Competing
in
Capabilities
The Central Dynamic
• Trade liberalisation re-visited
Relative Wages
I
wB
wA
II
III
Relative Quality
1
v
u
Digging Deeper:
the locus of capability
Know-how and Capability
worker
1
2
3
know-how
A
C
B
C
A
B
Capability
A
B
C
Know-how and Capability
worker
1
2
3
know-how
A
C
B
C
A
B
Capability
A
Products
Produced
B
X
C
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
1
2
3
know-how
A
C
B
C
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 Transmission
FAST
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
0.6
0.5
0.4
0.3
0.2
India
China
0
>2
50
0
0
-2
50
0
0
20
0
-1
00
0
-7
00
0
-3
50
0
-1
00
-7
30
0
10
0-
<1
00
p
pm
0.1
0
Component Suppliers to Steering Gear Firms
1
0.8
0.6
India
0.4
China
0.2
0
<1%
1-10%
10-20%
20-40%
>40%
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
Pre 1970
CNC Machines
Post 1970
Controls
Ball-screws
The ‘machine’
The Invidious Trade-Off
controls
55%
15%
ball-screws
wages
15% Bought-in Components
15%
Materials, Energy costs,
etc.
A typical cost breakdown
size & complexity
3-axis, 15
kW
Japan
11 kW,
350mm
Taiwan
India
7.5 kW,
165mm
0.25
1
Gross Labour Productivity
4
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