Goldstein (2002) Aircraft

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Unformatted text preview: CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 521 Cambridge Journal of Economics 2002, 26, 521–538 COMMENTARY This section is designed for the discussion and debate of current economic problems. Contributions which raise new issues or comment on issues already raised are welcome. The political economy of high-tech industries in developing countries: aerospace in Brazil, Indonesia and South Africa Andrea Goldstein* This paper explores the dynamics of high-tech industrialisation in three emerging countries with sub-regional power ambitions in the peculiar case of aerospace. The focus of the analysis is on the interaction between economic and political factors, at both the domestic and the international levels. The three (initially) state-owned firms show diverging fortunes that reflect differences in the ability to align the ownership structure to the financial requirements of technological upgrading, to adopt modern management practices, to participate actively in the internationalisation of global supply chains, and to garner the support of domestic interest groups. Key words: Aerospace, Brazil, Indonesia, South Africa JEL classifications: H11, L62, O14 1. Introduction While the body of scholarship devoted in recent years to the macroeconomic aspects of structural reform is very sizeable, the literature on its results at the micro—let alone firm— level remains much thinner. In this paper I use historical case studies to analyse the interplay between economic and political factors, at both the domestic and the international level, in shaping the recent evolution of aerospace firms in three developing countries.1 This approach appears particularly appropriate for high-technology industries Manuscript received 20 October 2000; final version received 28 October 2001. Address for correspondence: Andrea Goldstein, OECD Development Centre, 94 rue Chardon Lagache, 75016 Paris, France; email: [email protected] * OECD Development Centre, Paris. This is an abridged and revised version of CAS Research Papers Series¸ no. 32, National University of Singapore. I wish to thank Bernard Bobe, Thomaz Costa, Gilles Le Blanc, Andrew MacIntyre, Steve McGuire, Etel Solingen, three anonymous referees, and seminar participants at Université Marne-la-Vallée for comments on previous versions of this paper. The views expressed herein are those of the author and not necessarily those of the OECD, the OECD Development Centre, or their Members. 1 Compared with aggregate analysis (e.g. Tybout, 2000) the approach followed here suffers from some limitations, including the fact that it is not a process of verification (or falsification) for arriving at universal conclusions and that, at least in this case, it relies on secondary sources. © Cambridge Political Economy Society 2002 CJE 26/4 pp. 521-538 Final 522 20/5/02 4:30 pm Page 522 A. Goldstein where state intervention is widespread as uncertainties abound and political considerations of various types play an important role. In the 1970s and 1980s, a number of newly industrialised countries (including Argentina, Brazil, India, Indonesia, Israel, Korea, South Africa and Turkey) decided to develop an aerospace industry and other components of the military–industrial complex (MIC).1 Investing considerable sums of money in the MIC corresponded to different objectives, detailed below, and the relative weight given to each of them has varied somewhat across individual cases. If there is a commonality, however, it is that the decision was taken by authoritarian regimes, usually military ones. Israel was probably the most relevant exception and still a sui generis one. Beginning in the late 1980s and gaining momentum over the 1990s, a process of political opening with economic restructuring and liberalisation has changed the context in which the MIC operates. The international environment also changed following the fall of the Berlin Wall, the emergence of new forms of low-intensity conflict, and the tightening of the multilateral control regime for arms trade. Various factors have therefore pushed for downsizing the MIC: the imperative of improving a country’s competitiveness in the world arena; the discredit of statist economic policy structures; the tighter rein of the populace and of international financial institutions on the way public money is spent; the trend decline of global arms markets; and the unclear rationale of spending large sums to produce and deploy armaments that are of scarce use in fighting the emergencies of the new international order. In OECD countries where the largest defence contractors were state owned, one important consequence has been partial or complete privatisation. The aerospace industry is also subject to a process of concentration, with a small number of giant firms emerging (Boeing, Lockheed Martin, EADS, BAe Marconi) to produce for military and civilian customers. Finally, the principles of lean manufacturing that have changed the shape of other industries producing less complex manufacturing systems are being increasingly applied to aerospace. To improve our understanding of the process of industrial restructuring in high-tech industries, in this paper the unit of analysis is the largest aerospace firm in Brazil, Indonesia and South Africa. Indonesia is much poorer than the other two countries,2 but otherwise they provide an excellent set for a most-similar-systems design: history of state involvement in the economy, proneness to authoritarian role, aspiration to become subregional powers, and a brisk demand for aeroplanes resulting from geography. The next section presents a framework for analysing strategic industries in the developing world. The three following parts document the fortunes of the aerospace industries in Brazil, Indonesia and South Africa. To understand the dynamics of these firms—in terms of ownership, management practices, technological effort, internationalisation, conversion and diversification—it is necessary to explore how the process of political and economic reforms has affected both the general goals of each country in the aerospace business and the resulting relationship between firms and public authorities. 2. The political economy of high-tech industries in developing countries While it is not easy to separate them, there are two basic arguments for investing in the defence sector broadly defined (Brauer, 1998). On the one hand there are non-economic, 1 The term military–industrial complex indicates that the defence industry plays a proactive role in the policy-making process, reflecting its multiple interactive links with the rest of society and the vested interests that originate as a consequence (Dunne, 1995). Aerospace differs from other components of the MIC, such as the production of armoured vehicles, in that the scope for diversification into civilian uses is greater. 2 Indonesia also obtained its independence later, and its state has played a relatively less intrusive role in the economy, but these are differences of degree rather than kind. CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 523 The political economy of high-tech industries in developing countries 523 strategic motivations, such as the need to overcome generalised or specific arms supply embargoes and the desire to pre-emptively accumulate weapons production capabilities in case a conflict arises. On the other hand, there are various economic motives. Nurturing high value-added activities in the arms industry may: build up general manufacturing capabilities, through backward linkages, spin-offs and technology transfers from foreign partners; mitigate the brain drain; and support export diversification and enhance foreign exchange savings. The empirical literature, however, disputes most of these arguments. First, developing indigenous arms production crucially hinges on the availability of civilian capacities. Second, for a variety of reasons the import intensity of the arms industry is usually understated, while export earnings are over-reported, so that the net balance of payment effect is at best unclear, and possibly consistently negative. Third, the scope for technological spillovers on the rest of the economy is limited by both the specialised nature of many components used by the MIC and by the obstacles posed to the free circulation of skilled manpower between firms.1 Fourth, the MIC has a strong inbuilt dynamic to increase its size almost exponentially. While similar forces may be at play in other policy areas, the aggravation in the MIC case is that the unit value of developing and producing weapons and related goods is relatively high. As Dunne (1995) puts it, ‘the strength of the vested interests and their competition for resources leads to internal pressures for military spending, with external threats providing the justification’ (p. 410). There are persuasive arguments for thinking that aerospace is subject to market failures and that public intervention is appropriate: long lead times, large-scale economies in production, and the importance of research and development. As most recently. shown by Benkard (2000), the dynamics of aircraft production are characterised by huge returns from learning, thus making infant industry protection theoretically valid. Equally important, the incremental nature of technological innovation in civil aerospace coupled with demanding and costly certification procedures tends to force competing manufacturers to produce remarkably similar products. Success depends on design and manufacturing strength,2 the price and operational costs of the aircraft and after-sale services provided to customers that are relatively reduced in number but are spread around the world. Aerospace is hence a global oligopolistic sector, where, not surprisingly, almost all the countries now offering world-class planes were established in aviation by the end of World War I. Catching-up firms have tended to follow a three-phase learning process, beginning with licence manufacturing, continuing with subcontracting arrangements with established assemblers, and culminating with attempts at developing and manufacturing complete products.3 As observed above, in the 1990s the rationale for supporting the aerospace industry and other components of the MIC has been questioned All over the world, major defence companies have moved away from manufacturing a range of products to become systems integrators that put the products of other contractors together (Dunne, 1999). To some extent the industry has also become more global, with supply chains extending internationally, numerous cross-border equity participations, and the development of joint ventures and licensed production. This means that, to survive, firms in developing countries must integrate into the value chains of global leaders. But the ability to become 1 Dvir and Tishler (2000) reach more positive conclusions concerning the role of defence in industrial development. 2 The actual manufacture of an aircraft consists of three principal stages: fabrication of primary parts, assembly of major component, and final installation of the aircraft’s various operating systems into the structure. 3 See Texier (1999) on the Korean case. CJE 26/4 pp. 521-538 Final 524 20/5/02 4:30 pm Page 524 A. Goldstein systems integrators at lower tiers in the supply chain also means that the local manufacturing base must meet increasingly tight quality and efficiency requirements. In addition, even when privatised, firms still require the support of national governments as major customers. Because of sizeable economies of scale and learning, national orders are important in getting export orders, and governments play a key political and financial role in promoting exports. The concept of ‘multidimensional conspiracies’ in favour of development, introduced by Hirschman (1977) and elaborated by Evans (1995), throws light on the social and political factors that shape the different reaction of firms to changes in the incentive regime. This notion refers to the capacity to induce entrepreneurial energies in a given industry, to create positive spillovers in the rest of the economy, and to mould political interest groups. Crucially, the evolution of firm–state relationships influences corporate capabilities by leveraging the ability of firms to accumulate skills through various forms of subsidy (production, export, R&D, training, etc.). In the case of the aerospace industry, the degree to which these objectives are accomplished depends on the ability that policymakers and other stakeholders show in overcoming financial, technological and ‘learning’ barriers and on the possibility of integrating the sector into the broader national system of innovation, ‘either through the successful absorption and adaptation of foreign technology, or its indigenous generation’ (McGuire, 1999, p. 157). The priority that targeted policies receive in aerospace and other components of the MIC is, in turn, a function of the incentives and threats posed by the international security structure. The process is two-directional: changes in the foreign policy environment may explain, at least partly, variations in the allocation of money to the MIC, but this decision itself is constrained by the international economic arena. This link may take two particular forms: exposure to global market forces may increase the opportunity cost of devoting resources to high-tech sectors such as aerospace, but the possibility of reaping first-mover advantages in oligopolistic markets may justify state intervention and protectionist policies to support an infant industry even in the face of some sort of retaliation. The strategic trade policy empirical literature deals exclusively with OECD countries, as most non-OECD ones have yet to be embroiled in international technology-based frictions.1 But the Embraer case discussed below shows that, as they shift into more sophisticated activities, up and coming countries also begin to feel the ripples. Hence an additional purpose of the case studies is to shed light on the interaction between the individual firms, their respective governments, and the international arena. 3. The case of Brazil Brazil’s armed forces had kept an active and continuous interest in industrialisation since the 19th century and an industrialist-technocratic orientation developed in the 1940s (Sikkink, 1991). Concrete strategies involved a policy of market reserve, state financing and technological support to private firms through the Centro Técnico da Aeronáutica (CTA), established in 1947 in São José dos Campos in the state of São Paulo, and ‘probably the most advanced research [institution] among industrializing countries’ (Dahlman and Frischtak, 1993, p. 437). In the early 1960s, the Brazilian economy lost steam and the ensuing deterioration in political stability eventually led to a coup in 1964 1 Strategic trade policy refers to interventions that change the interaction in imperfectly competitive industries and thereby the equilibrium outcome. In their analysis of the 30–40-seater commuter aircraft market, Baldwin and Flam (1989) analyse the effects of Brazilian export subsidies. CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 525 The political economy of high-tech industries in developing countries 525 and to 21 years of military rule. While in full acceptance of private ownership, the military directed greater efforts towards development planning, and increased resources were allocated to science and technology. The alliance between public sector technicians and the military led to the creation of Embraer (Empresa Brasileira de Aeronautica) in 1969 as a CTA spin-off. For reasons of national security, it was argued, Brazil could not afford to depend on imported aircraft and spare parts, nor could it allow the domestic manufacture of such strategic materials to be controlled by foreign companies (Trebat, 1983). While Embraer was fully owned by the government, it was governed by private law and headed for a long time by a very competent and independent manager, Ozires Silva. Managerial autonomy and entrepreneurial attitude notwithstanding, the relationship between the company and the Ministry of Aeronautics has been a very close one from the very beginning. Not only did the Ministry manipulate the domestic market to Embraer’s advantage, but it also concentrated in its hands most financial, fiscal, marketing, regulatory and international responsibilities. In addition, the firm was able to provide customers with alternativee financing through BNDES, a state development bank, and benefited from very generous tax holidays and FINEX, an export support scheme. Production started in the 1970s in cooperation with foreign partners, negotiating coproduction and licensing arrangements designed to achieve rapid market penetration without excessive technological dependence. Embraer shied away from manufacturing high-value, high-technology components and concentrated instead on designing and producing fuselages and on final assembly. The two best-seller planes—the Tucano trainer and the Bandeirante turboprop—were of national design, although more than half of the latter’s value consisted of imported parts. Embraer also developed a close collaboration with Brazilian private firms, which supplied an increasing share of final components. To some extent, it was a good example of the ‘triple alliance’ between multinational corporations, local private entrepreneurs, and state-owned enterprises that underlined Brazil’s rapid accumulation of capital until the mid-1980s. The company’s strong focus on the export market was crucial in offsetting development costs. It permitted longer production runs, stimulated customers to bring new ideas for technical change, and demanded exacting performance standards. The Tucano, for instance, was sold to a number of Middle East countries and produced in Egypt under licence, while the Bandeirante accounted by 1982 for a third of the US market for 10–20-seater commuters (Dagnino, 1993, p. 9). The net foreign exchange impact, however, was minor. While the debt crisis signalled the abrupt end of the period of low finance costs that had supported the rise of the Brazilian aerospace industry, the time of reckoning did not arrive for Embraer until the early 1990s (Solingen, 1998). Launched in 1985, the EMB-120 Brasilia, a 30-seater turboprop derived from the Bandeirante, was supposed to become the firm’s main aircraft. Despite an initial success, the world recession and the Brazilian government’s decision to discontinue FINEX hit Embraer. Furthermore, the attempt to develop a smaller derivate, the CBA-123, in cooperation with Argentina turned out a flop. During the Collor and Franco presidencies (1990–94), political circumstances further hindered the launch of economic adjustment, privatisation and structural adjustment. Export markets for military equipment also closed. In 1994, Embraer made a loss of US$310m on sales of US$253m, its factory full of computer-controlled machines for precision cutting aluminium parts and testing composite materials, much of it lying idle. Some of Embraer’s specialised suppliers went bankrupt. CJE 26/4 pp. 521-538 Final 526 20/5/02 4:30 pm Page 526 A. Goldstein Despite the opposition of the military and a long strike in 1990, the worsening economic situation led the government to include Embraer on the list of state-owned enterprises to be sold. Following two failed attempts, in December 1994 a consortium bought a controlling 45% stake for US$89m. The syndicate included American investors assembled by Wasserstein Perella, an aggressive New York investment boutique, Bozano Simonsen, one of Brazil’s greatest financial conglomerates, and Previ and Sistel, respectively Banco do Brasil’s and Telebras’s pension funds. The government assumed the debt and retained 6.8% of the company’s shares. Clauses inserted into the agreement limited foreign ownership to 40% and forced the new owners to wait six months before sacking any workers. The new owners hired an outside executive to chair the firm (although to this day three of the six vice-presidents are long-time Embraer executives) and set up a nance company to help airlines in leasing, rather than buying, aircraft. An international consultancy firm designed a new organisational chart, structured around single projects to enhance flexibility, interaction and autonomy, and the number of managerial levels was cut. The payroll fell from a peak of 12,700 in 1990 to 3,600 in 1995, and the remaining workers agreed to wage cuts and flexible working in exchange for an identical cut in the salary of management. Productivity rose: the time needed to make a Brasilia was reduced from 14 months to 10 months over the same period. In the mid-1990s, Embraer broke into what was then a niche market for civilian regional jets with the EMB-145, a 50-seater in which it invested US$300m; several European and American component-suppliers to aerospace firms chipped in as ‘risk-sharing partners’. In 1998, the company rolled out the first prototype of the EMB-135, a smaller version of the EMB-145 with 90% commonality, thus lowering development costs and making the smaller plane more attractive to operators already committed to its larger counterpart. The development effort came as regional turboprop operators started upgrading to jets, since the industry liberalisation made major carriers increasingly dependent on the traffic generated outside their hubs. Embraer first became profitable in 1998, and exports, which make up 95% of total sales, were greatly boosted by the 1999 devaluation of the real, despite the concurrent increase in the financial costs of raising new debt as well as servicing outstanding dollar-denominated liabilities. At the 1999 Paris air show, Embraer announced it would build a new family of jets, carrying 70, 98 and 108 passengers, that should nearly double its production volumes. Initial deliveries of the ERJ-170 are planned to begin in 2002, while the larger aircraft will be available in 2004. Development costs for both configurations are huge (about US$750m), although two US firms—General Electric and Honeywell—are supporting the ERJ-170 project as risksharing partners.1 In selecting it as its company of the year, Brazil’s main business magazine described the transformation of Embraer as ‘a saga from agony to glory’.2 By 2000, it had grown into the world’s second-ranking regional jet maker after Bombardier (and the fourth biggest overall), reporting 1999 sales of US$1.8bn and net income of US$238m. Employment increased to over 7,000 people. Although Embraer still imports a substantial portion of its inputs, it has also become Brazil’s biggest exporter, accounting for 3.5% of total Brazilian sales abroad in 1999. Management has been arguing that the company lacks the skills or resources to venture alone into unknown markets such as China. The company also needs a large international partner to increase military aircraft sales, which currently account for 1 2 Prime contractors include Gamesa of Spain, Kawasaki of Japan, and Liebherr of Germany. Decolou! ’, Exame, 30 June 1999. CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 527 The political economy of high-tech industries in developing countries 527 1 7% of total revenue. International defence companies are indeed anxious to clinch a deal that would improve their chances of winning a possibly large order for the modernisation programme of the national air forces, which are expected to demand that Embraer be given a key role in the deal. In November 1999, a French consortium outbid rival proposals by BAe and Lockheed Martin, valuing the company at circa US$1bn. AerospatialeMatra, Dassault Aviation and Thomson-CSF each acquired a 5.57% stake in Embraer, and Snecma bought an additional 3% stake. The French-owned shares will not carry voting rights, although they will receive a 10% higher dividend and will allow the new partners to appoint two directors to the 11-member board. Embraer and the French industrialists are expected jointly to promote the Mirage 2000 and Rafale combat aircraft, as well as the turbofans and the electronic software manufactured by Snecma and Thomson-CSF. The decision was disputed by the air force commanders, who were offended at not being consulted over the government’s decision to back the deal. Brazil’s attorney general ruled that the sale does not constitute a control change and that, insofar as it does not weaken the country’s national interests, the government should not use its golden share to block the deal. In July 2000, Embraer’s American Depository Receipts started trading on the New York Stock Exchange. While better management has certainly been an important element in this reversal of fortunes, on top of its considerable internal know-how Embraer benefited from its location and from various forms of government support. São José dos Campos stands in the very heart of the Paraíba Valley, where Volkswagen, Ford and General Motors have also established some of their largest plants, attracting huge investments in the component and electronics industries that Embraer could tap into. Some such firms (such as Compsis) had indeed been created in the mid-1990s by skilled technicians fired by Embraer and other aerospace companies. R&D activities—such as mechanical analysis, thermal tests, electro-magnetic compatibility tests and vacuum simulations—were also outsourced to the CTA and other institutions. Public sector institutions such as BNDES and FINEP (part of the Ministry for Science and Technology) have actively supported this process. Another important feature has been the extension of export subsidies by BNDES (through Finamex) and Banco do Brasil (through the Proex ‘equalisation interest rate programme’). This mechanism, which provides up to a 3.5% cut in interest rates on loans to purchasers of exported Brazilian goods, is meant to offset the so-called Custo Brasil, i.e., the higher risk of doing business in the country owing to a number of structural factors. In this competitive environment, the rivalry between Embraer and Bombardier has escalated from the firm to the national level. In 1996, Canada requested the establishment of a panel to investigate whether export subsidies granted under the Proex were inconsistent with the WTO Subsidies Agreement. The panel found that Brazil’s measures were inconsistent with Articles 3.1(a) and 27.4 of the Subsidies Agreement. In May 1999, Brazil appealed against certain issues of law and legal interpretations developed by the panel, but the Appellate Body upheld all the findings of the panel. For its part, Brazil presented a complaint in March 1997 in respect of certain subsidies granted by the government of Canada or its provinces intended to support the export of civilian aircraft. The panel found that the Technology Partnerships Canada research fund and the Canada Account for financing exports to developing countries were indeed inconsistent with Articles 3.1(a) and 3.2 of the Subsidies Agreement, but rejected Brazil’s claim that such 1 Two new military planes—the EMB145 SA and the ALX light-attack jet fighter—were unveiled in May 1999. They are expected to play a key role in the US$1.2bn Amazon Surveillance System. CJE 26/4 pp. 521-538 Final 528 20/5/02 4:30 pm Page 528 A. Goldstein assistance constitutes export subsidies. Talks between the two governments for a negotiated settlement broke down in May 2000. The government of Canada asked the WTO for permission to retaliate against Brazil by blocking US$3.3bn in goods and trade privileges over seven years—one of the largest disputes in the history of the WTO. Brazilian authorities responded that the threat of sanctions ‘could make it difficult or even impossible for Brazil to seek alternatives which would prevent an irrational escalation of the dispute, with the capacity to set off counter-retaliations or other measures that would damage the economic and commercial relationship in different areas’.1 In July 2000, a WTO appellate panel ruled that Canada has complied with an earlier ruling to end illegal subsidies to Bombardier, but that Proex still violates international standards. 4. The case of Indonesia The Indonesian aerospace industry is largely the brainchild of an individual. Bacharuddin Jusuf Habibie completed a doctorate in engineering in Germany and then spent a dozen years at Messerschmitt-Boelkow-Blohm (MBB). He returned to Indonesia in 1974 at the request of President Suharto. Industri Pesawat Terbang Nusantara (IPTN) was created in 1976 and Habibie was appointed president, an office he retained even after becoming Research and Technology Minister in 1978.2 Habibie argued that an aerospace industry was a strategic necessity for Indonesia, an archipelago of 13,000 islands. More contentiously, he maintained that technological excellence was crucial to achieve the nation’s independence, accelerate economic catch-up, and be able to defend both cultural and political integrity (Rice, 1999). In a nutshell, that ‘for Indonesia, IPTN is more than about producing aircraft, it is a statement’.3 Despite a shallow technological base, an underdeveloped capital goods sector, and weak domestic capabilities to absorb and improve upon complex imported technologies (Lall, 1998), Habibie decided to steer the incipient Indonesian firm directly into full assembly. To do this, he took advantage of his control over all air industry procurement decisions, his almost unlimited access to government finance, and the favourable conditions he obtained to acquire imported inputs, circumventing the ‘buy Indonesian’ procurement policy (McKendrick, 1992, p. 42). International aircraft manufacturers proved keen to secure a foothold on the promising Indonesian market. MBB was one such partner, licensing IPTN to assemble the NBO-105 helicopter; another was CASA from Spain, the smallest of the independent European aerospace firms. It granted permission to assemble the NC-212 Aviocar, a 19-seater twin turboprop, sent staff to Bandung, and in 1979 established a joint venture to design and build the CN-235 Tetuko, a 44-seater plane. The first unit rolled off the assembly line in 1983, although it experienced severe difficulties in securing FAA certification in the US.4 The first aircraft ever manufactured 1 Brazil had said it was willing to eliminate subsidies on future sales of regional jets and compensate the Canadian economy and Bombardier for past sales by giving Bombardier privileged access to Brazilian government contracts. But Ottawa wanted Brazil to call a halt to new sales during the negotiations, and wanted assurance that Brazil would not appeal again to the WTO. See ‘Brazil threatens trade war retaliation’, Globe and Mail, 11 May 2000. 2 Habibie also launched other high-tech strategic projects, including shipbuilding, rolling stock, a national car, and nuclear reactors. In each case a state-owned enterprise was founded, reporting to the Agency for Strategic Industry (BPIS), chaired by Habibie. 3 ‘Indonesia’s IPTN carves a niche in world aviation history’, The Jakarta Post, 28 June 1997. 4 Despite the fact that, according to McKendrick (1992), ‘outside technical reviews of the CN-235 have been flattering’ (p. 46). CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 529 The political economy of high-tech industries in developing countries 529 in Southeast Asia (and in a Muslim country), the CN-235 undoubtedly brought a lot of prestige to Indonesia, IPTN and Habibie, but it was far from a great marketing success. By 1990, it had a modest 5% share in the 20-to-45-seater niche (Dagnino, 1993, Table 1, p. 34). Practically all of IPTN’s sales, moreover, have been to government-owned domestic airlines, the armed forces, and other public bodies. IPTN also strove to establish itself as an international subcontractor. Boeing has sent nearly 50 technical advisers to Bandung since 1982 and trained IPTN engineers, most notably Habibie’s son, in Seattle.1 Garuda (Indonesia’s flag carrier) has bought two dozen 747s and 737s since 1980 and six 777-200s in 1996. In return, Boeing buys from IPTN trailing edge flaps and interior components. While Habibie admitted in 1995 that IPTN and four other BPIS companies had never recorded a profit,2 financial data on strategic industries have long remained secretive. The analyses of McKendrick (1992) and Pang and Hill (1992) reach similar conclusions. First, IPTN achieved quite impressive progress in mastering advanced technical operations and in widening the pool of qualified Indonesian technicians and engineers.3 Still, claims that IPTN-assembled planes had local content in excess of 80% were inaccurate, as they only refer to the frame. More generally, despite including the development of small- and medium-sized enterprises among its raisons d’être, IPTN had not succeeded in creating an industrial cluster in Bandung—and it may have left untapped what opportunities for subcontracting were available (McKendrick, 1992). The exclusive IPTN dedication of three of the six laboratories established in the early 1980s by the National Centre for Science and Technology in Serpong also reduced their value to the bulk of Indonesian industry (Lall, 1998). Second, managerial constraints have greatly reduced the scope for exploiting such technological advances: delays have discouraged potential buyers and hindered the capture of the efficiency gains of continuous production. Inventory mishandling also provoked various problems with airlines that found themselves with no spare parts for the CN-235. These problems largely resulted from the governance environment in which IPTN operated: state ownership shielded the firm from the pressures of shareholders and creditors, the distinction between investors and managers were blurred by the fact that Habibie virtually played both roles—as BPIS czar and IPTN chairman—while the lack of competition in the domestic market did not force it into paying more attention to the desires of customers. For all such reasons, IPTN embarked on the ambitious CN-235 project far too early in its life cycle, a consideration that a fortiori applies to the even grander N-2130 venture (see below). During the 1990s, policy-makers seemed oblivious of these concerns. Habibie acknowledged that the export drive of IPTN and other strategic industries was not being successful, but put the blame on the lack of export credit support.4 Minister of Finance Mar’ie Muhammad had indeed argued that the government could not fund such a facility. In 1990, IPTN decided to develop the N-250 series of commuter fly-by-wire turboprops. Because there was a shortage of funds, at Suharto’s request a US$185m interest-free loan was taken from reafforestation funds in 1994. By then, Habibie was declaring that the three domestic carriers and a European leasing company had already ordered a total of 1 ‘Habibie and Boeing old friends’, The Seattle Times, 24 May 1998. ‘Strategic firms plan to set up more subsidiaries’, The Jakarta Post, 26 September 1996. 3 IPTN has used state-of-the-art optical milling machines, including 60 touch-in numerical control machines and 63 computerised numerical control machines (‘Toughing it out’, Flight International, 25 July 2000). 4 ‘Industries under BPIS to be restructured’, The Jakarta Post, 5 July 1995. 2 CJE 26/4 pp. 521-538 Final 530 20/5/02 4:30 pm Page 530 A. Goldstein 189 planes and that three planes a week would be produced, making it necessary to set up a plant in the US.1 The roll-over ceremony for the first N-250 64-seater prototype took place in November 1994, the maiden flight on 17 August 1995 (Indonesia’s 50th independence anniversary), and international certification was expected by 1997. With the CN-250 barely off the ground, an even more ambitious project to produce the N-2130 (N for Nusantara, two engines, 130 seats2) jet was launched. The plane would include innovations in composites, avionics and cabin design. To finance such a folly and raise US$2bn by 2002, a new company (DSTP) chaired by Suharto acting in his personal capacity was set up in 1995. Habibie’s son was appointed to head the design team, whose first prototype was expected to roll out in 2003. Pressure was applied to a variety of government-owned corporations to contribute, and Suharto called on all regents throughout Indonesia to collect a month’s wages per family from every member of the population, first instalment of a projected US$10 from every Indonesian. Coming on the heels of the blatant cronyism of the Timor car affair, the request seemed to suggest a serious deterioration in Suharto’s normally astute political judgement. Only a few months earlier, Habibie had persuaded Mar’ie to demote the president of Merpati, Indonesia’s second airline, on the grounds that he had refused to lease 16 CN-235s. At the 1997 Le Bourget Air Show, Habibie’s claims that the N-250 was already close to securing enough orders to break even were widely disbelieved, notwithstanding IPTN’s unorthodox sales techniques.3 The sharp drop in the Indonesian rupiah against the US dollar did not seem to bother BPIS either. Habibie reaffirmed his commitment to existing industrial projects, arguing that panicking would only worsen the overall situation of the economy.4 By late 1997, however, the company announced a restructuring plan to shed a quarter of its 16,000-strong workforce and spin off its profitable engine-maintenance centre. In October, a rescue package was signed with the IMF that imposed the cutting off of IPTN from budgetary and off-budget support.5 But even then IPTN defied the warnings and stated its intention to go ahead with its plans, relying on foreign loans only. With elections approaching, Habibie emerged in February 1998 as the sole candidate for the Vicepresidency. But expectations that IPTN and BPIS, from which Habibie resigned on taking the Vice-presidency, would thrive as their mentor rose to higher responsibilities quickly proved unrealistic. When the IMF suspended payment of the bail-out fund, the government announced that shares in the ten BPIS firms would be transferred into a new holding company and that IPTN would reduce the number of its foreign engineers from 260 to 38. The political and economic crisis came in May, when Suharto resigned and Habibie replaced him for 512 days.6 An analysis of his tenure is well beyond the goals of this paper. Suffice here to say that Habibie had made more that a few enemies on his way to power, especially in the Armed Forces. The preferential treatment given to 1 ‘IPTN to invest in U.S.’, The Jakarta Post, 7 June 1994. ‘Jakarta wags say this stands for the aircraft’s likely payload: 2 pilots, 1 mechanic, 3 cabin crew and 0 passengers’ (‘Flights of folly’, The Economist, 2 March 1996). For the ‘official’ story of DSTP, see Mursjid (1998): ‘I ask that DSTP be judged not [today] by the loftiness of our ambitions nor by the novelty of the financial strategy [ . . . ] but a number of years from now, when the N-2130 is flying commercial routes throughout the Indonesian archipelago, and indeed throughout the world’ (p. 233). 3 Barter deals allowed aircraft to be sold in exchange for sedan taxis, glutinous rice and military trucks. By 1998, orders had supposedly been confirmed for 34 planes, of which 26 were for Indonesian carriers and eight from an obscure Venezuelan airline (‘Boeing’s dangerous liaison’, The Seattle Times, 22 March 1998). 4 ‘BPIS won’t reschedule projects’, The Jakarta Post, 21 August 1997. 5 In his analysis of the Indonesian crisis, Hill (1999) questions the wisdom of the IMF involvement in industrial policy. 6 The Indonesian economy contracted by 13% in 1998 and remained virtually stagnant during 1999. 2 CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 531 The political economy of high-tech industries in developing countries 531 IPTN obliged them to buy domestic aeroplanes whenever available, and Habibie, a committed Germanophile, alienated the more Anglophile (and predominantly Batak Christian) naval commanders by pushing for the purchase of used East German naval vessels in 1997.1 Both policy reasons and conflicting personal ambitions also put him on collision course with orthodox finance officials. When the IMF decided in early 1998 to bar any future government subsidies for aircraft manufacturing, IPTN was left US$90m short in funding a second attempt at certification. Other cabinet members argued that the strategic industries’ projects should be temporarily halted and funding reallocated to set up labour-intensive public works.2 Problems at Garuda also produced negative spillovers: despite cancelling many long-standing contracts said to benefit the Suharto family, the decision to pull back from a deal to acquire six 747-400s strained the partnership between IPTN and Boeing. Finally, defence spending was cut at the urging of the IMF, from 9% of the government budget in the mid-1990s to 3.7% in 1999.3 In November 1999, IPTN was compelled to halt development projects for lack of funds. It received further bad news when, in order to help the ailing local airline industry and introduce more competition, the government revoked the decree requiring the purchase of its planes. IPTN lost US$28m in 1999 and is now mired in a debt of US$570m.4 Reducing the size of the government sector is certainly an imperative, given IMF conditionality and the large size of industrial assets accumulated as a result of the 1998 bail-out of private domestic banks. The administration of President Abdurrahman Wahid, however, lacked a common vision as far as economic policies are concerned and very little progress was made on the privatisation front. While there is no clear vision about what to do with high-tech industries, after pouring US$942m into developing the N-250 and US$66m for the N-2130,5 Indonesia is not hanging up its wings just yet. The new managers are doggedly marketing the CN-235 to countries that cannot afford sleek regional jets and transforming the company into a subcontractor for aircraft parts, engineering design and computer technology. IPTN is thus diversifying into components for Malaysia’s car manufacturer Proton, tools for agribusiness, and other non-aircraft items. The company plans to cut personnel to 7,500 units.6 Meanwhile, in the name of the national interest, the Indonesian Bank Restructuring Agency decided in February 2000 to recommend to the Finance and State Enterprises Ministries that IPTN’s debt be converted to equity. While there have been some vague declarations on the need to stop focusing on expensive white elephants and get on with supporting projects with better social welfare payoffs, Wahid’s stated intention of breaking Indonesia’s reliance on the United States for military equipment and expanding the domestic defence industry may also play to IPTN’s advantage. 1 Of course an equally plausible reason for the military discomfort with the IPTN preference is that highlevel officials would rather source equipment from overseas, thus increasing the opportunity for kick-backs from foreign sellers. Defence Minister Juwono Sudarsono was reported as saying that he is hoping to cut commissions down to a mere 15%, and that this would be a considerable improvement (Susan Sim, Indonesia Bureau chief, The Straits Times, personal communication, 13 May 2000). 2 ‘Siswono urges delay of car, jet plane projects’, The Jakarta Post, 10 February 1998. 3 ‘Defence Contractors Target Asian Military Market’, Aviation Week & Space Technology, 21 February 2000. 4 IPTN ranks 23 among the ‘bad debtors’ placed under the Indonesian Bank Restructuring Agency in 1999. 5 ‘New Flight Plan’, Far Eastern Economic Review, 2 March 2000. 6 ‘IPTN to lay off 2,500 workers’, The Jakarta Post, 15 April 2000. CJE 26/4 pp. 521-538 Final 532 20/5/02 4:30 pm Page 532 A. Goldstein 5. The case of South Africa Armaments development in South Africa was discontinued in the late 1940s, and virtually the whole wartime production capability was dismantled and converted back to civilian usage. In response to the imposition of a voluntary UN embargo in 1963, the Armaments Production Board was established with responsibility for acquisitions and the management of the public sector defence industry. From the outset, the policy of the Board was to utilise the private sector industry whenever possible, although the government took increasing direct responsibilities following the establishment of the Armaments Development and Production Corporation (Amscor) in 1968. The imposition of the UN mandatory arms embargo in 1976 changed the government’s stance, leading to the creation of the Armaments Corporation of South Africa (Armscor) in 1977. The preference for using the private sector when possible remained, and capabilities that already existed in the private sector were not duplicated. Armscor, however, felt it was necessary to establish product design and development capabilities in a number of other areas, such as weapons systems development and integration and munitions production. By combining the role of acquisition agency and industrial manufacturer, Armscor effectively became both player and referee. As Pretoria became increasingly involved in a number of regional conflicts and required more sophisticated weapons in greater quantities, the domestic defence industry expanded considerably. The share of the military budget devoted to domestic procurement expenditure more than doubled to almost 50% in 1981 (Birdi et al., 1999). The drive for self-sufficiency was facilitated by the availability of many inputs, including skilled personnel, on the international market, in circumvention of the UN embargo. At the end of the 1980s, the MIC had expanded into one of the largest sectors in manufacturing industry. South Africa, which bought 70% of its armaments abroad in the mid-1960s, relied on imports for 5% of its needs only (Aicardi de Saint-Paul, 1997). Weapons made in South Africa included the Ratel armoured vehicles, the Olifant tank, the class Minister frigates and the Cheetah fighter. All the weapons systems for the South Africa air force were sourced locally (Matthews, 1988). The spillovers into the rest of the economy, however, were limited and possibly negative. Similarly, the sharp increase in arms exports, especially to fellow ‘pariah states’, could not mask the still high import-intensity of South African arms and the sizeable costs of export subsidies. A local machine tool industry failed to develop, and the initially positive effect of government procurement on industrial growth vanished in the 1980s and 1990s, leading to a profile of capital stock accumulation of little use for civil production (Birdi et al., 1999). The future shape of the MIC, and the aerospace industry in particular, was shaped during the long transition leading to the election of Nelson Mandela as President of South Africa in 1994. First, the need for high levels of military spending and personnel mobilisation subsided. Second, the severe economic crisis that hit the country in the early 1990s increased the opportunity cost of military spending, at the same time as growing domestic and international pressure was put on the South African National Defence Force (SANDF) to redefine its role in the new, multiracial South Africa. The share of defence spending in GDP declined from 4.3% in 1989 to 2.2% in 1996, while personnel and operating costs increased at the expense of procurement and R&D investment. Third, South Africa has undertaken one of the most systematic defence and security reviews in the developing world, subordinating defence policy priorities to the overall goal of the Reconstruction and Development Programme (Cawthra, 1999). CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 533 The political economy of high-tech industries in developing countries 533 Budget cuts combined with the overall recession of the economy and the lack of any explicit defence conversion policy have led to a process of downsizing, restructuring and rising concentration (Batchelor and Dunne, 1998).1 Armscor was split into two different entities. Denel was established as a private company in 1992, with the state as its sole shareholder. The group consists of a controlling company with divisions and of subsidiary companies that are managed as separate self-sufficient business groups. Denel Aviation, in particular, supplies a diverse range of products and services to the aviation industry. It manufactures the Rooivalk attack helicopter, ‘probably the most advanced battle craft of its kind’.2 Armscor, for its part, has remained part of the (now civilian) Department of Defence, being responsible for the procurement of armaments for the SANDF and the South African Police Service. Despite such deep changes, South Africa still has a fully domestic-owned MIC consisting of about 700 companies employing 50,000 people, contributing 1.1% of GDP, and ranking second among the largest exporters of complex manufactured goods. Denel cut the payroll from 28,000 persons in 1992 to 13,800 in 1996 and actively pursued conversion—in particular through its informatics subsidiary—and diversification—in particular through the take-over of maintenance facilities at the country’s three international airports. The arms business, however, still forms its business core, representing 64% of 1996 sales, down from 79% in 1992 (Batchelor and Dunne, 1998, Table 12). Denel has forged a number of international partnerships, supplying auxiliary aircraft gearboxes to Rolls Royce and engine components to Snecma. Denel Aviation formed a strategic alliance in 1997 with Eurocopter, the Franco-German consortium, with the aim of strengthening cooperation on the Rooivalk and the Oryx medium transport helicopter. The venture will focus primarily on development, production and customer support, but joint international marketing is likely to form a significant element of the package, as the two companies have complementary product lines.3 Denel has also engaged in a policy of vertical integration and has acquired various domestic firms (Batchelor et al., 1999). The government initially rejected privatisation, but has then pressed the industry to consolidate, possibly merging Denel Aviation with ATE, other private-sector players, and even parts of South African Airways. It also envisages a major equity partnership with a foreign strategic investor, although the government will retain a majority of capital.4 The dramatic drop in the defence budget forced weapons manufacturers to look elsewhere in order to survive. If the government took a largely ‘hands off’ approach to the process of industrial recomposition, it has instead been more actively involved in securing international arms deals since the lifting of the UN embargo in May 1994. The position of the ANC evolved from condemning decades of skulduggery under the apartheid regime to defending the secrecy surrounding arms exports and the direct involvement of Mandela. Denel has been one of the large applicants to the General Export Incentive Scheme. As a result of this effort, weapons accounted for 36.5% of South Africa’s hightechnology exports, the single largest industry, and aerospace for a further 17.7% (Hodge, 1 Some successes have been achieved in adapting military technology to environmental control and drilling equipment for mining, production of civilian aircraft gearboxes, metal detectors and off-road vehicles, as well as in turning rifle stock production to the making of cricket bats. 2 ‘Survival of the fittest’, Financial Mail, 20 October 1995. 3 ‘South Africa’s aerospace industry goes international’, Interavia, January 1998. 4 ‘Companie-e-e-s! By the centre . . . all join arms!’, Financial Mail, 29 January 1999. Denel has not escaped allegations of cronyism and corruption, which have marked the governance of other South African state owned companies (‘Denel boss paid himself R18m handshake’, Mail & Guardian, 2 March 1998). CJE 26/4 pp. 521-538 Final 534 20/5/02 4:30 pm Page 534 A. Goldstein 1999).1 Weapons already dominated South Africa’s high-technology exports in 1991, with a 58.8% share, while aerospace export showed a 32.2% average growth rate in 1991–95. On a closer look, however, this strategy has paid off only partially and does not seem sustainable. Searching for a balance between lucrative orders for the industry and the South African adherence to the principles of global arms control has proved hard. Successive rows have erupted concerning the cancellation of sales to Turkey because Ankara may have used the weapons against the Kurds, to the former Rwandan government, and to Angola’s Unita, as well as the refusal to sell the Rooivalk to Indonesia for fear that the helicopter may be used in East Timor. Of even greater consequence has been Malaysia’s dalliance in confirming the order for eight Rooivalks. The only firm commitment for the aircraft, which entered service in late 1998, has been that of the national Air Force (SAAF) for 12 helicopters. A further failure for Denel has been the SAAF’s selection of the Pilatus trainer aircraft, a decision that sounded the death knell for the ACE tandem two-seater turboprop. The government has taken a more interventionist policy stance on the occasion of the large, multi-year procurement deals approved in November 1998, emphasising the importance of offset arrangements to give South Africa a greater role in manufacturing, system integration and product development. The total cost of the SANDF acquisition programmes is R 30b (of which R 18.6b for air equipment) and the industrial participation promises—direct investment in South African industry, export sales and local sales—are valued at R 110b (of which R 64.3b for air equipment). The air force design exercise, built around a sophisticated modelling program (Project Optimum) resulted in a configuration that looked ‘very similar (if scaled-down) to what had existed during the apartheid period’ (Cawthra, 1999, p. 11). The inclusion of weapons, such as 32 medium fighters, that may be of little use for the present tasks of the SANDF—support to the police and civil authority, border control and peace-keeping—signals the emergence of a new coalition between the military and the defence firms, pushing for a more assertive public procurement policy. In this respect, it is important to underline that black empowerment financial institutions, which play a crucial role in redrawing the contours of South Africa’s big business (Goldstein, 2000), have shown a growing interest in investing in the MIC. The overall economic and welfare effects of the package are far from obvious, especially insofar as foreign suppliers may raise their prices to include the price of the offsets and the penalty clause (Batchelor and Dunne, 1999). The aerospace industry, however, may be better placed than other components of the MIC to benefit from the Air Force’s acquisitions programmes, thanks to its significant capabilities in electronics (including radar), avionics, systems integration, weapons systems and ammunition. The negotiations between British Aerospace and Denel Aviation, with a view to the former taking a 20% equity participation in the latter, may allow the firm to become part of the global industry as a sub-contractor of one of the major players, especially if the deal forms the basis for a new South African aerospace company with ATE and Aerosud.2 The risk also exists, however, that foreign investors may simply be interested in using their domestic partners to export weapons to politically sensitive countries. 1 Data for weapons exports are drawn from the Armscor annual report and therefore are not strictly comparable with figures for other high-tech industries, which are customs and excise data. 2 ‘Government is understood to be “almost desperate” to offload Devel on to British Aerospace as part of BAe’s offset arrangements’ (‘Will offset deals ever fly?‘, Financial Mail, 30 July 1999). CJE 26/4 pp. 521-538 Final 20/5/02 4:30 pm Page 535 The political economy of high-tech industries in developing countries 535 6. Conclusion The purpose of this paper has been to describe and analyse key features in the development of an indigenous aerospace industry in three similar emerging economies. The emphasis has been on the degree of market competitiveness reached by the leading firm in each country and on the underlying reasons for what appear as quite diverging patterns of corporate fortune. I explored how the three companies have taken advantage of government subsidies, have secured a viable local technological and industrial infrastructure, and have influenced policies in order to reinforce their competitive position. According to international experts, the three companies under study all possess the capabilities to master complex development and production processes, as required for participating as subcontractors in the global supply chain for goods as sophisticated as aeroplanes. Yet the contrast in competitiveness is unambiguous. Embraer emerged from a difficult period as the world fourth-largest airframe manufacturer, whose planes ply the world’s skies.1 While Denel accumulated quite considerable technological capabilities during the apartheid period, it has proven much less successful in adapting to the new market environment and converting to civilian production. Finally, IPTN remains an infant firm fully dependent on government protection and support to keep itself afloat. Two sets of broadly defined factors emerge as the principal explanatory elements for this difference: technological capabilities and path dependency, on the one hand, and institutions and the nature of firm–government relationships, on the other. While these issues cannot be explored adequately by looking at the firms in isolation, dynamic capabilities have still to be seen at least partly as emerging from an accumulation of managerial, technological and manufacturing capabilities that remain firm-specific. Although it bore for a long time the imprint of its military origins, Embraer has been exposed from the very beginning to market forces and to international competition. As such, its early success was due to a combination of the growing volume of aeroplanes delivered, a reduction in production cycles and costs, and significant gains in industrial productivity. Positive cash flows enhanced its ability to establish and maintain multi-year relationships with specialised suppliers. In the early 1990s, Embraer was hit by a succession of major external shocks but could survive its mid-life crisis by building on its existing strengths. The ability to hear market signals, in particular, made it possible for Embraer to enter the regional jet market at a very early stage. On the other hand, South Africa developed a weapons industry geared to adaptation and Third World conditions, precisely the market most open to abuse and, with it, international opprobrium. The gradual move away from a military to a commercial bias focuses on niche markets, in particular avionics. But for this strategy to be successful, Johannesburg must develop into a real regional hub for aeroplane maintenance, a position that is based on very high rates of economic growth that have so far eluded South Africa. Finally, IPTN seems a good example of the way institutions determine in the long run the path a company may take. From the beginning, IPTN management—a term which actually refers to a single individual, Habibie—chose to give pre-eminence to technology development over financial and marketing considerations. In a shielded environment, IPTN persisted in its business plans in an age when civil turboprops are giving way to 1 Of course a more rigorous cost–benefit analysis would be required before stating that government policies towards Embraer have increased national welfare. A parallel point, which also requires a separate quantitative analysis, is whether Brazilian subsidies, insofar as they reduced the risk that the Canadian producer could acquire monopoly power, have increased global consumer welfare. CJE 26/4 pp. 521-538 Final 536 20/5/02 4:30 pm Page 536 A. Goldstein regional jets. To a large extent, the story of IPTN mirrors that of Indonesia (Temple, 2001): achievements have been precarious ones and the risk of failure was never far away. With these considerations in mind, it is easy to see why Brazil has done much better recently. The methodology of privatisation, which led to an ownership coalition grouping private investors with two semi-public pension funds, was crucial in allaying nationalistic fears that, by falling into the embrace of a foreign group, Embraer could lose control over its accumulated know-how. Public authorities then supported the company’s aggressive pursuit of foreign sales through generous export aids. More fundamentally, in response to Bombardier’s WTO plea, Brasilia stepped into the fray, turning the private friction into a government-to-government issue. Finally, the growth of Embraer had depended on the existence of a dense network of suppliers and service firms. In a nutshell, entrepreneurial energies were induced, positive spillovers to the rest of the economy created and a supportive political coalition emerged. The contrast with Indonesia could not be starker. Even disregarding accusations of nepotism and outright corruption in the company’s operations, the political motivation of national prestige that justified its creation made it difficult to mould a pro-IPTN political coalition, including among the military. The sudden enthusiasm shown by the business community for the MN-2130 ‘was driven by wider clientelistic calculations and an expectation of being granted a substantial rent elsewhere’ (MacIntyre, 2000). Habibie was equally inept at nurturing a network of subcontractors, whose rise would have vindicated the social and welfare logic of investing in aerospace. No surprise then that when the rug of state funding was pulled out from under its feet by the 1997 crisis, IPTN found itself struggling just to define its own commercial raison d’être. South Africa emerges as an in-between case. Authorities have not made up their minds yet on what role they see for Denel and other smaller firms in this sector, any more than they have been able to operationalise their industrial policy vision more generally. As regards the creation of the political conditions for making possible the survival of the industry, in this as in other sectors a lot will hinge on the interests of investors to contribute jointly to the fulfilment of the general goals of the government’s black economic empowerment programme. In sum, the case studies presented in this paper contain important insights into the compatibility between technological upgrading and economic development. Firms from industrialising countries can build their competitive strength in world markets, provided they efficiently combine organisational and technological development, forge international alliances and gain support from national authorities. 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