early 1970s (Yamazawa 1984, Chapter 4). The verification of the CPC development of an industry requires well-matched production and trade data for well-defined homogenous product, which is never readily available. Shimano (1979) provides us with matched production and trade data in volume (physical units) over ninety years for major products in Japan. However, in Fig. 2 above, both production and trade figures are taken from value data and deflated by price indices estimated separately for production, import, and export taking into consideration of significant changes in product mix of each of them.

## Mechanism underlying the CPC development

The five phases thus distinguished describe a development cycle of an industry. But what mechanism underlies the shift from one phase to the next? At introductory phase learning effects in both consumption and production are important. As the consumption of the new product is wide spread in the market, domestic entrepreneurs are encouraged to start production, gradually improve quality, and reduce cost through repeated production experience. Import substitution and export are continuous process and common factors promotes the shift throughout two phases. They are the growth of demand (domestic and export) and matching expansion of production accompanied by decreasing unit cost of production, which enables substitution of domestic product for foreign products first at home market, i.e. import substitution and then at foreign markets, i.e. export expansion. Decreasing cost is realized through (a) operation on a larger scale, (b) adoption of better technology, and (c) accumulated experience in both labour and management skills, all of which are made possible through the expansion of production and successive capacity investment.

Underlying behind capacity investment and decreasing cost in the process of the CPC development are entrepreneurship and the accumulation of managerial resources specific to the industry. Managerial resources include not only capital fund for capacity investment but also production and marketing technology specific to this industry and managers, engineers, foremen and other skilled workers embodying these industry specific technology.

Domestic production is started by an entrepreneur with foresight, observing the spread of demand for the new product at home market and realizing the profitability of import substituting production. He may be handicapped by the insufficient availability of managerial resources, but will gradually accumulate them as he repeats production and sale. Both learning effect on production and increased competitiveness of domestic products reflect the accumulation of managerial resources within firms.

The shift from the export to mature phase is caused by stagnant demand growth, which discourages capacity investment and thus fails in further cost reduction. It goes without saying that so long as steady export growth is expected it will supplement stagnant domestic demand and lead further expansion of domestic production and thus postponing the mature stage. However, producers are often not well informed of market abroad and their decision of capacity investment tends to be dominated by prospect for domestic demand. It is akin to the emphasis on home market given by Linder (1961). On the other hand, as import substitution occurs in later-starting countries, this country's export will have to decrease. This process of decreasing export will continue further beyond the point where export stops and import starts again, i.e. the reverse import stage. The last two stages are also continuous and