Competing

in

Capabilities

The Central Dynamic

• Trade liberalisation re-visited

Relative Wages

1Relative Quality

wB

vu

I

II

III

wA

Digging Deeper:

the locus of capability

Know-how and Capability

worker know-how 1 A C 2 B C 3 A B

Capability A B C

Know-how and Capability

worker know-how 1 A C 2 B C 3 A B

Capability A B C

ProductsProduced X Y Z

The First Puzzle

The value of the firm:Why can workers not ‘carry away’ the firm’s

value (capability)?

The key idea:Intra-firm transfers of know-how are ‘costless’

worker know-how 1 A C 2 B C 3 A B

- the departure of an individual worker leaves total know-how fixed- each recruit can absorb any available piece of know-how costlessly

Intuition:

By replicating know-how within the firm, the firm can dilute the bargaining power of workers …… but an intrinsic effect of this is that spin-offs become viable.

The Main Implication

The Main Implication- Spillovers emerge endogenously

The Main Implication- Spillovers emerge endogenously

- No monopolization of capability

The Main Implication- Spillovers emerge endogenously

- No monopolization of capability

A platform for latecomers

• We noted above that the driver of Phase 2 globalization lay in the transfer of existing capabilities…

• The speed of transfer reflects both factors that are exogenous to the firm, and also some delicate strategic decisions…

The Speed of Transfer

- Delicately dependent on industry characteristics

- Key channels differ by industry

(a) Buyer search channel: Textiles(b) Trade Fairs: Ubiquitous(c) Supply chains: Vertical Transfers

The Evidence on “FDI Spillovers”

Speed of TransmissionFAST

Auto components: Vertical relations with shared technology;

standardization and codification of working

practices.Domestic Appliances: Horizontal JVs – here

incentives of senior partner are critical (cf.

China).Machine Tools: Public sector bodies etc.

SLOW

Component Suppliers to Multi-National Car Makers

00.10.20.30.40.50.6

India

China

Component Suppliers to Steering Gear Firms

0

0.20.4

0.60.8

1

<1% 1-10% 10-20% 20-40% >40%

India

China

A Timescale for Capability Building

• A multinational seat maker on a greenfield site in India drops from initial 2,085 ppm to 65 ppm in year 3.

• A domestic Indian seat maker drops from 20,000 ppm to 200 ppm over 5 years.

The Mahindra Story

… and at the other end of the spectrum

CNC Machine Tools

The Machine Tool Industry

How trajectories develop/divide

Conventional Machines CNC MachinesControlsBall-screwsThe ‘machine’

Pre 1970 Post 1970

The Invidious Trade-Off

controls

ball-screws

15% wages

Bought-in Components

Materials, Energy costs,etc.

15%

15%

55%

A typical cost breakdown

Gross Labour Productivity

3-axis, 15 kW

7.5 kW,165mm

11 kW,350mm

0.25 1 4

size

& c

ompl

exity

Japan

India Taiwan

Quality Comparisons

50 Indian CNC lathes and vertical machining centres were twinned with equivalent foreign machines doing a similar job in the same plant.

Structural shifts in the Indian Industry

• The emergence of ACE designers

• A lesson for policy…of which more tomorrow