Contemporary characteristics of the CPC mechanism

Both textile and steel industries have typically followed CPC development in countries with abundant labor and a sizable domestic market. Even when foreign MNCs introduced the early stage of development, local firms followed at later stages and both aimed at import substitution (IS) from the beginning. By contrast, ready-made clothing production and electric industry, although labor-intensive and introduced earlier, started export expansion (EE) from the beginning without experiencing IS. This particular pattern, the product cycle (PC) development of Vernon (1964), is made possible by MNCs, which bring in capital, technology, and packaged parts and materials and use local labor for sewing and assembling, and export abroad through their marketing channels. Their production technology is standardized so neither skilled labor nor continuous learning and adopting of technology is required, and export is possible from the beginning. Industry development of the PC type provides developing countries with labor employment and foreign exchange, but both learning effects on local firms and laborers and linkage effects on other industries are inevitably limited.

On the contrary, the primary force underlying the CPC development in Japan consisted of improved production efficiency, that is, better utilization of labor, a larger scale of operation, advanced technology and equipment, and a general improvement in production and management techniques. Both cost reduction and quality improvement occurred, enabling the substitution of domestic products for foreign ones, first at home (IS) and later abroad (EE). Figure 6(a) illustrates the declining import/consumption ratio (IS) and the increasing export/production ratio (EE) in the CPC development and Fig. 6(b) shows the reduction of relative cost underlying the IS and EE illustrated in Fig. 6(a). The path A→B→C shows the continuous efficiency improvement and decreasing domestic cost relative to foreign cost that are required for successful IS and EE in the marketplace. Quality improvement may be included as a factor contributing to non-price competitiveness of domestic products. Yamazawa (1984, chap.4 and 5) verified that both productivity increase and relative price decline accompanied successful IS and EE of cotton textiles and steel products in the pre-war Japan.

In contrast, in contemporary developing countries industry development is better related at first with protection than with efficiency improvement. Once imports have created domestic demand, domestic production is encouraged to meet the demand by restricting imports, and IS is to be achieved even without sufficient productivity improvement and cost reduction (path A→D, Fig. 6(b)). That is, IS and EE are possible with limited improvement in efficiency if assisted by high tariffs, import bans, and export subsidies.

These government interventions prevail in many contemporary developing countries, and it has been widely observed that these countries impose high tariffs even after IS has apparently been achieved and EE has begun. The path A→D→E illustrates this mechanism. However, it is too costly in the long run to continue EE without efficiency improvement. It may be an exaggeration to say that no efficiency improvement is made in this process. However, it is plausible to contend that IS is achieved under tariff protection and EE starts with export subsidies, but that efficiency improvement and cost reduction are only brought about by export competition at foreign markets. The path A→D→C illustrates the kinked path of efficiency improvement; the domestic product becomes competitive at point C so that true IS is achieved (that is, there is no import rush in the absence of import restriction) and