Philipp Fink, Industrial Dualism in:

Philipp Fink

Late Development in Hungary and Ireland, page 156 - 159

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
156 4. Uneven FDI-led Development Following the development of aggregate figures, it seems that the FDI-led development regime is at last delivering the necessary results in both countries. During the latter half of the 1990s, both countries belonged to the fastest growing economies in the OECD. Between 1996 and 2000, Hungarian GDP grew by an average 4.5% p.a. and unemployment averaged 6.7% p.a. (OECD 2002a: 21) with exports expanding by 233% and contributing to 60% of the country’s GDP in 2000 (WIIW 2004; OECD 2005). Irish GDP grew by 7.6% p.a. between 1993 and 2001 (Barry et al. 2001a: 1) and unemployment fell from 15% in 1989 to 4% in 2000 (Barry et al. 1999b: 20; ICSO 2002: 14) with the proportion of exports to GDP growing by over 30% between 1990 and 1998 (OECD 1999b: 46), leading to a total export share of 92% of GDP in 2000 (OECD 2005). However, the undisputed positive development of aggregate economic figures mask the dualistic nature of economic growth in both countries Hungary and Ireland have witnessed economic growth along with an increasing dualism in regards to their respective industrial and social structures. The developmental inputs from TNC-dominated export sectors do not spread into the rest of the economy, resulting in growth enclaves. Economic growth in both countries is, therefore, heavily dependent on the performance of export-oriented TNCs and from demand impulses stemming from their export markets. Consequently, disarticulation in form of a dichotomy of growth arises (Wade 2003: 653-655) producing social inequality. Evolving socioeconomic disparities are the consequence of a lack of TNC embeddedness, which is in part related to the nature of the TNC. In part, it is also the result of a low regulative and redistributive capacity of the state to effectively counteract the unintended emergence of economic and social disparities. To begin with, the concept of industrial and social dualism is defined as the result of the import or transfer of superior technology by investing TNCs from the core into a peripheral economy. Due to a lack of transmission channels, technology does not-diffuse into the whole economy, leading to strong differences in terms of economic performance and thereby creating social disparities. Beginning with Hungary, the evolution of economic dualism will be displayed. It will be shown that the duality of the productive structure feeds through to create social disparities, which are further amplified by the role of the Hungarian and Irish states in the respective development process. Therefore, FDI-led growth can be of high quantity, but of doubtful developmental quality, as Hungarian and Irish economic peripherality perpetuates. 157 4.1 Dualism Following Singer’s (1970: 60-61) definition, dualism displays the chronic coexistence of “superior and inferior elements” (Singer 1970: 60). The performance differences show “no signs of diminishing” (Singer 1970: 61) and possibly may even increase. The level of interdependence or “interrelations” between the two is low or non-existent. Moreover, the superior sector may even contribute to the increased underperformance of the inferior sector (Singer 1970: ibid.). Internal dualism reflects international dualism defined by the structural difference in technological endowment between core and peripheral countries (Singer 1970: 64). Internal dualism arises due to the inappropriateness of imported superior technology from the core and the lack of indigenous ability in the peripheral country to adapt the imported technology to local capabilities (Singer 1970: 65). As a result of the host economy’s absorptive incapability, imported technology does not diffuse into the remaining economy. Instead, “where modern technology is used its use remains limited to the specific area where it has been introduced, and it thus has become an enclave of modernity” (Singer 1970: ibid.). Technology-driven industrial dichotomy creates a situation whereby growth inputs are confined to the modern TNC-dominated sector of the economy. Hence, two sectors reside next to each other with a negligent level of interdependence. They are distinguishable from each other by distinct performance differences in terms of productivity, profits as well as in their market orientation. The performance of the modern foreign-dominated export sector is dislocated from the remaining economy, as its demand impulses originate from its export markets. Dualism is, therefore, an expression for peripheral economic growth (Elsenhans 2007: 306). Industrial dualism and hence peripherality has social implications. Owing to higher productivity and profits in the modern sector, wages are higher and enclave incomes are additionally widened through skewed redistribution and tax policies (Singer 1970: 66). Industrial dualism, therefore, leads to rising income inequality which, results from distinct differences in productivity and profits (Elsenhans 1987a: 36-37). 4.1.1 Industrial Dualism Within the context of FDI attraction, technology transfer is undertaken by private agents through TNCs. Positive externalities in the form of direct and indirect spillovers from investing TNCs to indigenous firms are assumed to be an automatic mechanism, as stipulated by the premises of endogenous growth theory (Kottaridi 2005: 81). Singer does see the use of TNCs as a transmission belt for the diffusion of technology from the core to the periphery and so diluting “the concentration of innovation in richer countries” (Singer 1970: 66). Nevertheless, he remains critical of the willingness of TNCs to cater for an adequate diffusion of production knowledge and technology due to the costs and risks involved for the firm (Singer 1970: ibid). 158 Industrial dualism, therefore, results from the limited or non-embeddedness of TNCs in the respective economy (Rodríguez-Clare 1996: 866). Low embeddedness in the host economy expresses itself through a lack of substantial backward and forward linkages between indigenous and foreign-owed firms as well as the absence of product and factor market connections, which inhibits the development of spillover effects (Ruane/U?ur 2006: 77). As a result, the level of interdependence of the foreign-dominated, modern export-oriented and high technology sector with the rest of the economy is low. On the one hand, the autarchy of the foreign-owned sector is a result of the oligopolistic nature of the TNC. As shown by Kindleberger (1969: 14) and Hymer (1976: 72-76), FDI can defend or strengthen firm-specific tangible and intangible competitive advantages. Due to the unequal distribution of these intrinsic competitive advantages, they resemble monopolistic or oligopolistic rents for the individual firm (Kindleberger 1969: 11; Hymer 1976: 25). As a result, in a situation of global competition the investing firm is interested to maximise its control over its investment. This minimises the possibility of a rival firm capturing its tangible and intangible assets and therefore possibly jeopardising its competitive advantage (Hymer 1976: 2ibid). Hence, an investing TNC is interested in co-operation taking place at arms-length and in an atmosphere, which is under its control (Jenkins 1991: 23). Similarly, the issue of co-operation with indigenous firms is heavily dependent on the industry in which the TNC operates and the organisation as well as the position of the respective affiliate within the international production chain of its parent corporation (Paus 2005 31-32). Highly internalised production prohibits the creation of substantial supplier linkages with indigenous firms. Likewise, a low degree of autonomy and an inferior position of the affiliate in terms of innovative and strategic tasks within an international production chain will lower co-operation possibilities with indigenous firms (Paus 2005: 33). Although in the case of export-oriented TNCs direct product market competition with indigenous firms is only minimal, the plight of indigenous firms is further exacerbated by factor market competition with TNCs. Superior profits, higher productivity and the orientation towards competitive issues defined by their international market performance allow TNCs to pay above average wages for qualified labour (Barba Navaretti/Venebles 2004: 163-165). Consequently, indigenous capability for innovation is further impaired due to the inability to access human capital and knowledge. Indigenous firms remain characterised by a low level of productivity, innovation, profits. These factors constitute barriers to entry to international markets or to become important TNC first tier suppliers. The low level of interdependence between foreign-owned and indigenous firms can also be the result of the lack of linkage capability of indigenous enterprise. The unavailability of indigenous suppliers can result from the inappropriateness of TNCs activities and its technology for the host economy, as indigenous firms are less export-oriented or specialised in different areas (Lall 2002: 64-65). Citing various studies on the absorptive capacity of indigenous industry, Paus (2005: 28-30) argues that in order to meet co-operation requirements, indigenous 159 firms must posses the necessary knowledge to produce the required products with the required quality. The plight of indigenous enterprise is additionally exacerbated by industrial policy. Policies are biased towards the attraction of TNCs, whilst the needs of indigenous firms are insufficiently met. Instead of engaging directly in the augmentation of indigenous capabilities in order to overcome the developmental constraints imposed by the barriers-to-entry, state capacity in Hungary and Ireland is selfrestrained. In accordance with the development strategy’s spending constraints; the state singularly focuses on supply-side issues. It, therefore, refrains from direct intervention to remedy market failures stemming from imperfect competition (Paus 2005: 30). The state picks and nurtures established firms, but does not create “winners” (O’Hearn’s 2000: 82). Investment in infrastructure, education, the provision of market information as well as favourable tax regimes are aimed at improving the economic environment to nurture established indigenous enterprise (O’Hearn 2000: ibid.). Hence, the state in both cases “leaves capability development to free market forces […]. It can result in slow and truncated technological development” (Lall/Narula 2004: 457). The enacted industrial policies are insufficient to tackle either the quasi-oligopolistic competitive positions of TNCs and to increase the strategic value of their operations or to induce indigenous competitiveness. Consequently, the continued underperformance of indigenous enterprise creates an overreliance on FDI inflows and TNC exports to induce economic growth. Instead of being complementary sources of investment, output and labour demand, TNCs supplement the role of indigenous firms. Hence, the vast differences in productivity and technological specialisation continue, whereby foreign-owned firms clearly dominate indigenous enterprise, resembling an uneven growth process. Echoing Wade’s (2005: 653) notion of “disarticulation” and Elsenhans’ (2007: 306) state of economic peripherality, economic growth in economies with dualistic industrial structures results in the dependence on exports and therefore on foreign market developments. As a result, production is disconnected from internal demand and consumption patterns. Hence, despite economic growth leading to higher incomes, the developmental contribution of TNCs is questioned, as economic peripherality persists. 4.1.2 Social Dichotomy The dual industrial structure is complemented by a pronounced social dichotomy, leading to a situation of social dislocation (Kirby 2004: 219). The over-reliance on FDI and export-generated growth feeds through into social inequality (Wade 2003: 635). Due to the export-oriented nature of FDI inflows, profits and productivity of the foreign-dominated export sectors are defined by the performance in the respec-

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Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.