labor market, and so on so as to mobilize resources for setting up and supporting the continuous operation of non-viable firms (Lin, 2007; Lin and Zhang, 2007a; Lin, et al. 2003). This kind of development mode might be good for mobilizing scarce resources and concentrating on a few clear, well-defined priority sector (Ericson, 1991); but an economy of this type becomes very inefficient as the result of misallocation of resources, rampant rent seeking, macro instability, and so forth (Lin, 2003, 2007). By contrast, an LDC governments, e.g. the newly industrialized economies in Asia and recently China,<sup>3</sup> may pursue a comparative-advantage-following (CAF) strategy. In CAF, the government attempts to induce a firm’s entry in a industry according to the economy’s existing comparative advantage, and to facilitate the firm’s adoption of appropriate technology by borrowing at low cost from the more advanced countries. With this strategy, the economy may enjoy rapid growth that could be greater than that in the DCs owing to the advantage of the latter-comers and the faster upgrades in factor endowments in the LDC (Lin, 2003; Lin and Zhang, 2006; and Zhang, 2006). Thus, the convergence of LDCs with DCs could be realized.

At the Marshall Lectures at Cambridge University on October 31-November 1, 2007, Lin used per capita income as a proxy for the relative abundance of capital and labor in an economy and argued: When Japan initiated its automobile-production in the mid-1960s, its per capita income was more than 40 percent of that in the United States. The automobile industry was not the most advanced, capital-intensive industry at that time nor was Japan a capital-scarce economy. Thus, Japan has achieved great success in automotive industry since the mid-1960s. When South Korea instituted an industrial policy for automotive production in the mid-1970s, its per capita income was about only 20 percent of that of the United States and about 30 percent of that of Japan. This could explain why South Korea has achieved a limited degree of success in automotive industry after the mid-1970s. The automotive industries in China and India were started in the 1950s when their per capita income was less than 10 percent of that of the United States. The automobile firms in both countries were not viable; therefore their survival required continuous government protection 30 years after their establishment. (cited in Lin, 2007)

**Table 1. Level of Per Capita Income (1990 Geary-Khamis dollars)**

||United States|Japan|South Korea|India|China|
|---|---|---|---|---|---|
|1955|10,970|2,695|1,197|665|818|
|1965|14,017|5,771|1.578|785|945|
|1975|16,060|10,973|3,475|900|1,250|

**Source:** Maddison Angus, Monitoring the World Economy, 1820-1992. Washington, DC: Organization for Economic Cooperation and Development, 1995, pp. 196-205.

The main purpose of the present paper is to develop an endogenous growth model that combines structural change with repeated product improvements to discuss the issues of optimal industrial structure, the (most) appropriate technology, and economic growth in an LDC in a

> 3 Hsieh and Klenow (2007) argues that both China and India would get big TFP (Total Factor Productivity) gains from rationalizing allocation of capital and labor in both countries (TFP would double), while China appears to have benefited from recent reform efforts, but India shows little gain.

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