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Beg, Borrow and Steal: Industrial Policy Lessons for Developing Countries
Development success stories from across the globe teach us that to reach international competitiveness, you can’t go it alone
In the mid 1960s, a young man from India moved to Crewe in the northwest of England to begin an apprenticeship with Rolls-Royce. The three years he spent in that small English town sparked a life-long passion for cars and he returned to India in 1968 determined to start his own car manufacturing company. Setting up your own car maker in 1960s/70s India might seem like an unattainable dream, but not for this former apprentice. He was Sanjay Gandhi, son of Indira Gandhi, Prime Minister of India at the time.
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All it took was a call to his mother and his wish was granted. In 1971 Maruti Motors Limited was incorporated with Sanjay Gandhi at the helm, a licence from government to produce 50,000 cars a year in his back pocket. One of the stipulations of the license, however, was that every Maruti car was to be made without the use of foreign partnership or even technical assistance. It appears Sanjay did flout this rule a little; rumour has it an early prototype was propelled by the engine from a Triumph motorbike.
Still, eschewing foreign expertise proved a big mistake and the next six years were a disaster. A swirling mix of corruption, ineptitude and dodgy prototypes meant Maruti never came close to producing a half decent car. In 1977, Indira Gandhi was ousted as Prime Minister and Maruti was swiftly liquidated by the new government. A total of 21 units were made, and not a single one sold.
Many thought the story would end there, a cautionary tale in the pages of industrial policy textbooks. But in 1980, Sanjay was killed in a plane crash and Indira, back in power, resurrected Maruti to shore up her dead son’s legacy. You’d be forgiven for predicting another disastrous run for Maruti, but this time was different. Rather than trying to go it alone, the Indian government signed a partnership agreement with Suzuki, allowing the Japanese manufacturer access to the heavily protected Indian market on the condition that 60% of each car was domestically produced. The Japanese agreed and Suzuki-Maruti was born. The Indian government was beginning to learn that inward looking industrial self-sufficiency wasn’t working. To develop productive industries, they had to learn from abroad. While Maruti crashed and burned, Suzuki-Maruti is still around today, 40 years later.
This case is by no means unique. There are many examples of successful industrial policies in developing countries that leveraged the expertise of global leaders to reach international competitiveness. Many come from South Korea, which in the early 1960s had a GDP per capita of about $100 and almost no heavy industry to speak of. Yet within a few short decades, it was exporting cars and steel to the world.
In his book How Asia Works, Joe Studwell convincingly explains how Hyundai became one of the world’s most successful car manufacturers in large part by learning from established foreign car companies. For example, in 1973 the company signed a technology licensing deal with Japan’s Mitsubishi. In return for licensing fees and a share of revenue, Hyundai could use Mitsubishi’s engine, transmission and rear axle designs in their own-brand car, the Pony. By the time the deal expired, Hyundai had all the expertise it needed to go it alone.
According to Studwell, Hyundai’s management also picked up “all kinds of other peripheral ideas from visiting any international car maker that would receive them, including GM, VW and Alfa Romeo.” But Hyundai shunned co-production deals, preferring instead the sorts of licensing deals which allowed them to move towards the technological frontier while maintaining independence. They also hired a battalion of foreign consultants with experience at the peak of automotive engineering. For example, they took on the former boss of British Leyland, George Turnbull, to run their production line. Overall, Studwell argues that “The symbols of [Hyundai’s] technology acquisition were… the Hyundai bungalows and the Hyundai hotel… in which foreign consultants were housed while their knowledge was absorbed.” What would become other key export industries in South Korea, most notably steel, became internationally competitive by following roughly the same playbook.
The garments sector in Bangladesh also reached international competitiveness in the 1980s through similar means. Leveraging its advantage of being excluded from the Multi Fibre Agreement, the Bangladeshi government allowed Korean garment manufacturer Daewoo to partner with local firm Desh, but with some significant conditions focused on building domestic capacity.
As part of the deal, Desh sent 130 employees to Daewoo’s factory in South Korea to take part in 8 months of intensive training. The knowledge and expertise flowed and eventually 115 of these trainees left Desh to start their own garment businesses, catalysing rapid growth in the sector. Bangladesh is now the second biggest garment exporter in the world.
There are also countless examples of China “learning” from western brands to move up the value chain. To begin with, the country was happy doing the simple assembly manufacturing for western companies. But it used this proximity to commercial leaders as an opportunity to learn how to do the more valuable stuff. Now China is home to some of the world’s leading technology manufacturers like Hisense and Huawei.
But China also pioneered the darks arts of industrial policy, where learning from others strays into corporate espionage. A recent BBC article tells the story of Zheng Xiaqing, a former employee of US energy conglomerate General Electric Power. The Department of Justice alleges that Zheng stole intellectual property relating to “the design and manufacture of gas and steam turbines, including turbine blades and turbine seals”. Zheng, rather ingeniously, hid the confidential files in the binary code of a digital photograph of a sunset and sent them to an accomplice in China for the benefit of China-based companies.
What does all this mean for developing countries looking to industrialise their economies and move up manufacturing value chains? The most important lesson is that it is very difficult – and practically unprecedented – to go it alone. Beg, borrow, steal – however you do it, find a way of learning from the best if you want domestic companies to reach international competitiveness.
Africa has an ace up its sleeve in this regard. The much-discussed demographic dividend means African markets will be some of the biggest in the world before long. Policymakers should leverage this strength when negotiating with international companies wanting access to their markets. As part of any deal, they should insist on some form of learning and technology transfer to domestic companies, tailored carefully so as to not scare off potential FDI. This can begin with a few key regional industries – perhaps commodities processing – before expanding to wider markets.
Seen from this angle industrial policy has a certain cascading synchronicity. Japan learned from the United States, South Korea learned from Japan, Bangladesh learned from South Korea. African countries must now learn from countries which are a step ahead on the industrialisation journey.
The story of Sanjay Gandhi and Maruti is an extreme case, but it holds an important truth. Even with the political connections that come with a name like Gandhi, Sanjay’s project was doomed to fail. His three years in Crewe should have taught him how difficult it is to catch up with the Rolls-Royces of the world. National pride and hubris too often clip the wings of industrial policy. When it comes to competing with the word’s best, if you can’t beat them, learn from them.