Transplanting Economic Development: Don't Pick Winners, Buy Losers!

Abstract

This paper addresses the issue of how developing economies acquire new capabilities and the role of industrial policy in facilitating the technology acquisition that underpins these new capabilities. We focus on the role of the firm as aggregator of production technologies, business methods, market intelligence, and tacit human capital (“know-how”), and draw a link between the disappointing pace of diversification and technology upgrading in many developing economies to the low numbers of formal firms capable of operating at scale and of entering global markets. We equate the acquisition of new capabilities with the establishment of new firms and consider the alternative modes of acquiring new firms – build, “borrow” (attract FDI), and buy. Given the self-evident difficulties many economies have in utilizing the “build” and “borrow” modes, we develop a case for considering the scarcely utilized “buy” mode. Under this approach, developing countries would acquire the assets (and management) of technologically interesting plants/firms, which failed in their original environment, but, transplanted to developing country environments, would represent significant technology upgrades for the developing country. Thus, rather than “picking winners” to drive development, we consider the efficacy of “buying losers”. We provide examples of the successful use of this mode and discuss its potential use as a strategic approach to accelerate technological upgrading and industrial diversification in the developing world.

Keywords: economic development, technological advance, catch-up growth, transplants, incubators, picking winners, industrial policy

JEL Classification: F21, F63, G34, L52, O14, O17, O25, O33, O43, O47