive research institute. Exports—both of assembled vehicles and of components—were minuscule. Malaysia’s exports of oil and agricultural products long enabled the state to subsidize the industry. With trade liberalization, continued underwriting of Proton became unsustainable, leading to its sale in 2017.

Conclusion

The country case studies reveal two divergent approaches to automotive industrialization. Some countries have attempted to deepen local capabilities via institutions for industrial diffusion and cooperation. Intensive development proved remarkably successful in Korea, and to a lesser extent in China and Taiwan, but failed in Malaysia. In contrast, Indonesia, the Philippines, and Thailand have come to rely almost solely on foreign multinationals, leading to a shallow but potentially extensive pattern of development. The Conclusion reviews the balance between external threats and access to resources that helped determine the degree of commitment to institution building. It then tests that framework against the experience of Mexico, Brazil, and other developing countries, and considers the implications for theories of economic development. New challenges facing the automobile industry include congestion, global warming, and the transition to electric and autonomous vehicles. In each case, institutions for industrial cooperation and diffusion will play a crucial role.

Korea

The rise of Korea provides robust support for the proposition that strong institutions are necessary for intensive automotive development. By 2017, Korea had become the world’s sixth largest producer of passenger cars, and Korean components producers were among the few companies from outside Europe, Japan, and North America to feature in the world’s top 100 producers. Korea’s success built on a highly -educated workforce and the creation of automotive testing and research institutions. The origins of these institutions can be traced to the external threat faced by the country, and to its inability to earn revenue through exports of agricultural products or raw materials. As Hyundai-Kia grew into a global corporation, the research institutions became more important for medium-sized companies, and in promoting basic research. Hyundai-Kia’s success stands in marked contrast to the three subsidiaries of foreign automakers, which all struggled as Korean labor costs rose substantially above those of developing economies.

Thailand

Thailand is our primary case of successful extensive development. The impressive volume of Thai-based automotive assembly and vehicle and parts exports, the largest in the ASEAN region, reflects a highly efficient assembly base, dominated by foreign assemblers and component producers and driven largely by growth of capital stock rather than by indigenous productivity. This trajectory has been the result of deliberate policy interventions, such as automotive FDI incentives, excise taxes and tariffs designed to promote scale economies, and cluster-related infrastructure. These policies have been formulated and implemented by relatively cohesive institutional networks motivated by broader economic concerns, especially foreign exchange problems. Yet those same factors have not resulted in intensive growth: a manufacturing complex based at least in part on domestic firms producing parts and components, providing intermediate and capital goods, improving processes, and participating in product design.

The Lure and Challenges of the Automobile Industry

The automobile industry simultaneously entices and challenges developing countries. It is a leading employer, a major trader, and a crucial integrator of manufacturing technologies. Would-be entrants into the industry face formidable challenges, however: high entry barriers, demanding quality requirements, and (for components producers) assemblers’ expectations that component producers will be able to co-locate with their plants. Only 15 of the world’s largest auto components manufacturers come from outside Europe, Japan, or North America. Changes in technology and regional and global trade regimes have consolidated the industry and reduced the availability of policy instruments. Nonetheless, opportunities exist for developing economies, not least because of the potential for integration into regional and global supply chains. Most of the growth in demand for autos is concentrated in the developing world. Less developed countries on the periphery of major markets have substantially increased their share of global output over the last two decades.

China

Institutional development supporting China’s intensive development was Janus-faced: both Beijing and local governments engaged in extremely early development of institutions to support industrial cooperation and diffusion, including an elaborate national training system and a gigantic automotive research and testing center, but put them to work serving a socialist planned economy and control by the Communist Party. Creation of institutions for industrial diffusion reflected acute Chinese perceptions of external threat and a relative dearth of natural resources. China has emerged as the world’s largest producer and consumer of automobiles, but most are assembled by foreign-dominated joint ventures. However, around 40% are designed and assembled by Chinese firms, both private and state-owned, and even many of the Sino-foreign joint ventures have developed the capacity to design, engineer, and export their own cars. China is struggling to loosen the fetters of state -ownership and to reform institutions and practices to better suit a market economy.

The Philippines and Indonesia

Where Thailand succeeded at extensive development, the Philippines and Indonesia long floundered. Both countries initiated systematic automotive industrialization efforts in the early 1970s. The Philippines developed a detailed program to combine local supplier upgrading with MNC (multinational corporation)-linked exports, whereas Indonesia pursued a more straightforward intensive development strategy aimed at a complete value chain based on local assemblers and suppliers. Neither succeeded. Permissive conditions—weak external threats, limited popular pressure, and relatively easy access to foreign exchange—undermined policy stability and hindered both countries’ efforts at developing institutions capable of strengthening local firms and linkages. Occasional moves toward more extensive development occurred in response to the sporadic tightening of economic pressures. These nevertheless resulted in distinctly different levels of progress: Indonesia has gradually begun to rival Thailand as an MNC assembly base, whereas despite the Philippines’ early status as an automotive pioneer, its auto industry has remained a case of “arrested development.”

Introduction

Automotive industrialization in East Asia exhibits striking cross-national variation in both strategy and performance. China, Korea, and Taiwan have pursued “intensive” growth strategies, increasing local value added based on domestic inputs and capabilities. Malaysia has attempted to follow this strategy, but without success. In contrast, Thailand has relied on foreign assemblers and their principal suppliers to become a champion of “extensive” growth, resulting in an impressive expansion of production, assembly, and exports. Latecomer Indonesia has followed Thailand with some success, whereas the Philippines has remained an automotive backwater. This variation reflects the broader environment shaping the firm capacities of firms: (1) intensive growth poses particularly difficult policy challenges; (2) more difficult policy challenges require stronger institutions; and (3) institutions that promote upgrading emerge to the degree that political pressures compel national regimes to address external threats and domestic unrest absent easy access to resources necessary to do so.