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Preface
I am pleased to publish my second book on China after an almost 30-year interval since the first one (Chinese Firms and State in Transition, 1991). That first book was an outgrowth of my doctoral thesis from the University of California, Berkeley, and dealt with China’s economic system reform in the 1980s under Deng Xiaoping. This book deals with a new and significant topic for China: technological innovation, which has emerged as one of the most important factors for the current and future growth of its economy. Such a change in topic also reflects the change in the scope of my own research; I have shifted from being a scholar on economic system transition from planned economies to market economies to an innovation scholar following the Schumpeterian tradition.
Perhaps the change in my research interests reflects the actual transitions in China in the intervening decades. When China made a radical change from being a closed communist economy to becoming an open market economy in late 1978, many economists in the Western world doubted that it would succeed, and certainly not at the scale of achievement it has reached today. That pessimistic view may partly have stemmed from consideration of the possible conflict between an authoritarian political system under the communist regime and the vitality of the market economy, which was partly applicable to the case of the former Soviet Union. However, as a Korean who also lived under a form of authoritarianism known as developmental dictatorship for several decades and witnessed the remarkable East Asian miracle, I believed that China would be as successful as Korea. Thus, I decided to study China’s transition as the topic of my doctorate thesis under the guidance of professors Laura Tyson, Benjamin Ward, and Gregory Grossman, who are all big names in comparative economic systems involving research on the former Soviet Union and China. Berkeley was, at the time, the best place for such research.
Following its miraculous economic growth, spurred on by the Beijing Consensus, China is now facing a slowdown. Global attention has moved to the issue of the middle-income trap, the situation in which economic growth slows down as a country reaches the middle-income stage. Several countries, such as Thailand, Turkey, and Brazil, have been caught into this trap. One of the sources of the trap identified in the literature is the difficulty of building innovation capabilities that will enable upgrades from a low-wage-based industry to a high-end goods-based one. The prevailing view is that authoritarian rule cannot be combined with innovation. This book deals with this interesting issue in the context of China. It provides an assessment of how China has made a transition from
labor-intensive products to technology-intensive products, embracing innovation while remaining under communist rule. It also discusses China’s limitations and future prospects, especially after the onset of a new “cold war” between China and the US, which was signaled by the tariff war initiated by the Trump administration. The discussion then moves on to the question of whether or not China will fall into another trap called the “Thucydides trap,” or the conflict between the existing hegemon and a rising power, and of whether the country will face further economic slowdown due to the US policy of containing the growth of China.
This book plays around three key terms, namely, the Beijing Consensus, the middle-income trap, and the Thucydides trap, and applies a Schumpeterian approach to these concepts. Schumpeter was an economist who put forward technological innovation and big business as the core factors that determine long-term economic growth. These are also the most important factors that have affected and will affect the current and future economic changes in China, respectively. Thus, one of the unique features of this book is that it conducts a Schumpeterian analysis of the Chinese economy at multiple levels, namely, the firm, sector, and macro levels. Another feature is that it also conducts a comparative analysis that examines China from a Korean perspective based on a similar experience of growth under a developmental authoritarian state. Regarding the first aspect, I apply to China the theory and insights from my 2013 book (Schumpeterian Analysis of Economic Catch-up: Knowledge, PathCreation, and the Middle-Income Trap), which earned the 2014 Schumpeter Prize. For the second aspect, I apply to China ideas and analytical tools similar to those from my 2016 book on Korea (Economic Catch-up and Technological Leapfrogging).
These two aspects also mean that this book examines the Chinese economy from an “economic catch-up” perspective (Abramovitz 1986; Gerschenkron 1962). Economic catch-up simply refers to the closing of the gap between the economies of a latecomer, like China, and a forerunner, like the US. However, a key insight from my 2013 book is that a catch-up starts with learning from and imitating a forerunner, but finishing the race successfully requires taking a different path. This act is also known as leapfrogging, which implies a latecomer doing something different from, and often ahead of, a forerunner. Technological leapfrogging may lead to technological catch-up, which means reducing the technological gap, and then finally to economic catch-up in living standards (per capita income) and economic size (GDP). This linkage from technological leapfrogging and catch-up to economic catch-up corresponds exactly with a similar linkage from the Beijing Consensus to escaping (or not) the middle-income and the Thucydides traps. One conclusion from this book is that China’s successful rise as a global industrial power has been due to its strategy of technological leapfrogging, which has enabled the country to move beyond the middle-income trap and possibly the Thucydides trap, although at a slower speed.
One limitation of the book is that some chapters are rewriting, modifications, or updates of already published journal articles that I have co-authored with others. However, this limitation is also a mark of quality in that they have all undergone the referee process for journal publication. For example, the journal article version of Chapter 2 has been cited more than 420 times according to Google Scholar as of June 2021, and it has become a classical analysis of technological catch-up and the rise of Huawei in China. I would like to acknowledge the following articles, for which I am the corresponding author and all the necessary copyrights and permissions have been obtained from the publishers; the degree of revision, rewriting, and updating of the articles for inclusion in this book varies from chapter to chapter.
Chapter 2: Qing Mu and Keun Lee (2005), “Knowledge Diffusion, Market Segmentation and Technological Catch-up,” Research Policy, 34(6): 759–83; Chapter 3: Keun Lee and Young Sam Kang (2010), “Business Groups in China,” in: A. Colpan, T. Hikino, and J, Lincoln (Eds.), Oxford Handbook of Business Groups; Chapter 4: Sungho Rho, Keun Lee, and Seong Hee Kim (2015), “Limited Catch-up in China’s Semiconductor Industry,” Millennial Asia, 6(2), 147–75; Chapter 5: Keun Lee, Mansoo Jee, and Jong-hak Eun (2011), “Assessing China’s Economic Catch-up at the Firm-Level and Beyond,” Industry and Innovation, 18(5), 487–507; Chapter 6: Keun Lee, Xudong Gao, and Xibao Li (2016), “Industrial Catch-up in China,” Cambridge Journal of Regions, Economy and Society, 10(1), 59–76; Chapter 7: Jun-Youn Kim, Tae-Young Park, and Keun Lee (2013), “Catch-up by Indigenous Firms in the Software Industry and the Role of the Government in China,” Eurasian Business Review, 3(1): 100–20; Chapter 8: Si Hyung Joo, Chul Oh, and Keun Lee (2016), “Catch-up Strategy of an Emerging Firm in an Emerging Country,” International Journal of Technology Management, 72(1/3): 19–42. Chapter 9 is a substantially revised and updated version of the following article: Keun Lee and Shi Li (2014), “Possibility of a Middle Income Trap in China: Assessment in Terms of the Literature on Innovation, Big Business and Inequality,” Frontiers of Economics in China, 9(3), 370–97.
I would like to acknowledge the colleagues who provided diverse feedbacks and inputs at various stages of the research related to some parts of this book, starting from the early 2000s. I profusely thank B. Lundvall, Justin Lin, Ed Steinmuller, Dominique Foray, Eduardo Albuquerque, Young-Rok Cheong, Hwy-Chang Moon, Dong-Hoon Hahn, Young-Nam Cho, Christine Wong, Wing T. Woo, Barry Naughton, Jae-Hong Lee, Wanwen Chu, Lu Ding, Jong-hak Eun, Zhuqing Mao, and Mansoo Jee. A special thanks go to Justin Lin, who provided me with many opportunities to interact with Chinese colleagues, such as Yong Wang and Jiajun Xu, at the Institute for New Structural Economics founded by him. Similar thanks go to Jin Chen at Tsinghua University, and Xiaobo Wu and Shi Li at Zhejiang University. This work was also supported by the Laboratory Program for Korean Studies by the Ministry of Education of the
Republic of Korea and the Korean Studies Promotion Service of the Academy of Korean Studies (AKS-2018LAB-1250001). Finally, I profusely thank Adam Swallow, the editor of the Oxford University Press, for his support for this project from the beginning to the final publication, as well as the three anonymous reviewers who provided important feedback on the final version of the manuscript. This book was completed in January 2021, in the middle of the second wave of the coronavirus crisis.
Keun Lee
4. Role of Science and Technology Institutions in Limited Catch-up: Semiconductor Industry
4.1
4.2
4.3
4.4
4.5
4.6
4.7
PART II. ASSESSING THE CATCH- UP IN A COMPARATIVE PERSPECTIVE
5. Assessing China’s Economic Catch-up in a Comparative Perspective: Beijing Consensus, Washington Consensus, East
5.1
5.2
5.3
5.4
5.5
6. Catching-up and Leapfrogging in
6.1
6.2
6.3
6.5
6.6
7. Catch-up in the IT Service Sector and the Role of the Government in
7.1
7.2
7.3
7.4
7.5
8. Huawei’s Leapfrogging to Overtake Ericsson
8.1
8.2
8.3
8.4
8.5
8.6
PART III. PROSPECTS OF CATCH- UP AND LEAPFROGGING
9. Possibility of a Middle-Income Trap in China
9.1 Introduction
9.2 Three Criteria to Assess Possibility of MIT in China
9.3 Innovation and Higher Education: Criterion One
9.4 Big Businesses: Criterion Two
9.5 Inequality: Criterion Three
9.6 Summary and Concluding Remarks
10. Thucydides Trap, Global Value Chain, and Future of China
10.2 Comparison of the Economic Size of the US and China: The Thucydides Trap
10.3 GVC as the Key Linkage between the Two Traps
10.4 Mounting Challenges Facing the Chinese Economy
10.5 Concluding Remarks: Will China Overcome the Triple Traps by Leapfrogging?
List of Figures
1.1
2.1
2.2
3.1
2.4
2.5
2.6
3.5
4.4 US–China IC development in years
4.5 SMIC’s fab capacity, 2013
4.6 Wafer capacity of China’s top five IC manufacturers, 2005–2008
5.1 Washington Consensus versus East Asian Consensus
5.2 Relative importance of UREs in China
5.3 Top 25 countries in academic publication in three technological fields
5.4 Number of global companies by country, 2000–2019
6.1 Chinese mobile phone market
6.2 Changed market share (%) of indigenous firms and MNCs in telecom system industry in China
6.3 Market share (%) of domestic brands in China’s automobile market
6.4 Summary of the catch-up in four sectors in China
7.1 Main developers and publishers in the Chinese online gaming market
7.2 Major pirated games published by Chinese game firms
7.3 Number of online games developed by Chinese firms, 2002–2008
7.4 Share of security software (2008) and ERP (2005) in the Chinese market
7.5
8.1 Patent filings of Huawei and Ericsson registered at EPO, USPTO, and SIPO, 2000–2010
9.1 US patents granted to select economies, 1981–2019
9.2 Number of Fortune Global 500 companies and their total sales-to-GDP ratio in select economies, 1994–2018
9.3 Number of Fortune Global 500 firms and numbers and share of manufacturing firms
PTIC Posts and Telecommunications Industrial Corporation
xviii List of a bbreviations
R&D research and development
RMB Renminbi (Chinese currency)
SAIC State Administration for Industry and Commerce
SASAC State Assets Supervision and Administration Commission (of China)
SMEs small and medium size enterprises
SMIC Semiconductor Manufacturing International Corporation
SOE(s) state-owned enterprises
SPC stored programmed control
SSI sectoral systems of innovation
SUV sport utility vehicle
TSMC Taiwan Semiconductor Manufacturing Company
UMC United Microelectronics Company (of Taiwan)
UREs university-run enterprises
USPTO United States Patent and Trademarks Office
VCR/VCD video cassette recorder/video cassette disk
WSOEs wholly state-owned enterprises
WTO World Trade Organization
ZTE Zhongxing Technology Enterprise
1 Introducing Schumpeter to China
1.1 Beijing Consensus, Middle-Income Trap, and Thucydides Trap
When China opened its door and reformed its policies in December 1978, its per capita income was less than 10 percent of the world average in terms of purchasing power parity-adjusted dollars in 2000 prices. By the early 2010s, its GDP per capita had reached over half of the world average, which made China an upper middle-income country, with its per capita income higher than 20 percent of the US level. By the late 2010s, the per capita income of China reached the 30 percent level of the US, at par with that of Brazil. This phenomenon indicated a rapid catch-up, from merely 2.5 percent of the US level in 1980 (Figure 1.1). China had successfully reduced absolute poverty; the population living under the poverty line decreased from more than 50 percent in 1980 to less than 10 percent in 2001 (Ravallion and Chen 2007; Table 10).
However, such rapid growth was accompanied by worsening income inequality for four decades, or at least until the late 2000s (Li 2018). China’s sudden rise as the world’s number two giant economy (from 10 percent the size of the US economy in 1980 to 70 percent in 2020) alarmed the incumbent superpower, the US, forcing it to change its former policy of engagement to containment, starting with the trade war in 2018. A simple way to understand such a remarkable achievement and the emerging challenge in China is by referring to a series of keywords, from the Beijing Consensus to the middle-income trap (MIT) and then to the Thucydides trap.
The first term, Beijing Consensus, describes the successful rise of China and its possible difference from the existing ways of economic growth, such as the Washington Consensus or East Asian model.1 China has shown some deviation from the conventional prescription of the Washington Consensus (Williamson 1990) and the IMF or World Bank lines. However, Yao (2010) suggested that such a deviation also follows certain common policy lines of the Washington Consensus, such as openness. As a developmental state, China shares features
1 The term “Beijing Consensus” has not been academically defined. Ramo (2004) defined it as a combination of emphases on innovation, sustainability, equality, and self-determination. Yao (2010) called it authoritarian growth. See Lee (2006) or Rodrik (1996) on the comparison of the Washington Consensus with the East Asian model.
Figure 1.1 Per capita income of selected economies as percentage of that of the US: the MIT (middle income trap)
Source: Drawn using the raw data from the IMF database. Purchasing power parity-based GDP per capita is used.
such as mercantilist export orientation with the East Asian miracle model (World Bank 1993), pioneered by Japan and followed by the Asian Tigers South Korea (hereafter Korea) and Taiwan (Lee, Lin, and Chang 2005). Chapter 5 of this book presents the commonalities and differences among the three consensuses (Beijing, Washington, and East Asia).
The Beijing Consensus is now less mentioned in and out of China because the rate of economic growth peaked at 14 percent around 2008 and then continued to decline to less than 7 percent or 5 percent toward the end of 2010s (Figure 1.2). This leads to the second term, MIT, which has risen as an important issue in the Chinese economy and is extensively discussed in the literature.2 World Bank (2012: 12) defines the MIT as a situation in which a country’s per capita GDP stays within the box of 20 percent to 40 percent of the US level for several decades; many countries, including Mexico, Thailand, and Brazil, are considered stuck in the trap (Lee 2019a: 24–30). China has reached the 30 percent level of US per capita income, exactly the middle point of the box range. The question is whether China will be similar to Brazil and fall into the trap or keep growing beyond the box, as Japan and Korea did in the past. This issue is the focus of Chapter 9 of Part III of this book.
2 In 2007, Naughton (2007: 5–6) observed that the challenges that China faces are shifting and increasingly resembling those faced by other middle-income developing economies than those faced by former planned economies.
The Trump administration took actions (e.g., tariffs) to stop China from growing into another superpower that would threaten the American hegemony; consequently, China currently faces another trap, namely, the Thucydides trap. The trap originally refers to a situation in which a war is almost inevitable when one power threatens to displace another (Allison 2018). We and this book, focusing on the impact on China, define the Thucydides trap as a situation in which the US causes China to stop expanding as an economic power. The issue is whether China will fall into this trap, which is dealt with in Chapter 10 of this book. The chapter also analyzes the global value chains (GVCs) of China to show their role in linking the MIT to the Thucydides trap.
In a way, this book is an assessment of China’s economic catch-up for concepts such as the Beijing Consensus, MIT, and Thucydides trap. The word “catch-up” dates back to the famous work of a Russian economic historian, Gerschenkron (1962), where he discussed the process in which latecomers in Europe in the late nineteenth century tried to catch up with the forerunning UK. Such a concept of catch-up was also adopted in Abramovitz’s (1986) article on “catching-up, forging ahead, or falling behind” when he compared the economic performance of European countries during the post-World War II period. Thus, economic catch-up has been simply defined as the narrowing of a latecomer firm’s or country’s gap vis-à-vis a leading country or firm (Fagerberg and Godinho 2006; Lee and Malerba 2018). We focus on data such as per capita income levels and economic size measured by the GDP of China, US, and other countries to discuss economic catch-up. Technological catch-up means closing the gap in technological capabilities measured qualitatively or quantitatively (e.g., patent counts and R&D-to-GDP ratio).
Figure 1.2 Trend of GDP growth rate of China
The abovementioned three keywords will be running throughout the book; nevertheless, this book adopts a Schumpeterian perspective as its theoretical framework. Schumpeter is the economist who emphasized the importance of innovation (creative destruction) and big businesses as leading engines of economic change. These factors are particularly relevant when we discuss the possibility of MIT in China in Chapter 9 and of the Thucydides trap in Chapter 10. The important elements of the Beijing Consensus have also affected the emergence of large and innovative firms, which rarely happened in typical developing countries.
Considerable studies have considered MIT to occur when middle-income countries are trapped between low-wage manufacturers and high-wage innovators because their wage rates are excessively high to compete with low-wage exporters and their level of technological capability is considerably low to enable them to compete with advanced countries (Lin 2012b; Williamson 2012; Yusuf and Nabeshima 2009; World Bank 2010, 2012). That is, the MIT phenomenon is a problem of growth slowdown because of weak innovation.
The importance of large businesses in the process of economic development has long been recognized in the literature. Schumpeter emphasized in his earlier work that entrepreneurship is mostly associated with startups or SMEs. Nevertheless, his later work (Schumpeter 1934: 71–72) discussed the contribution of large businesses in generating innovation by large R&D investment and thereby enhancing the living standard of people.3 Although the use of the criterion of large businesses in assessing MIT is relatively new, Lee et al. (2013) verified the importance of large businesses in economic growth in and beyond the middle-income stage via a rigorous econometric method. Their study determined that many middle-income countries command an insufficient number of large businesses, which is one of the reasons for their slowdown in the middle-income stage. Thus, Chapter 3 of this book discusses the origins of large businesses in China, particularly business groups.
As already mentioned, this book adopts the Schumpeterian economics of catch-up as its theoretical framework. Nelson and Winter (1982) initiated a great revival of evolutionary economics and motivated research applying Schumpeter’s insights to the study of technological and economic catch-up. Such research includes a series of works, including those of Verspagen (1991), Nelson (2008a, 2008b), Fagerberg and Godinho (2005), Lee (2013, 2019a), and Mazzoleni and Nelson (2007). A distinctive feature of these works by Schumpeterians is the emphasis on innovation and technological capabilities as the enabling factors of catch-up. Fagerberg and Godinho (2005) and Mazzoleni and Nelson (2007) noted
3 Schumpeter (1934: originally 1911 in German) discussed the role of entrepreneurs in economic development. This changing emphasis from entrepreneurship to large businesses is called Schumpeter marks I and II. Chandler’s (1990) Scale and Scope also showed how large businesses in the US and Germany have contributed to these countries’ economic growth.
that in the 1960s and 1970s the main factor supporting catch-up was capital accumulation. However, in the 1980s and 1990s, the accumulation of technological capabilities was more relevant than other factors. At present, only the countries that have immensely invested in the formation of skills and R&D infrastructure seem to be capable of catching up; those that did not tend to fall farther behind.4 Lee and Kim (2009) found that secondary education and political institutions are important for low-income countries, whereas policies facilitating technological development and higher education seem to be highly effective in generating growth for upper middle- and high-income countries.
A typical sequence of catch-up by latecomers starts with learning from forerunning countries before moving into the innovation phase (Nelson 2008a, 2008b). Therefore, a successful catch-up should consider the institutions of knowledge learning and creating and the modes for access to the foreign knowledge base. Thus, our primary objective is to provide a comparative analysis of China in terms of the modes and performance of learning and building technological capabilities mostly at the hands of large businesses. Then, we aim to assess the performance and prospects of Chinese domestic firms in acquiring “indigenous innovation capabilities” to transcend the middle-income stage and overcome the Thucydides trap. Our analysis starts at the firm or sector level and continues to the national and policy dimensions.
Several unique elements of the learning and knowledge access strategies of China can be found in the Chinese catch-up model (i.e., the “Beijing Consensus”), which is different from the experience of Korea or Taiwan (Lee, Jee, and Eun 2011). These unique features include the following: (1) parallel (indirect) learning from foreign direct investment (FDI) firms to promote domestic companies in the framework of “trading markets for technologies,” which is considered “forced technology transfer” in the US terminology in their negotiation with China; (2) forward engineering (the role of university spin-off firms) in contrast to reverse engineering (copycat making) adopted in Korea and Taiwan; and (3) the acquisition of foreign advanced technologies and brands through international mergers and acquisitions (M&As) and going global (zouchuqu) at an earlier stage of the economic development.
Chapter 5 of Part II of this book compares the Beijing Consensus with the East Asian model and Washington Consensus. Chapters 6, 7, and 8 discuss successful cases of firms and sectors in China, which represent some or all of the three elements of the Beijing Consensus defined above. In this regard, an outstanding exemplar firm leading China’s catch-up is Huawei. We accordingly start by
4 Such emphasis on capabilities is in line with the so-called capability triad in Best (2018), which is comprised of three factors, the business model, production capabilities, and skill formation, and their interconnections.
explaining the origins of Huawei in Chapter 2, and the process of how it caught up with the Swedish giant Ericsson is elucidated in Chapter 8.
The analyses in these chapters utilize a common framework called a Schumpeterian model of technological leapfrogging and catch-up, as elaborated in the next section.
1.2 Schumpeterian Model of Technological Leapfrogging and Catch-up
1.2.1 Schumpeterian Theory of Technological Leapfrogging and Catch-up
Although Schumpeter emphasizes innovation as a key determinant of long-run economic change, technological innovation remains exogenous or unpredictable. In neoclassical economics, innovation is still a black box or residual. Then, it is modern Schumpeterians, called neo-Schumpeterians, with their collected work in Dosi et al. (1988), who explained that innovation is unnecessarily unpredictable because innovation also happens in a relatively ordered pattern (“order in change”). A step toward this direction of endogenizing innovation is the emergence of the concept of “innovation systems” (Freeman 1987; Nelson and Winter 1982) as a key concept of neo-Schumpeterian economics.
Innovation systems can be discussed at various levels, such as national, sectoral, subnational, regional, firm, and inventor. At the national level, the concept of national innovation systems (NIS) has been proposed by Lundvall (1992) and Nelson (1993) and is defined as the various elements and relationships that interact in the production, diffusion, and adoption of new and economically useful knowledge. At the sectoral level, the concept of sectoral systems of innovations (SSI) is proposed by Malerba (2002). A Schumpeterian thesis has presented that this innovation system determines the performance of nations and firms, as verified in many empirical studies.5 A malfunction of these systems is called “system failure,” comparable with market failure in neoclassical economics. A comprehensive application of the SSI concept in many sectors was presented in a collected volume of Malerba (2004a), which dealt with sectors in advanced or European economies. A follow-up study on the sectors in the latecomer economies was undertaken by Malerba and Mani (2009) and Malerba and Nelson (2012). The application of Schumpeterian theory to the context of catch-up by latecomers has led to a recognition that latecomers’ catch-up can also be well explained because it also follows certain regularities and patterns (Lee 2013).
5 Lee and Lee (2019) developed a composite NIS index and proved the linkage of this index to economic growth in a country-panel analysis.
Economic catch-up is defined in the literature as the narrowing of a latecomer firm’s or country’s gap vis-à-vis a leading country or firm (Fagerberg and Godinho 2005). Nevertheless, Lee and Malerba (2018) proposed that catch-up by latecomers does not mean only the act of cloning because what is achieved by a successful catch-up invariably diverges from practices in the countries serving as benchmark models. This divergence reflects the fact that exact copying is almost impossible and that a successful catch-up involves changes and modifications to existing products and technologies.
This issue of cloning versus divergence can also be considered in terms of imitation versus innovation (Kim 1997) and is one of the most fundamental questions facing latecomers in their effort to catch up. This issue in catch-up can also be observed from the evolution of the literature. Traditional literature, such as Lall (2000); Westphal, Kim, and Dahlman (1985); and Hobday (1995), has observed that latecomers tried to catch-up with advanced countries by assimilating and adapting the incumbents’ more-or-less obsolete technology. On the contrary, a new and contrasting view, such as by Lee and Lim (2001) and Lee (2013), is that latecomers do not simply follow the advanced countries’ path of technological development; rather, they sometimes do something new, skip certain stages, or create a new path that is different from those of the forerunners. That is, several choices are available for a possible entry or catch-up strategy by latecomers, such as path following, stage skipping, and path creating, in which path means the trajectory of technologies and stage means the stages in the trajectories.
Following Lee and Ki (2017), Figure 1.3 shows the different trends of the productivities (the vertical axis) of technologies of different generations (with the horizontal axis representing time), which explains the three strategies mentioned above. We suppose that the current time is period 91 in the figure and that leading incumbent firms have adopted the currently most up-to-date, secondgeneration technology and are thus benefitting from the highest productivity. Therefore, three choices or strategies are available for a latecomer firm that intends to make a late entry.
The first choice is to adopt the first-generation or oldest technology with the lowest price, that is, the path-following strategy. This strategy indicates that latecomers move along the old technical trajectories of incumbents. An advantage of this strategy is that established firms are unaffected by the transfer or leakages of proprietary technologies because latecomers target and aim to purchase the oldest technologies. Such technologies are readily available at low prices, particularly during business downturns. However, given their lowest level of productivity, late-entrant firms cannot compete with incumbents with a higher productivity in the same market. Thus, these firms must try to enter a different segment (low-end segments) typically during the mature stage of a product life cycle while utilizing other advantages, such as low costs in labor. For instance, the late entry and
