Sustaining Competitiveness and Technonationalism: the Global Financial Crisis and Beyond

The speed of the Asian economic recovery has stirred some debate over “decoupling.” It is interesting to point out that many Asian economies have propelled its economic growth through technological development. Many Western MNCs have outsourced their manufacturing in the Asian region. With China rising, many companies including Korean chaebols have set up new plants in China to use their cheap resources and exploit the market opportunities there. Whether the ailing U.S. economy would rebound and growth in Asian economies is becoming decoupled with that of the West would depend on many factors. Among them, sustaining competitiveness through innovation and production is the greatest factor in the mix for a solid recovery.

In the midst of a severe recession, retaining or restoring competitiveness through technological innovation centers on R&D and manufacturing capabilities. In terms of R&D, economic/industry downturns or financial crisis can be a golden opportunity to make a leap in R&D capacity and advance in emerging sectors. Korean high tech firms have done so in several industries including LCD panels and TVs and mobile phones, as explained in prior posts. They were able to obtain the necessary technology during the economic downturns and foresaw the potential of the emerging technology and invested in it accordingly.

Korea has made enormous strides in the high-tech sectors starting from the low-cost OEM vendor for Western MNCs to top-tier high-tech powerhouse. It acquired the production process technology, and then used its manufacturing foundation for design and R&D. In doing so, it has employed the various modes of technology transfer from abroad: reverse brain drain, reverse engineering, buying the Western high-tech companies, strategic alliance with foreign firms, and so on. China has followed suit, rapidly accumulating technology capacity. For instance, the Chinese bought out financially-distressed Korean high tech firms such as Hynix Semiconductors’ TFT-LCD unit. As the Korean have done so, the Chinese would use its manufacturing capacity as a stepping stone to move up the economic food chain.

One of the underlying issues in high tech sectors has been whether and how much to outsource their operations worldwide. Global electronic firms including Korean firms have expanded their manufacturing and R&D offshoring around the globe. This is not limited to high-tech sectors. For example, Hyundai has built their plants in the U.S., Europe, and Asia.

Outsourcing decisions have been predicated on a confluence of many factors. For one, there are strategic considerations to save the cost in terms of raw materials and labor, to have easy access to the necessary technology, and to meet the needs of the local customers better. Of course, this strategic move is coupled with favorable local business conditions including taxes, labor union relations, and other regulations.

On the macro side, currency rates have been an important factor for outsourcing/offshoring decisions so as not to be affected by currency depreciation. This is one of the crucial factors Korean firms have considered. Further, corporations won’t set up their operations in an economy where the middle class with purchasing power is disappearing due to rising unemployment and dwindling income. In essence, outsourcing decisions have been closely intertwined with the financial reality.

We live in a borderless world where not only capitals and products but also technologies flow freely. Who will benefit more from this free flow of capital, knowhow and talent? Therein lies a contention between national interests and corporate interests, or a conflict between technonationalist goal and its firms’ overseas expansions. Reflecting these opposing forces in government policies or corporate strategies has been neither straightforward nor easy. Governments may need to deal with this issue with long time horizons. In order to retain the top-notch engineers, R&D centers and manufacturing operations within a country, appropriate government interventions are needed to grow the overall health of the economy and the necessary social/industrial/technology infrastructure such as a solid higher education system and balanced industrial structure (In Asian countries, the dominance of big businesses has served as advantages as well as disadvantages of their economies, which is another story). It may be also important to recognize the limited roles of the government by restricting its roles in building a stable platform and conditions in which firms can grow and prosper through fair competition.

Global high tech firms are busy planning forward-looking R&D projects and investments. For instance, as I’ve recently mentioned, Korean high tech firms have announced to set up manufacturing facilities for LCD panels and semiconductors in China. In LCD TVs, Samsung has done better in Q2 than the Japanese makers including Sony that has been the dominant player in the U.S. TV market for a long time, which is remarkable given their humble beginning as an imitator a few decades back, yet the Korean and the Japanese firms are now in race for LED TVs.

While the U.S. are much concerned about losing their technological excellence as R&D and manufacturing capabilities have migrated to Asia, the challenges are equally daunting on the Asian side. Who will come out ahead would require a systemic approach at both national and corporate levels.