5 Industrial Policies Patterns of Learning and Development An Evolutionary Perspective

LEM
WORKING PAPER SERIES
Industrial Policies, Patterns of Learning and

Development: an Evolutionary Perspective
Mario Cimoli a
Giovanni Dosi b,c
Xiaodan Yu b,d
a
CEPAL, Santiago, Chile.
b
Institute of Economics, Scuola Superiore Sant’Anna, Pisa, Italy.
c
Department EmbeDS, Scuola Superiore Sant’Anna, Pisa, Italy.
d
Nottingham University Business School China, University of Nottingham China,
Ningbo, China.
2020/08 March 2020

ISSN(ONLINE) 2284-0400
Industrial Policies, Patterns of Learning and Development: an
Evolutionary Perspective
Mario Cimoli,† Giovanni Dosi* and Xiaodan Yu‡,*
†
CEPAL, Santiago, Chile
*
Institute of Economics, Scuola Superiore Sant’Anna, Pisa, Italy
‡
Nottingham University Business School China, University of Nottingham China,
Ningbo, China
Abstract
This work discusses the role of industrial policies within an evolutionary view of innovation
and learning as drivers of economic development. Building on the notions of technological
paradigms and trajectories, it links the processes of catching-up with the dynamics of
capability accumulation within and across firms. In turn such processes are embedded in
broader national systems of innovation wherein industrial policies play a pivotal role.
Key words: Technological paradigms – Catching up - Theory of production –Absolute and
Comparative Advantages - National systems of innovation - Industrial Policies – Economic
Evolution and Development
JEL-classification: O 14-O30-O53-O54 1.
This work significantly draws upon Cimoli and Dosi (1995), Cimoli, Dosi and Stiglitz (2009a), Yu et al (2015)
and Dosi and Tranchero (2020). We thank Eva Paus for her insightful comments. Support from the European
Union Horizon 2020 Research and Innovation programme under grant agreement No. 822781 - GROWINPRO
is gratefully acknowledged.
1.Introduction
Deep relationships of some sorts between technical change and economic development are
now generally acknowledged in both economic history and economic theory. Still, their
nature is a matter of debate concerning the precise causal links. For example, it is quite
intuitive that improvements in the efficiency of techniques of production or in product
performances may be a determinant or at least a binding precondition of growth in per capita
incomes and consumption. But, intricate debates concern “what ultimately determines
what...”: e.g. is it resource accumulation that primarily fosters the exploration of novel
innovative opportunities, or, conversely, does innovation drive capital accumulation?; do new
1
technological opportunities emerge mainly from an extra-economic domain (“pure science”)
or are they primarily driven by economic incentives?; should one assume that the institutions
supporting technical change are sufficiently adaptive to adjust to whatever underlying
economic dynamics emerges from market interactions; or, conversely, are they inertial
enough to shape the rates and directions of innovation and diffusion?
These are obviously quite intricate questions. However, there has been over at least the last
four decades a flourishing of studies on the sources, mechanisms and patterns of
technological innovation, diffusion and imitation. And, the opening of the technological
blackbox has often gone together with important insights into innovation-driven market
competition. Business historians have finally achieved some cross-fertilization with (some
breeds of) economic theorizing. And the institutional understanding of the socio-economic
fabrics of contemporary societies starts showing fruitful complementarities with other
analyses stemming from the economists’ quarters. Quite a few of these contributions have
been proposed by scholars who would call themselves evolutionists or institutionalists.
Indeed, there is a sense that these diverse streams of research show a few common threads,
highlighting the co-evolution of technologies, corporate organizations and institutions (more
in Freeman, 2019). These threads - linking evolutionary analyses of the microeconomics of
innovation and learning all the way to generalizations on some invariant features of the
process of development - are the subject of this contribution. Far from being a comprehensive
survey, it is rather a sort of “roadmap”. We start by discussing the theoretical implications of
what we know about the dynamics of innovative activities at micro and sectoral levels.
Technical change is structured by technological paradigms and follows relatively ordered
trajectories. In such a view, knowledge accumulation plays a central role (section 2).
A major implication of this view is in terms of theory of production. It is rather

straightforward to derive some sort of non-substitution properties, in the short-term, and, also
in the long-term: There are firms and countries that are “better”, that is more efficient and
more innovative, than others irrespectively of relative prices. This implies that technological
asymmetries or gaps as permanent features across firms and, even more as, across countries.
This is addressed in section 3.
In section 4 we focus on the implications on technical change seen as an evolutionary process

in terms of invariances and specificities in patterns of change at sectoral or national level
2
which in turn can be interpreted in terms of some underlying features of the processes of
collective learning, market selection and institutional governance.
In Section 5 we focus on the role of industrial policies, written large, and Section 6
concludes.
2. The fundamental properties of technology
Technological paradigms and trajectories
A variety of concepts have been put forward over the last few decades to define the nature of
innovative activities: technological regimes, paradigms, trajectories, salients, guideposts,
dominant designs and so on. The names are not so important (although some standardization
could make the diffusion of ideas easier!). More crucially, these concepts are highly
overlapping in that they try to capture a few common features of the procedures and direction
of technical change (for discussions and references, see Dosi 1988 and Dosi and Nelson
2010). Let us consider some of them.
The notion of technological paradigm is based on a view of technology grounded on the

following three fundamental ideas.
First, it suggests that any satisfactory description of “what is technology” and how it changes
must also embody the representation of the specific forms of knowledge on which a particular
activity is based. Putting it more emphatically, technology cannot be reduced to the standard
view of a set of well-defined blueprints. Rather, it primarily concerns problem-solving
activities involving - to varying degrees - also tacit forms of knowledge embodied in
individuals and organizational procedures.
Second, paradigms entail specific heuristic and visions on “how to do things” and how to
improve them, often shared by the community of practitioners in each particular activity
(engineers, firms, technical societies, etc.), i.e. they entail collectively shared cognitive
frames (Constant, 1985).
Third, paradigms generally also define basic models of artifacts and systems, which over time
are progressively modified and improved. These basic artifacts can also be described in terms
of some fundamental technological and economic characteristics. For example, in the case of
an airplane, these basic attributes are described not only and obviously in terms of inputs and
the production costs, but also on the basis of some salient technological features such as
3
wing-load, take-off weight, speed, distance it can cover, etc. What is interesting is that
technical progress seems to display patterns and invariances in terms of these product
characteristics. Similar examples of technological invariances can be found e.g. in
semiconductors, agricultural equipment, automobiles and a few other micro technological
studies.
The concept of technological trajectories is associated to the progressive realization of the

innovative opportunities associated with each paradigm, which can in principle be measured
in terms of the changes in the fundamental techno-economic characteristics of artifacts and
the production process. The core ideas involved in this notion of trajectories are the
following.
First, each particular body of knowledge (i.e. each paradigm) shapes and constraints the rates
and direction of technological change irrespectively of market inducements.
Second, as a consequence, one should be able to observe regularities and invariances in the
pattern of technical change which hold under different market conditions (e.g. under different
relative prices) and whose disruption is correlated with radical changes in knowledge-bases
(in paradigms).
Third, technical change is partly driven by repeated attempts to cope with technological
imbalances which it itself creates. A general property, by now widely acknowledged in the
innovation literature, is that learning is local and cumulative. Local means that the
exploration and development of new techniques is likely to occur in the neighborhood of the
techniques already in use. Cumulative means that current technological development - at least
at the level of individual business units - often builds upon past experiences of production
and innovation, and it proceeds via sequences of specific problem-solving junctures
(Vincenti, 1992). Clearly, this goes very well together with the ideas of paradigmatic
knowledge and the ensuing trajectories. A crucial implication, however, is that at any point in
time the agents involved in a particular production activity will face little scope for
substitution among techniques, if by that we mean the easy availability of blueprints different
from those actually in use, which could be put efficiently into operation according to relative
input prices.
Paradigms, routines, organizations
4
A locus classicus in the analysis of the profound intertwining between technological learning
and organizational change is certainly Alfred Chandler’s reconstruction of the origins of the
modern multi-divisional (the M-form) corporation and its ensuring effects on the American
competitive leadership over several decades (Chandler 1990, 1992a and 1993). And, as
Chandler himself has argued, there are strict links between story and evolutionary theories
(Chandler, 1992b). While it is not possible to enter into the richness of the Chandlerian
analysis here, let us just recall one of the main messages:
[...] it was the institutionalizing of the learning involved in product and process
development that gave established managerial firms advantages over start-ups in the
commercialization of technological innovations. Development remained a simple process
involving a wide variety of usually highly product-specific skills, experience and
information. It required a close interaction between functional specialists, such as
designers, engineers, production managers, marketers and managers [...]. Such individuals
had to coordinate their activities, particularly during the scale-up processes and the initial
introduction of the new products on the market [...]. Existing firms with established core
lines had retained earnings as a source of inexpensive capital and often had specialized
organizational and technical competence not available to new entrepreneurial firms
(Chandler 1993: p. 37).
As thoroughly argued by Chandler himself, this organizational dynamics can be interpreted

as an evolutionary story of competence accumulation and development of specific
organizational routines (Chandler, 1992b). Did seemingly superior organizational forms
spread evenly throughout the world? Indeed, the Chandlerian enterprise diffused, albeit rather
slowing, in other OECD countries (Chandler, 1990; Kogut, 1992). However, the development
of organizational forms, strategies and control methods have differed from nation to nation,
because of the difference between national environments (Chandler 1992a: p. 283).
Moreover, the diffusion of the archetypical M-form corporation has been limited to around
half a dozen already developed countries (and even in countries like Italy, it involved very
few companies, if any). Similar differences can be found in the processes of international
diffusion of American principles of work organization - e.g. Taylorism and Fordism - (for an
analysis of the Japanese case, see Coriat, 1990). For the purposes of this work, it is precisely
these differences and the diverse learning patterns which they entail that constitute our
primary interest. So, for example, a growing literature identifies some of the roots of the
5
specificities of the German, the Japanese or the Italian systems of production into their early
corporate histories which carried over their influence up to the contemporary form of
organization and learning (see Chandler, 1990; Coriat, 1990; Kogut, 1993; Dursleifer and
Kocka, 1993; Dosi, Giannetti and Toninelli, 1993).
Even more so, one observes quite different organizational initial conditions, different
organizational histories, and together, different patterns of learning across developing
countries. Let us consider them at some detail. During the last three decades, developing
countries have shown increased technological dynamics associated with a subsequent
development of their industrial structures, thus some significant technological progress did
indeed occur in the NIEs and some of them also became exporters of technology.
The evolutionary path of technological learning are related to both the capacity to acquire
technologies (capital goods, know how etc.) and the capability to absorb these technologies
and adopt them to the local conditions. In these respects, one has now a good deal of
microeconomic/micro technological evidence highlighting the mechanisms which stimulate
and limit endogenous learning in the NIEs.
Without doing any justice to the richness of these contributions, they seem to suggest the
existence of some characteristics in the paths of technological learning at the firm level (see
also Cimoli, 1990 and Cimoli and Dosi, 1988). In particular, one might be able to identify
some relatively invariant sequences in the learning processes, conditional on the initial
organizational characteristics of the firms and the sectors of principal activity.
A first set of regularities regards the varying combinations between acquisition of outside
technologies and endogenous learning. As well know, the transfer of technology to
developing economies is a common source for the subsequent development of learning
capabilities at the firm and sectoral levels. Possibly with too extreme an emphasis, Amsden
and Hikino identify the ability to acquire foreign technology as a central characteristic, [...] of
late industrialization at the core of which is borrowing technology that has already been
developed by firms in more advanced countries. Whereas a driving force behind the First and
Second Industrial Revolutions was the innovation of radically new products and processes,
no major technological breakthrough has been associated with late-industrializing economies.
The imperative to learn from others, and then realize lower costs, higher productivity, and
better quality in mid-tech industries by means of incremental improvements, has given
6
otherwise diverse 20th century industrializers a common set of properties (Amsden and
Hikino 1993: p. 37).
3. Technological dominance, micro heterogeneity and non-substitution
The notion of paradigms contains elements of both a theory of production and theory of
innovation. In short, we shall call it henceforth an evolutionary theory. Loosely speaking, we
should consider such a theory at the same level of abstraction as, say, a Cobb-Douglas
production function or a production possibility set. That is, all of them are theories of what
are deemed to be some stylized but fundamental features of technology and, relatedly, of
production processes.
In fact, one finds a few remarkable assumptions underlying conventional production theories.
As already mentioned, technologies - at least in a first approximation - are seen as a set of
blueprints describing alternative input combinations. Moreover, at any one time there must be
many of them, in order to be able to interpret empirical observations as the outcome of a
microeconomic process of optimal adjustment to relative prices. Information about these
blueprints is generally assumed to be freely available (except those circumstances whereby
they are privately appropriated via the patent system). Finally, one assumes to be able to
separate the activities leading to the efficient exploitation of existing blueprints from those
leading to the development of new ones (exogeneity of technical progress is its extreme
version). Of course, this is only a trivialized account of a family of models that can be made
much more sophisticated, by e.g. adding details on how blueprints are ordered with respect to
each other (more technically, issues like continuity and convexity come under this heading).
However, it still seems fair to say that the basic vision of production- also carried over in
aggregate growth and development models - focuses on questions of choice among well
defined techniques, generally available to all producers, who also know perfectly well what
to do with all the recipes when they see them.
Well, to put it very strongly, the theory of production based on paradigms develops on nearly
opposite theoretical building blocks. And indeed many of the latter yield empirically testable
hypotheses.
Here, we shall argue that a paradigm-based theory of technology may perform the same
interpretive tasks, at the same level of generality, and do it better, in the sense that it is more
in tune with microeconomic evidence and also directly links with theories of innovation. An
evolutionary theory would predict the following.
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a) In general, there is at any point in time one or very few best practice techniques which
dominate the others irrespectively of relative prices.
b) Different agents are characterized by persistently diverse (better and worse) techniques.
c) Over time the observed aggregate dynamics of technical coefficients in each particular
activity is the joint outcome of the process of imitation/diffusion of existing best-practice
techniques, of the search for new ones, and of market selection amongst heterogeneous
agents.
d) Changes over time of the best practice techniques themselves highlight rather regular
paths (i.e. trajectories) both in the space of input coefficients and also in the space of the
core technical characteristics of outputs.
Indeed the catching-up in the productivity distributions is a first fundamental mark of

successful catching-up processes more generally (more in Malerba and Nelson, 2011; Lee
and Malerba, 2017; Landini and Malerba, 2017).
The striking success of China is an excellent case to the point.
Table 1 shows the annual growth rate of labor productivity of incumbent firms, highlighting
the dramatic growth of productivity in China’s manufacturing. The overall productivity of
incumbents grew at 9.98% during 1998–2007. All sectors display positive productivity
growth rates, (except petroleum refining, which had negative growth during the 1998–2002
period).
Further, note the remarkable differences in productivity growth across sectors, as such
circumstantial evidence of significant inter-sectoral differences in absorptive capacities
(Cohen and Levinthal, 1989) of “frontier,” generally foreign, technologies, and of
corresponding differences in the average catching-up rates. Figure 1 offers three snapshots of
the non-parametric kernel density distributions of labor productivity, together with the
comparison with the corresponding Italian and French ones, as a vivid illustration of the
overall technology gaps with two higher income countries.1 At a first glance the readers
might find such a comparison as somewhat far-fetched if one has in mind of a “world
production function,” possibly multiplied by some country-specific scalar. After all, Chinese
wages have been/are at least an order of magnitude lower than Italian and French ones. As a
consequence, one would expect to see the three countries on very different positions on such
1
We chose Italy and France as we have access to comparable micro data. Our informed guess, based on
smaller samples like COMPUSTAT and Orbis firm-level evidences support that the property applied to all
“advanced countries”, including the USA and Germany.
8
production functions. But is it really the case? If it were so, one would also expect, first,
major differences between China, on the one hand, and Italy and France, on the other, in
capital/ output ratios—the appropriate proxy for “capital intensities” when “production
functions” differ. And of course one should expect strong correlations between labor
productivities and capital/labor ratios within each country and within each sector. Premise to
the following: the proxies for “capital” are very noisy on Italian and French data and just
more so on Chinese ones!2
Remarkably, what the evidence suggests is rather at odds with the conventional wisdom.
First, capital/output ratios also at sectoral levels do not differ very much between China and
the two considered European countries (cf. Table 2): Indeed they tend to be higher in China!
Second, the within-country, within-sector micro correlations between labor productivities

(VA/L) and capital/output ratios (K/VA), for whatever proxy for K is used, is robustly
negative in China and is mildly negative in Italy and France (statistics available upon
request). Putting it another way, labor and capital productivity are strongly positively
correlated. Indeed, under the conventional theories, given relatively uniform relative prices
one should not expect distribution of productivities at all. However, they are persistently
there even in developed countries (more in Syverson, 2011, and Dosi and Grazzi, 2006) and
much more so in developing ones.
Together, third, even within China, labor productivities and capital/labor ratios—as such a
proxy of degrees of production mechanization/automation— are basically orthogonal (see
Figure 2 for an illustration of a sector out of most).
Overall, the evidence suggests that very little action comes from “moving along isoquants” in
response to relative prices. Rather, “best practice” techniques involve a more efficient use of
both labor and capital, and relatedly, catching-up fundamentally involves improvements on
both dimensions. It is a world of complementarities rather than substitution, wherein
technology-gaps and learning efforts are both reflected by labor productivity differences,
quite independently from relative prices, while TFP proxies might well yield a quite distorted
picture of the development process. Indeed, given the ubiquitous complementarities between
labor and capital, labor productivities alone turn out to be a robust proxy for the lower bound
2
Reasons of “capital” are at best biased by construction: witness the old “capital controversy” between the
Cambridge, UK and Cambridge, Mass (more in Cohen and Harcourt, 2003 and Shaikh, 2016). And more so are
measures simply obtained from balance-sheets. In particular, “capital” measures in the case of China (in firm’s
balance sheet) are calculated as the value of fixed capital stock at original purchase prices (these book values
are the sum of nominal values for different years).
9
of “true” efficiency distributions within countries, but also across countries, with the added
advantage of avoiding any explicit or implicit hypotheses on interfactor substitutability and
capital measurements.
Table 1. Annual growth rate of labor productivity over 1998–2007, and subperiods 1998–2002 and
2002–2007 among “continuing” firms (i.e. firms keeping in the same two-digit sector over the
relevant period). Source: Yu et al. (2015).
CIC Sector 1998–2007 1998–2002 2002–2007
13 Food processing of agricultural products 11.25 8.55 13.46
14 Other foodstuff 8.87 5.73 11.22
15 Beverages 10.63 6.20 12.80
16 Tobacco 15.29 11.08 10.65
17 Textile 9.79 10.14 10.54
18 Garments, footwear etc. 7.84 4.84 10.57
19 Leather, fur, feather etc. 7.55 6.52 10.29
20 Processing of timber, manuf. of wood, bamboo etc. 11.87 7.61 14.43
21 Furniture 6.19 4.82 10.40
22 Paper and paper products 10.33 9.48 11.75
23 Printing, reproduction of recording media 8.92 7.54 8.17
24 Articles for culture, education and sports 8.39 7.06 10.03
25 Processing of petroleum, cokeries, nuclear fuel 3.77 -1.61 6.36
26 Raw chemical materials and chemical products 11.40 10.44 11.85
27 Pharmaceuticals 8.94 10.64 7.53
28 Chemical fibers 10.31 12.05 8.85
29 Rubber 8.80 7.01 9.39
30 Plastics 5.83 6.43 6.24
31 Non-metallic mineral products 12.76 9.86 14.71
32 Smelting and processing of ferrous metals 13.86 12.68 14.14
33 Smelting and processing of non-ferrous metals 12.45 13.73 12.64
34 Metal products 5.44 7.84 4.32
35 General purpose machinery 15.40 13.76 15.72
36 Special purpose machinery 16.23 13.09 15.13
37 Transport equipment 12.67 11.64 13.05
39 Electrical machinery and equipment 9.51 8.84 9.32
40 Communication equipments, computers etc. 5.64 8.37 3.30
41 Measuring instruments and machinery 9.62 9.46 9.57
42 Artwork and other 10.01 9.32 12.70
10
Average 9.98 8.73 10.66
Figure 1: Empirical density (Pr, vertical axis) of labour productivities, whole manufacturing of
China, France and Italy, years 1998, 2002 and 2006. Note: The first row - constant 2000 prices and
exchange rates (IMF source); the second row - PPP adjusted price (World Bank source). Source: Yu et
al. (2015).
Table 2. The median of capital intensity (capital/output ratios) by sector. Note: ❑a ∈¿the last column,
the France data is year 2004. Source: CMM, INSEE (on France), and ISTAT-Micro 3 (on Italy).
Source: Yu et al. (2015).
NACE Sector China Italy France China Italy France China Italy France a
1998 2002 2006
173 Finishing of textiles 2.772 1.971 1.863 0.732 0.755 0.694 1.228 1.512 1.546
175 Carpets, rugs and other textiles 1.672 1.327 0.789 0.752 0.775 0.688 0.891 0.987 1.055
182 Wearing apparel 1.052 0.785 0.620 0.268 0.276 0.226 0.318 0.318 0.336
193 Footwear 1.062 0.885 0.529 0.29 0.331 0.288 0.488 0.631 0.645
203 Wood products for construction 1.477 0.954 0.629 0.728 0.734 0.763 0.773 0.744 0.736
212 Articles of paper and paperboard 1.475 1.367 1.123 0.824 0.901 0.988 1.025 1.206 1.217
221 Publishing 3.873 5.250 5.716 0.259 0.19 0.117 0.229 0.204 0.192
222 Printing 2.559 2.456 2.084 0.508 0.566 0.562 0.700 0.797 0.792
241 Production of basic chemicals 2.547 1.784 1.049 0.977 1.045 1.153 2.081 2.443 2.811
243 Paints, varnishes, inks mastics 1.312 1.086 0.852 0.584 0.544 0.57 0.946 0.936 1.052
11
Pharma., med. chemicals, botanical
244 prod 1.707 1.514 1.508 0.57 0.623 0.656 0.666 0.83 0.837
246 Other chemical products 1.436 1.167 0.707 0.588 0.628 0.636 0.973 1.004 1.072
251 Rubber products 1.587 1.479 0.974 0.514 0.588 0.495 0.951 1.088 1.03
252 Plastic products 1.614 1.394 1.055 0.714 0.795 0.818 0.969 0.991 1.035
261 Glass and glass products 1.696 1.442 1.079 0.579 0.594 0.742 0.996 1.169 1.198
266 Concrete, plaster and cement 2.084 1.643 1.676 0.93 0.847 0.965 1.365 1.399 1.253
275 Casting of metals 1.113 0.937 0.698 0.669 0.815 0.734 0.886 1.127 1.128
281 Structural metal products 1.290 1.176 0.870 0.433 0.481 0.455 0.547 0.505 0.569
284 Forging, pressing, stamping, of metal 1.981 1.289 0.820 0.574 0.695 0.618 0.77 0.913 0.967
285 Treatment and coating of metals 1.113 0.980 0.923 0.452 0.515 0.467 0.673 0.762 0.803
286 Cutlery, tools and general hardware 1.554 1.068 0.940 0.471 0.584 0.559 0.734 0.861 0.892
287 Other fabricated metal products 1.337 1.018 0.788 0.586 0.626 0.566 0.818 0.921 0.871
Machinery for prod. use of mech.

291 power 2.041 1.524 1.012 0.48 0.491 0.408 0.674 0.76 0.714
292 Other general purpose machinery 1.756 1.321 0.905 0.323 0.315 0.272 0.372 0.364 0.361
294 Machine Tools 2.530 1.669 0.961 0.343 0.391 0.289 0.425 0.465 0.466
295 Other special purpose machinery 2.177 1.486 0.977 0.358 0.337 0.332 0.520 0.585 0.614
Electric motors, generators and

311 transform 1.570 1.200 0.767 0.369 0.452 0.397 0.510 0.526 0.501
Manuf. of electricity distrib, control

312 equip 1.409 1.127 0.781 0.335 0.453 0.352 0.640 0.648 0.553
316 Electrical equipment not e/where class 1.163 0.863 0.671 0.299 0.288 0.275 0.498 0.516 0.497
Parts for motor vehicles and their

343 engines 1.781 1.336 1.094 0.526 0.63 0.534 1.088 1.311 1.185
361 Furniture 1.293 1.092 0.798 0.593 0.61 0.564 0.633 0.674 0.722
366 Manufacturing n.e.c. 0.793 0.830 0.808 0.467 0.485 0.405 0.576 0.669 0.781
Mean 1.713 1.419 1.127 0.534 0.574 0.550 0.780 0.871 0.888
Median 1.578 1.305 0.914 0.520 0.586 0.561 0.717 0.814 0.820
Figure 2. Scatterplot of log(VA/L) versus log(K/L) for Corn milling sector (CIC 131), year 1998.
OLS regression: Coefficient = 0.038 (Standard error 0.029), R 2 = 0.0006, number of observations =
2838. Source: Yu et al. (2015).
12
In fact the empirical elasticities of substitutions implied by the negative micro relation
between labor productivities and capital/output ratios (i.e. positive correlations between labor
and capital productivities) are positive in sign: “isoquants” do not look like the standard
isoquants but are more similar to rays out of the origin.
Granted all that, let us now focus on the micro picture which the data offer and its dynamics.
Start noting the different upper bounds of the three country distributions, as such an
impressionistic proxy of different inter-country lags and leads (together of course with
different sectoral compositions of output).
Second, the width of the support of the distribution of China is much larger, revealing much
greater technological asymmetries across Chinese firms. The dynamics of catching-up in
China’s manufacturing productivity is indeed associated with (i) a rightward movement of the
mean of the distributions; (ii) a corresponding rightward movement of the support; and (iii) as
we shall analyze in more detail below, a shrinking of the support itself. Labor productivity
distribution is asymmetric and left-skewed. The evolving pattern of the left-tail and that of
the right-tail are different as well, as the magnitude of left-tail shift toward higher levels of
productivity is very significant, compared with a relatively mild movement of right-tail. Such
dynamics matches what in the old development literature was called a “reduction of the
dualistic structure economy” composed by a shrinking traditional/relatively backward part of
manufacturing and an expanding “modern” one, which however is only just beginning to
push “frontier technologies” further. An important piece of evidence on intra-sectoral
asymmetries in efficiency and their changes over time is the top to bottom ratio of labor
productivities. Table 3 displays the ratio of the 9th decile over the 2nd decile for each sector
13
from 1998 to 2007. The ratios decrease in most of the sectors, indicating a reduction of
productivity dispersion, plausibly due both to learning by laggard firms and selection (exit) of
worse performers. The ratios are generally lower in “traditional” ones (CIC 17–24 including
textile, garments, leather, furniture, paper manufacturing, etc.) and higher in relatively
technology-intensive sectors (e.g. transport equipment, electrical machinery, and
communication equipment). The ratios drop more rapidly in the first part of the period under
consideration which is also a period of retreat of SOEs from the so-called “competitive
sectors.” At the same time, the ratios in quite a few “heavy industries” such as petroleum
refining, and non-ferrous metals sectors grows, hinting at some sort of persistent “dualism”
within such industries (note that growing intra-sectoral asymmetries can and often go hand-
in-hand with high average growth rates). How much of the dynamics in overall productivity
distribution is due to inter-sectoral relocation of production?
Table 3. Ratio of the average labor productivity of the second highest decile over the second lowest
one. Source: Yu et al. (2015).
CIC Sector 1998 2002 2007
14 Other Foodstuff 19.12 12.20 9.04
15 Beverages 14.89 11.82 9.06
16 Tobacco 17.05 22.95 26.44
17 Textile 8.61 7.01 6.07
21 Furniture 9.29 7.15 6.93
25 Processing of petroleum, cokeries, nuclear fuel 8.82 12.26 11.23
29 Rubber 6.56 7.49 7.42
30 Plastics 8.65 7.18 7.02
32 Smelting and pressing of ferrous metals 9.57 8.58 8.40
14
33 Smelting and pressing of non-ferrous metals 9.70 8.43 12.72
40 Communication equipment, computers etc. 13.52 11.08 8.36
Table 4 displays the time series of value-added shares of each two-digit sector in overall
manufacturing. It is remarkable that relatively little structural change has occurred over the
period under investigation, even if indeed in the ‘right direction.’ So, for example, the shares
of transport equipment, electrical machinery and equipment, and communication equipment,
computers etc. are amongst the highest from the start of the period under consideration, and
their total share just increases from 20.7% in 1998 to 22.5% in 2007. A synthetic view of the
relative importance of the within- vs. between- sectors contributions to productivity growth is
presented in Table 5 (for details on the shift-and-share decomposition method of productivity
growth, see Appendix).
Of course the precise relative measures of sector-specific learning vs. structural change (what
nowadays is often referred to as “re-allocation”) depend a lot on the techniques of
measurement (e.g. whether the sectoral weights are in terms of employment or value added).
So, for example, Paus (2019) find a contribution of the latter of around 19%. However, no
matter the measure, the “within component” dominates.
A sign indeed that China achieves quite early a “modern” industrial structure. However, as
we shall discuss below this is an exception in the overall picture of catching up experiences.
Interestingly, this evidence seems to contradict Kuznets’s view of increasing productivity due
to structural change, i.e. movements from low-productivity sectors to high-productivity ones
also within manufacturing. On the contrary, our evidence suggests that, unlike what happened
in the 1980s (cf. Wang and Szirmai, 2008), the movement of the overall manufacturing
means is mainly due to sector-specific dynamics. Incidentally, note that “virtuous” structural
change is by no means automatic or inevitable. Indeed, the apparent failure to undertake that
15
path appear to be at the heart of the middle-income trap with e.g. Latin American countries
have experienced: more in Paus (2019).
Of course, the relative stability of sectoral shares at two-digit sectoral level, does not rule out
much more turbulence at finer levels of disaggregation within each two-digit sector: indeed,
there is very intensive “micro structural change.” However, the evidence marks a difference
with other episodes of industrialization and catching-up, in that China appears to be from the
period of our observation already quite mature in terms of broad manufacturing structure. For
example, when South Korea had the same real per capita income that China had in 1998,
which was 1973 (Maddison’s historical statistics www.ggdc.net/maddison/oriindex.htm), it
had a share of around 22% of textile and clothing over total manufacturing (World
Development Indicators database), compared to a 1998 Chinese share of 12%. In the
literature a quite common claim is that export and productivity growth go together (possibly
with causality running in both directions). China does indeed display a dramatic rise in the
share of export in total manufacturing output and coupled with a dramatic growth in
productivity.
However, the Chinese lend little support to the notion of “learning by exporting”.
Figure 3 shows the labor productivity distributions of exporters and non-exporters for the
years 1998 and 2007, in some selected sectors (chemical, electrical machinery, and
communication equipment) which well illustrate a more general pattern. Note that in 1998
exporters have higher level of productivity and their support of distribution is narrower than
that of non-exporters. However, a significant catch-up of non-exporters takes place, so that in
2007, exporters and non-exporters have similar productivity distributions and similar widths
of support.3
Table 4. Contribution of each two-digit sector to the total value added of manufacturing
(percentages). Source: Yu et al. (2015).
CIC Sector 1998 2002 2007
14 Other Foodstuff 2.07 1.99 1.99
15 Beverages 3.51 2.69 2.01
16 Tobacco 5.70 5.13 3.11
17 Textile 6.39 5.81 5.23
3
We are currently exploring the conjecture that within the overall pattern of fast learning by Chinese
manufacturing, many “not-frontier” firms found it easier to enter the export markets with the access of China
to the WTO.
16
21 Furniture 0.50 0.53 0.69
25 Processing of petroleum, cokeries, nuclear fuel 3.56 3.79 3.52
29 Rubber 1.33 1.12 1.02
30 Plastics 2.35 2.47 2.28
32 Smelting and pressing of ferrous metals 6.47 6.92 9.52
33 Smelting and pressing of non-ferrous metals 2.08 2.24 4.58
40 Communication equipment, computers etc. 7.39 9.64 8.44
Total 100 100 100
Figure 3: Empirical density of (log) labor productivity of exporters and non-exporters of transport
equipment (CIC 37) and electrical machinery and equipment (CIC 39) sectors in selected years (1998,
2003, and 2007). Source: Yu et al. (2015).
17
18
Table 5. Within sector learning vs. structural change in productivity growth (source: our elaboration on Chinese Manufacturing Micro data)
Annual Annual
CIC Sector P0 PT Growth Intra Shift Total P0 PT Growth Intra Shift Total
(%) (%) (%) (%) (%) (%) (%) (%)
1998-2002 2002-2007
13 Food processing of agricultural products 40.68 74.30 16.25 4.20 0.02 4.22 74.30 165.12 17.32 5.49 0.00 5.49
14 Other foodstuff 35.26 62.07 15.18 1.70 0.01 1.71 62.07 128.80 15.72 2.16 0.00 2.16
15 Beverages 50.30 86.33 14.46 2.57 0.00 2.57 86.33 174.04 15.05 2.32 0.00 2.32
16 Tobacco 311.94 634.26 19.41 6.05 0.00 6.05 634.26 1448.41 17.96 4.79 0.00 4.79
17 Textile 18.91 35.63 17.16 5.78 0.00 5.78 35.63 76.19 16.42 6.41 0.00 6.41
18 Garments, footwear, etc. 23.66 30.34 6.41 1.05 -0.91 0.14 30.34 55.73 12.94 2.40 -0.56 1.85
19 Leather, fur, feather, etc. 25.97 34.54 7.39 0.73 -0.46 0.27 34.54 55.62 10.00 1.22 -0.87 0.36
Processing of timber, manuf. of wood,

20 bamboo, etc. 25.94 44.51 14.45 0.68 -0.06 0.63 44.51 94.47 16.24 1.14 -0.42 0.72
21 Furniture 32.34 43.45 7.65 0.22 -0.07 0.15 43.45 67.52 9.22 0.42 -0.67 -0.25
22 Paper and paper products 27.27 55.11 19.23 2.29 0.00 2.29 55.11 132.98 19.26 2.77 0.00 2.77
23 Printing, reproduction of recording media 30.45 59.63 18.29 1.22 0.00 1.22 59.63 111.41 13.32 0.95 0.00 0.95
Articles for culture, education and sport

24 activity 24.85 31.23 5.87 0.30 -0.27 0.03 31.23 53.91 11.54 0.65 -0.16 0.49
25 Oil refining, coking, nuclear fuel 67.07 109.05 12.92 2.16 0.00 2.16 109.05 126.24 2.97 0.37 0.00 0.37
Raw chemical materials and chemical

26 products 30.88 67.52 21.60 8.75 0.00 8.75 67.52 175.35 21.03 10.18 0.00 10.18
27 Pharmaceuticals 44.94 87.29 18.05 3.21 0.17 3.38 87.29 150.83 11.56 2.21 0.00 2.21
28 Chemical fibers 45.25 76.35 13.97 0.87 0.00 0.87 76.35 158.49 15.73 0.92 0.00 0.92
29 Rubber 27.85 53.94 17.96 1.24 0.00 1.24 53.94 98.40 12.78 0.92 0.00 0.92
19
30 Plastics 34.86 56.05 12.61 1.73 -0.03 1.70 56.05 85.31 8.76 1.43 -0.41 1.02
31 Non-metallic mineral products 21.61 38.50 15.53 4.96 0.00 4.96 38.50 108.60 23.05 8.28 0.00 8.28
32 Smelting and processing of ferrous metals 34.62 80.27 23.40 8.70 0.00 8.70 80.27 208.33 21.01 10.10 0.00 10.10
Smelting and processing of non-ferrous

33 metals 31.86 66.44 20.17 2.47 0.00 2.47 66.44 208.07 25.65 4.70 0.01 4.70
34 Metal products 31.22 52.69 13.98 2.27 -0.04 2.22 52.69 78.37 8.26 1.52 -0.60 0.92
35 General purpose machinery 22.60 51.26 22.72 6.01 0.00 6.01 51.26 145.54 23.21 9.00 -0.10 8.90
36 Special purpose machinery 18.94 47.35 25.74 4.73 0.00 4.73 47.35 144.79 25.05 6.01 0.00 6.01
37 Transport equipment 35.19 85.62 24.89 11.35 0.00 11.35 85.62 202.69 18.81 11.73 0.00 11.73
39 Electrical machinery and equipment 40.51 71.58 15.29 5.13 0.14 5.26 71.58 116.70 10.27 4.30 -0.69 3.61
40 Communication equipment, computers, etc. 68.28 123.44 15.96 7.53 1.98 9.51 123.44 116.55 -1.14 -0.75 -0.05 -0.81
41 Measuring instruments and machinery 31.29 58.45 16.91 1.21 -0.01 1.20 58.45 129.34 17.22 1.70 -0.06 1.63
42 Artwork and other 22.46 34.29 11.15 0.68 -0.25 0.43 34.29 74.24 16.71 1.25 0.00 1.25
Whole manufacturing 32.73 62.90 17.74 99.89 0.21 100.00 62.90 126.15 14.93 104.58 -4.58 100.00
Note: P 0 is the aggregate productivity in the beginning-year of the period. P T is the aggregate productivity in the end-year of the period. Unit 1000
yuan at 1998 constant price. “Annual Growth” is the compound annual growth rate of aggregate labour productivity. “Intra” is the percentage
contribution of within sector productivity growth to overall aggregate productivity growth. “Shift” is the percentage contribution of between sector
employment reallocation to overall aggregate productivity growth. “Total” is the overall contribution (i.e., the sum of “Intra” and “Shift” effects) of
each 2-digit sector to aggregate productivity growth. The row “Whole manufacturing” shows the contribution of “Intra” and “shift” effects for the
aggregated manufacturing sector. Sectors with zero shift effects are the shrinking ones. (For details on the shift-and-share decomposition method
of productivity growth, see Appendix.)
20
Some general interpretative implications
There are many important implications of the foregoing argument. From a theoretical point of
view, it implies a radical de-linking income distribution, production theory and development.
In the conventional story every young scholar has to acquire there is an obvious link between
technological conditions, input availabilities and remunerations.
It is well known: if production functions are well behaved – homogeneous degree-one, hence
no increasing returns, etc. – relative scarcities determine relative input intensities. And if the
estimates fall short of full “explaining” output, that goes under the heading of the famous
“Solow residual”, also re-named as Total Factor Productivity.
The consequences for trade theories are straightforward: The Heckscher-Ohlin-Samuelson

theorems follow.
And what about the interpretation of why per-capita incomes differ so much across countries?
Over the last few decades a disproportionate amount of efforts has gone into the search of
arguments to add to the Kamasutra of variables entering the “production function” (nowadays
not only questionable proxies for “culture” and “institutions” but also sinister notions like
“genetic endowments”).
Here we have taken the opposite route and explored the implications for development of
“opening up the black box of technology”, to use the felicitous definition of Nate Rosenberg.
Within the black box, one does not find production function and even less so, Cobb-Douglas
ones, but rather painstaking efforts aimed at knowledge accumulation, nested in more or less
supportive organizations and institutions.
4. Structural change as a fundamental feature of catching–up
The evolution of technological capabilities and production specializations
With the mentioned partial exception of China – which in a sense entered the catching up
phase already “mature” in terms of sectoral composition of output - most countries undergo
major transformation in the sectors in which they operate and in the products they
manufacture (and China is no exception). However, not every country is successful, and, to
repeat, many remain grabbed into a “middle-income trap”.
21
In many respects, catching-up entails “climbing up the ladder” of production efficiency –
well captured by the dynamics in the productivity distributions discussed in the previous
section – but also of product complexities and product demand elasticities.
To recall a discussion of the 90s, the impact on competitiveness and growth of producing
potato chips is not identical to that of producing computer chips!
In turn, the climbing up is associated with the accumulation of technological and

organizational capabilities, often against the comparative advantages a country displays.
That is, absolute technological levels (and not comparative ones) are a fundamental driver of
trade performance, growth and, ultimately, welfare. To clarify the point, Cimoli et al. (2009a)
describe the thought experiment of opening up trade between a “Stone Age economy" and an
ICT-based one. As Ricardo would argue, the country coming from the Stone Age will be
more likely to export “stone-intensive" products for which it has a comparative advantage
(and vice versa for the ICT-based economy with, say, computers). However, there could be
no bilateral trade at all if the more advanced ICT economy will end up producing almost
anything worth trading irrespective of the stone- or ICT-intensities of the products. What
really matters for economic growth might ultimately be absolute levels of technological
capabilities and how they interact with world demand for products.
An interesting measure in this respect of the “fitness” of a country in terms of the

“complexity” of the products in which it is specialized as a predictor of its growth potential is
presented in Tacchella et al (2012) and Cristelli et al (2015).4
A comprehensive historical overview of successful cases of structural transformations and

industrialization is provided by Ha-Joon Chang (2002). The most telling cases of successful
latecomers’ industrialization are probably the United States, Germany and more recently
Japan, South Korea and China.
Indeed, it was the First Secretary of the US Treasury, Alexander Hamilton, who
systematically elaborated the infant industry argument in 1791. In a nutshell, Hamilton
argued that foreign competition would have prevented domestic industries from becoming
internationally competitive, unless the State had intervened to compensate initial losses or to
enforce import duties (Hamilton, 1791). American industries ended up being literally the
most protected in the world until after WWII (Chang, 2002): needless to say, this goes a long
way in explaining the US pattern of structural change. Furthermore, the role of the Federal
4
A germane attempt characterized however by a few technical drawbacks is in Hidalgo and Hausmann (2009).
22
government in industrial development has been substantial even in the post-war era, thanks to
the large amount of defense-related procurement and mission-oriented research (Mazzucato,
2013; Mowery, 2012). Similarly, in List (1841) we find a very lucid discussion of the
shortcomings of simply adhering to comparative advantages: in his view, the true objective of
developed countries trying to impose free trade over Europe was simply “kicking away the
ladder” that they themselves had climbed (Chang, 2002). The German experience also points
to the importance of ad-hoc institutional innovations which facilitated catching-up and were
the basis of the successive forging ahead with respect to Britain. Of particular importance
was the introduction of the Humboldtian university for the education of graduate engineers,
which supplied human capital that proved essential for the diffusion of in-house industrial
R&D departments (Dosi et al., 1994). Another pillar of German industrialization was the
emulation of imported British machine tools (often thanks to British craftsmen attracted to
Prussia, Freeman 1995). More recently, Japan (Freeman, 1987) and the Asian tigers (Nelson
and Pack, 1999) were able to reap the benefits from fast growing technological markets. At
the roots of the Japanese success there was the explicit decision by Japanese political
authorities to neglect the path of “natural” development implied by comparative advantages
(Freeman, 2004). In few years, Japan ceased being an importer of foreign technology and
developed important indigenous innovation capabilities, even surpassing the United States in
terms of R&D efforts. The secret of its success was building up of one of the most successful
Innovation Systems (which inspired the formulation of the concept itself, see Freeman 1987),
where the long-term planning of the MITI fostered learning and spurred innovation in the
export-led industrial complexes.
The classic works mentioned above are detailed case-studies of single countries and their
historical experience. More recently, research leveraging natural quasi-experiments and new
estimation techniques has allowed the precise causal identification of the effects of sectoral
policies. For instance, China’s 11th five-year plan (2006-2010) promoted shipbuilding as a
strategic industry for defense-related purposes. Kalouptsidi (2017) finds that the reduction in
production costs associated with the policy explains the massive Chinese gains of global
market shares in ships: in the absence of the targeted subsidies, China's production would be
cut to less than half. Lane (2017) studies the Heavy Chemical and Industry (HCI) policy that
South Korea enacted in 1973 as a response to the US troop withdrawal. Again, targeted
industries were chosen for their military importance, and the comparison with otherwise
similar industries shows that the policy promoted rapid development that lasted long after the
23
measures were removed. Interestingly enough, downstream sectors also benefited from the
lower prices induced by the policy, an instance of the policy-induced industrial externalities
that Hirschman (1958) labelled “forward linkages”. The HCI entailed both industrial
subsidies and targeted trade protection; nonetheless, it must be noted that in certain situations
sheer trade protection can be sufficient to change the patterns of trade and allow
industrialization. Juhasz (2018) documents that the temporary protection from British imports
caused by the Napoleonic Blockade was fundamental in the accumulation of technological
capabilities in 19th century France. The mechanized cotton-spinning industry rapidly
developed in French departments that received more sheltering, in plain accordance with the
predictions of the infant industry argument. Hanlon (2019) complements this evidence by
looking at production input advantages, instead of output market protection. Using data from
last century’s metal shipbuilding, he shows that even a temporary cost advantage can become
the source of long lasting competitive advantage due to dynamic localized learning effects
and learning-by-doing. We shall come back to the role of policies below.
Here let us further note that technological catching-up (and of course straightforward
innovation) goes hand-in hand with organizational innovation.
5. The crucial role of industrial policies
Some general patterns can be distilled from these historical cases. (For quite germane policy
considerations cf. Paus, 2019.)
Emulation and, sometimes, leapfrogging as a general principle inspiring policies
Emulation – we borrow the term from Reinert (2009) – is the purposeful effort of imitation of
‘frontier’ technologies and production activities irrespectively of the incumbent profile of
‘comparative advantages’. It often involves explicit public policies aimed at ‘doing what rich
countries are doing’ in terms of production profile of the economy and it always involves
microeconomic efforts – on the part of individuals and, more so, firms – to learn how to do
things others in frontier countries are already able to do. It is a familiar story over the last
three centuries. It dates back at least to the case of England vis-à-vis the Low Countries in the
period preceding the Industrial Revolution, and it applies all the way to the contemporary
Chinese industrialization. Emulation concerns primarily - as it ought to – products and
processes based on new technological paradigms. In one epoch it meant mechanized textile
24
production and the construction of the related machines. Later it was steel production,
electricity based products and machinery, and internal combustion engines. Nowadays it has
to do first of all with information and telecommunication technologies. In fact, it sometimes
happened that catching-up countries not only emulated the leading ones, but ‘leapfrogged’ in
some of the newest most promising technologies. It happened in the 19th century United
States and Germany which forged ahead of England in electromechanical engineering,
consumer durables, synthetic chemistry. But why should everyone emulate frontier
technologies in the first place, rather than being guided by one’s own ‘comparative
advantages’? Or, as the skeptics often put it, isn’t it absurd to suggest that everybody should
specialize in ICT production? We have answered the question above. Typically, relatively
backward economies display an absolute disadvantage in everything, that is they are less
efficient in the production of every commodity, and in fact the disadvantage in many
commodities is likely to be infinite in the sense that they are not able to produce them at all.
Catching-up entails closing the gap in production knowledge and learning how to produce
novel goods (which at the beginning are generally novel only for the catching-up country,
even if ‘old’ for the world). This is particularly important with respect to new technological
paradigms because such technologies are most often general purpose: they influence directly
or indirectly most production activities. For example, it was so in the past (and it continues to
be so nowadays) in the case of mechanical engineering and electricity as it is today the case
of ICT technologies. Moreover, goods and pieces of equipment based on the new
technological paradigms generally entail higher elasticity of demand and richer opportunities
for further technological advance (cf. Dosi, Pavitt and Soete, 1990; Castaldi et al., 2009, and
Cimoli et al., 2009b). Hence emulation of frontier countries in these activities implies, other
things being equal, higher growth possibilities and a greater potential for productivity growth
and, eventually, domestic product innovation.
The complementarity between technological learning and the development of

production capacity
We have already emphasized above, the difference between technological knowledge and
sheer information, bearing important implications in terms of ‘stickiness’ and difficulty in the
transmission of the former – embodied as it generally is into specific people, organizations
and local networks. A consequence is also that learning rarely occurs so to speak, ‘off line’,
especially in the initial phases of industrialization. Rather it goes together with the acquisition
of production equipment, and with the efforts of learning how to use it and how to adapt it to
25
local conditions (more in Bell and Pavitt, 1993). In turn, this goes hand in hand with the
training of workers and engineers and the formation of managers capable of efficiently
running complex organizations. These are also the reasons why it is dangerous to see
industrialization – even in its early stages - simply as a matter of “diffusion”: the adoption
and use of equipment also when acquired “turn key” from abroad, and more so when the
technologies are in the form of “blueprints” or licenses require a lot of local painstaking
learning efforts. Of course, no policy maker is in the position to fine tune the details of the
production activities and together of the patterns of learning which the economy has to
exploit. Such details of the actual dynamics depend a good deal on the details of corporate
strategies and, why not, on chance. So, just to give an example, there was no way that the
Korean policy makers could know, or even less ‘plan’, say, a learning push in
semiconductors memories rather than microprocessors. However policy making ought to be
acutely aware of the fact that future capabilities build upon, refine and modify incumbent
ones: hence the policy goal of building good path-dependencies (the point resonates with a
similar advice by Hausmann and Rodrick (2006) when addressing the patterns of product
diversification along the development process).
Moreover two fundamental caveats must be kept in mind.
First, a useful distinction can be made between production capacity - covering the knowledge
and organizational routines apt to run, repair, incrementally improve existing equipment and
products –, and technological capabilities - involving the skills, knowledge and
organizational routines needed to manage and generate technical change (Bell and Pavitt,
1993, p. 163). It increasingly happens that the kinds of activities which foster the
accumulation of the latter, increasingly involving specialized R&D laboratories, design
offices, production engineering departments, etc.
Second, and relatedly, “while various forms of ‘doing’ are central to technological
accumulation, learning should not be seen simply as a doing-based process that yields
additional knowledge simply as the by-product of activities undertakes with other objectives.
It may need to be undertaken as a costly, explicit activity in its own right: various forms of
technological training and deliberately managed experience accumulation” (Bell and Pavitt,
1993, p.179) Interestingly, the transition from the production capacity phase to the
technological capabilities phase has been managed superbly well by countries like Korea and
Taiwan and it is where, on the contrary, most Latin American countries got stuck.
26
The necessity of nurturing infant industries
Consider again the caricature of a stone-age economy and an ICT economy, and allow them
to interact. Two properties are quite straightforward. First, the patterns of economic signals
will be quite biased in favor of stone-intensive product in one country, and ICT-intensive in
the other (i.e. precisely their current ‘comparative advantages’). Hence if the former wants to
enter the ICT age has to purposefully distort market signals as they come from international
exchanges (on the assumption that there are some: it could well be that the ICT economy is
unwilling to absorb any stone product!). Second, it is quite unlikely that the stone producers
even under the ‘right’ kind of signal, will be able to instantly acquire the knowledge to
produce competitively ICT products.
Certainly, all individuals take a long time to learn new skills. Turning violinists into football
players and vice versa is rather hard, if at all possible. And, even more so, this applies to
organizations and organization-building. Even when the transformations are possible, they
require time, nurturing and care. If a newly born violinist, ex-football player, is made to
compete with professional violinists, he will make a fool of himself. If a catching-up
company is suddenly made to compete with the world leaders it will most likely disappear.
Often, it is already a daunting task to learn how to make – no matter how inefficiently – a
product which might indeed be rather standard in technologically more sophisticated
economies: demanding also competitive efficiency is alike asking the violinist to run the 100
meters in around ten seconds after some quick training rounds. Safeguarding the possibility
of learning, is indeed the basic pillar of the infant industry logic. On the incentive side, to
repeat, market signals left to themselves are often not enough and indeed frequently
discourage the accumulation of technological capabilities in so far as they ought to occur in
activities currently displaying significant comparative disadvantages and thus also
unfavourable current profitabilities. Incidentally note, also, that the existence of financial
markets are meagre instruments, if at all, for translating a future and uncertain potential for
learning into current investment decisions (more in Stiglitz, 1994). Thus, there are also sound
learning-related reasons why the historical evidence shows that, just prior to industrial
catching-up, average industrial import tariffs are relatively low; they rise rapidly in the
catching-up phase, and they fall after a mature industrialization. Indeed, it is during the
catching-up phase that the requirement of distorting (international) market signals is more
acute, precisely because there are young and still relatively fragile learning infants. Before
27
there are no infants to speak of. After, there are adults able to swim into the wild international
ocean by themselves.
Doing that, however, does not involve only ‘signal distortion’. As many of the Latin
American experiences have shown, this is far from enough. Partly it has to do with the fact
that many forms of protection entail the possibility of learning but not, in the language of
Khan and Blankenburg (2009), the ‘compulsion’ to innovate as distinct from the sheer
incentive to just exploit a monopoly rent, no matter how inefficient and lazy is the potential
‘learner’. Partly, it has to do with the conditions of capabilities accumulation and the
characteristics of the actors involved. After all, even under the best intentions and incentives,
our violinist not only will take time to learn but will be able to develop his/her football skills
only in a team. In turn, most often, the team will not be the making of sheer self-organization,
especially when production entails relatively complex products, as it usually does. At the
same time, violin players might not be the best candidate to football playing, irrespectively of
the incentive structure. Out of metaphor, industrialization might have rather little to do with
the sheer award of property rights and with the establishment of firms as legal entities. In
fact, it is quite misleading to think that all over the world there are plenty of sources of
technological knowledge just awaiting to be exploited – the lag being due mainly to
institutional and incentive-related forces. On the contrary, irrespectively of the opportunities
for the entrepreneurial exploitation of technological knowledge which the ‘international
knowledge frontier’ notionally offer, the fundamental gap regards precisely the lack of
capabilities in exploring and exploiting them. This is a crucial bottleneck for development:
such gaps apply to rather simple capabilities which even casual visitors of developing
countries notice (whenever walking out of IMF paid hotels…), regarding - at early stages of
development – even rather basic activities such as accessing internet or processing a credit
card and applies, much more so, to firm-level capabilities such as drilling an oil well (or, at
early stages, even keeping an existing well working). As discussed in several contributions to
Cimoli, Dosi and Stiglitz (2009a), ‘horizontal’ policies of education and training, together
with the activities of technical support to firms by public institutions can go a long way in the
capability-enhancing direction. But even that is not likely to be enough. In fact policies are
often bound to get their hands explicitly dirty with respect to the nature, internal structure,
strategies of a few corporate agents themselves. Fostering the emergence and in a few
occasions explicitly building technologically and organizationally competent firms are indeed
fundamental infant nurturing tasks. In fact, even the most developed countries present only a
28
fraction of technologically dynamic organizations within a much greater population of firms.
(Note that all this applies to both ‘high tech’ and ‘low tech’ sectors as conventionally
defined). In a sense, industrialization has to do with the properties of changing distributions
between ‘progressive’ and ‘backward’ firms.
Indeed, all this might not be enough: the State in the past had often to do more than just
“pushing and pulling” entrepreneurs into certain strategic sectors, and ended up acting as
“entrepreneur of last resort”. We believe that this continues to be the case today.
Indeed industrial policies for development and catching up are likely to involve (i) state
ownership; (ii) selective credit allocation; (iii) favourable tax treatment to selective
industries; (iv) restrictions (or some conditionalilties) on foreign investment; (v) local context
requirements; (vi) special IPR regimes; (vii) government procurement; (viii) promotion of
large domestic firms (Dahlman 2009 discusses them in the case of China and India , but the
lessons are more general).
In a nutshell, this is the full list of the capital sins which the market faithful are supposed to
avoid!
6. Industrial Policies in a Sino-centric world: some conclusions
An ensemble of ‘infant nurturing’ measures, we have suggested, has been a major ingredient
of development policies throughout the history of industrialization, and it continues to be so
today. Historically, the ‘infant learners’ had to be shielded or helped in the domestic and
international markets essentially in their interactions with the more efficient and more
innovative firms from ‘frontier’ countries. This happens to a large extent also today.
However, the unique feature of the current ‘Sino-centric’ world - as Castro (2009) puts it – is
that many catching-up countries are, so to speak, caught between two fires: the developed
world is still ahead of them, but at the same time China quickly reduces its absolute
disadvantages across the board, in both more traditional productions and in activities based
on the newest technological paradigms. And it does so at rates higher than its catching-up in
wages (notwithstanding the fast growth of the latter). The outcome is an absolute cost
advantage in an expanding set of goods including those which were/are central to industrial
production of many low and middle income countries. In that respect the magnitude and the
speed of Chinese industrialization risk exerting a sort of crowing out effect vis-à-vis the
industrializing potential of many other countries. So, for example, Brazil – a country indeed
on the upper tail of the distribution of industrializers in terms of technological capabilities –
29
turns out to be a very ‘high wage’ country as compared to China, but so are also other less
developed Latin America countries, and even African countries are losing cost-based
international (and domestic) competitiveness vis-à-vis China. A reason to give up the ‘infant
nurturing’/capability accumulation philosophy? In our view it is not: on the contrary, it adds
to the reasons urging to practice various combinations of the ‘capital policy sins’ mentioned
above. And it ought to push toward a more explicit use of the domestic or regional markets as
venues of culture of an emerging national industry even when the latter tends to be squeezed
on the international arena between ‘advanced productions’ and Chinese exports.
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Appendix: Shift-and-share decomposition methodology
To measure the contributions of structural change to aggregate productivity growth, it is

crucial to distinguish between the contributions of shifts between sectors and the
contributions of productivity growth within sectors. Notice that we use an aggregated dataset
based on our firm-level dataset for using the decomposition method below.
Recent studies using shift-share technique include Ali Akkemik (2005), Timmer and Szirmai,
(2000) and Kumar and Russell (2002). We adopt van Ark and Timmer (2003) shift-share
model, in order to be comparable with the results of Wang and Szirmai (2008).
The difference in aggregate labour productivity levels at time 0 and T can be written as
n n
PT −P0=∑ ( PTi −P 0i ) S i+ ∑ ( STi −S0i ) P i (1)
i=1 i=1
with P0i and PTi the labour productivity of sector i at year 0 and T ; S0i and STi the employment
share of sector i at year 0 and T ; Sisector’s period average share of total employment, and Pi
sector’s period average labour productivity. The growth of aggregate productivity can be
decomposed into intra-sectoral productivity growth (the first term on the right-hand side of
equation (1), called “intra-effect”) and the effects of changes in the sectoral allocation of
labour (the second term, called “shift-effect”). Let Ci denote the contribution of sector i to the
aggregate labour productivity growth. We have
n n
PT −P0 =∑ Ci =∑ (C intra
i + Cishift ) (2)
i=1 i=1
van Ark and Timmer (2003) reallocate all shift effects (C shift ¿from sectors that experienced
shrinking labour shares to sectors that expanded their share in total labour. Suppose K is the
34
set of sectors which expand their labour shares; J is the set of sectors with declining labour
share. For expanding sectors k and shrinking sectors j,
C k =C intra +C shift T 0 T 0
k k =( Pk −Pk ) Sk + ( S k −S k ) ( P k −PJ ) ∀k ∈K (3)
C j=C intra
j =( P Tj −P0j ) S j ∀ j ∈ J (4)
with average labour productivity overall shrinking sectors and averaging over years
PJ =∑ ¿ ¿ ¿ . (5)
j ∈J
References
Ali Akkemik, K. (2005). Labor productivity and inter-sectoral reallocation of labor in Singapore
(1965-2002). Forum of International Development Studies.
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ening: relative contributions to growth and convergence. The American Economic Review 92 (3),
527–548.
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bonus hypothesis examined. Structural Change and Economic Dynamics 11, 371–392.
van Ark, B. and M. Timmer (2003). Asia’s productivity performance and potential: The contribution
of sectors and structural change.
Wang, L. and A. Szirmai (2008), Productivity growth and structural change in Chinese
manufacturing, 1980-2002, Industrial and Corporate Change, 17(4), 841–874.
35

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LEM

WORKING PAPER SERIES

Industrial Policies, Patterns of Learning and

2020/08 March 2020

Mario Cimoli,† Giovanni Dosi* and Xiaodan Yu‡,*

A major implication of this view is in terms of theory of production. It is rather

In section 4 we focus on the implications on technical change seen as an evolutionary process

2. The fundamental properties of technology

Technological paradigms and trajectories

The notion of technological paradigm is based on a view of technology grounded on the

The concept of technological trajectories is associated to the progressive realization of the

Paradigms, routines, organizations

As thoroughly argued by Chandler himself, this organizational dynamics can be interpreted

3. Technological dominance, micro heterogeneity and non-substitution

Indeed the catching-up in the productivity distributions is a first fundamental mark of

The striking success of China is an excellent case to the point.

Second, the within-country, within-sector micro correlations between labor productivities

13 Food processing of agricultural products 11.25 8.55 13.46

14 Other foodstuff 8.87 5.73 11.22

15 Beverages 10.63 6.20 12.80

16 Tobacco 15.29 11.08 10.65

17 Textile 9.79 10.14 10.54

18 Garments, footwear etc. 7.84 4.84 10.57

19 Leather, fur, feather etc. 7.55 6.52 10.29

20 Processing of timber, manuf. of wood, bamboo etc. 11.87 7.61 14.43

21 Furniture 6.19 4.82 10.40

22 Paper and paper products 10.33 9.48 11.75

23 Printing, reproduction of recording media 8.92 7.54 8.17

24 Articles for culture, education and sports 8.39 7.06 10.03

25 Processing of petroleum, cokeries, nuclear fuel 3.77 -1.61 6.36

26 Raw chemical materials and chemical products 11.40 10.44 11.85

27 Pharmaceuticals 8.94 10.64 7.53

28 Chemical fibers 10.31 12.05 8.85

29 Rubber 8.80 7.01 9.39

30 Plastics 5.83 6.43 6.24

31 Non-metallic mineral products 12.76 9.86 14.71

32 Smelting and processing of ferrous metals 13.86 12.68 14.14

33 Smelting and processing of non-ferrous metals 12.45 13.73 12.64

34 Metal products 5.44 7.84 4.32

35 General purpose machinery 15.40 13.76 15.72

36 Special purpose machinery 16.23 13.09 15.13

37 Transport equipment 12.67 11.64 13.05

39 Electrical machinery and equipment 9.51 8.84 9.32

40 Communication equipments, computers etc. 5.64 8.37 3.30

41 Measuring instruments and machinery 9.62 9.46 9.57

42 Artwork and other 10.01 9.32 12.70

Machinery for prod. use of mech.

Electric motors, generators and

Manuf. of electricity distrib, control

Parts for motor vehicles and their

CIC Sector 1998 2002 2007

13 Food processing of agricultural products 15.62 11.35 10.02

14 Other Foodstuff 19.12 12.20 9.04

15 Beverages 14.89 11.82 9.06

16 Tobacco 17.05 22.95 26.44

17 Textile 8.61 7.01 6.07

18 Garments, footwear etc. 6.51 5.45 5.42

19 Leather, fur, feather etc. 7.80 7.17 6.80

20 Processing of timber, manuf. of wood, bamboo etc. 11.25 6.91 6.51