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| >> Foreign Aid in the National Interest >> >> Chapter 2 |
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Jump to Chapter 2 Sections:
Stages of economic developmentAs economies develop, they move through three stages of competitive advantage and ways of competing. In the factor-driven stage, basic inputs such as low-cost labor and access to natural resources are the main sources of competitive advantage and international products. During this stage firms produce commodities or relatively simple products designed in more advanced countries. Technology is assimilated through imports, foreign direct investment, and imitation. Companies compete based on price and lack direct access to consumers. They have limited roles in the value chain and are focused on assembly, labor-intensive manufacturing, and resource extraction. A factor-driven economy is highly sensitive to global economic cycles, commodity price changes, and exchange rate fluctuations. In the investment-driven stage, efficiency in producing standard products and services becomes the dominant source of competitive advantage. Products and services become more sophisticated, but most technology and designs still come from abroad. Technology is accessed through licensing, joint ventures, foreign direct investment, and imitation. During this stage countries both assimilate foreign technology and develop capacity to improve it. The national business environment supports heavy investment in efficient infrastructure and modern production methods. Companies mainly serve original equipment manufacturing customers and extend capabilities more widely in the value chain. An investment-driven economy is focused on manufacturing and outsourced service exports. It is susceptible to financial crises and external, sector-specific demand shocks. In the innovation-driven stage, the dominant source of competitive advantage is the ability to produce innovative products and services at the global technology frontier using the most advanced methods. The national business environment is strong in all areas and contains deep clusters of related industries. Well-developed institutions and incentives support innovation. Companies compete using unique strategies that are often global in scope. An innovation-driven economy has a high share of services and is resilient to external shocks. page 4 |
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