The road test

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176 1997). Mexico, in the meantime, has shifted further towards the hyper-integrationist pole, following its accession to NAFTA in 1994, which gradually eliminated most limitations on transnational trade and investment.

Nevertheless, the comparison of their patterns of upgrading still reveals some important differences in the structure of advantages of different development models. The difference is least obvious with regard to the value of final product: all of the countries under examination specialize in smaller vehicles in low- to medium product range, although in both East Central Europe and Mexico there are examples of companies assembling a small volume of top-range luxury products. Although Korea’s independist approach to development has led to a successful breakthrough into international markets, its manufacturers have not managed to capture the most lucrative segments, and their specialization has not changed much over the last two decades. By contrast, both Mexico and ECE show a strong catch-up trend in the 1990s, which coincides with their greater opening towards foreign investment. By the 2000s, the average value of their vehicle exports was practically identical to that of most core exporters, except Germany (Figure 6.1).

Figure 6.1Unit values of exports of finished vehicles (in constant 2005 USD)

The differences become more apparent once we turn to the structure of component exports, which reflects the ability of the country to competitively manufacture parts of different

0 2 4 6 8 10 12 14 16

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

DE USA JP ECE KR MX

Note: Data for HS 8703 - Motor vehicles for transport of persons (except buses). Data for Mexico only available from 1995.

Source: own calculations based on COMTRADE database

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177 degrees of complexity, instead of simply importing them from the outside. It also elucidates the finer aspects of the structure each country’s comparative advantages. Figure 6.2 shows tha the mid 1990s, all countries under examination had a clear advantage in the production of low-value added components, which accounted for more than 50% of their exports and constituted the main source of export earnings. However, while Mexico also maintained a positive trade balance in the medium and high value-added segments, in South Korea the large trade surplus from exports of simple parts served to offset a sizeable deficit in more complex parts. In the ECEs, exports of low-cost products were not enough to compensate for the import of high value-added imports, leading to an overall negative balance in component trade (Figure 6.2).

This situation changed dramatically in the course of the following decade. As the ECE’s automotive cluster grew, the total value of exports increased nearly 17 times to 41 billion dollars in 2007, twice the total value of component exports from Mexico and 6 times more than those of Korea. The region also quickly acquired competences in exports of more complex parts, which now nearly rival the output of low value-added components, with the overall trade surplus reaching a quarter of total trade. South Korea also moved away from its original specialization: rising wages reduced the profitability of low value-added exports, but the country stepped up its exports of higher value added ones, and the total balance remained practically unchanged. In the meantime, however, Mexico began to show some signs of the weaknesses of hyper-integrationist development. With the accession to NAFTA, the Mexican government was forced to withdraw trade compensation requirements which originally obliged resident multinationals to balance every dollar of imports by 1.75 dollars of export. The ratio was reduced to 0.8 dollars in 1994 and completely phased out in 2004 (Hufbauer & Schott 2005). As a result, the balance of high value-added components turned negative and the country’s specialization shifted more strongly towards the low value-added segment.

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178 Figure 6.2 Trade balance in components by value-added category, % component trade²²

Figure 6.3 Trade balance in automotive industry, % of total trade in the sector

These differences in the structure of components output are more meaningful in the case of Mexico and East Central Europe than in the case of South Korea, which remains linked to the world markets primarily through exports of finished products. While in both ECEs and Mexico export of automotive parts account for around 50% of total automotive trade and have a

22 Based on HS trade classification. High value-added components comprise engines, transmissions, steering and breaking systems (HS92 840731, 840732, 840733, 840734, 870894, 870600, 870840, 870839, 840820), low value-added ignition harnesses, seats, bodies and their parts, exhaust systems and silencers, wheels, seats, wipers etc. (HS92 401110, 401120, 401310, 700711, 700721, 830120, 851240, 870810, 870821, 870829, 870870, 870891, 870892, 940120, 854430, 830230, 870710, 870790), and medium value-added axles, clutches, accumulators and other components not included in the above two categories (841520, 851220, 851230, 851290, 870831, 870850, 870860, 870880, 870893, 910400, 850710, 841330, 852721, 852729, 700910). See also (Pavlínek et al. 2009).

-20.0 -10.0 0.0 10.0 20.0 30.0 40.0

ECE KR MX ECE KR MX

1996 2007

HVA MVA LVA

Note: three year averages.

Source: Authors' calculations based on COMTRADE

-20.0 -10.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 0.0

ECE KR MX ECE KR MX

1996 2007

Components Vehicles Total

Note: Vehicles refer to products under HS code 8703 (Motor cars & vehicles for transporting persons, excluding busses). For the list of products included in "components", see footnote 2 in this chapter.

Source: Authors' calculations based on COMTRADE

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179 large impact on the overall trade balance, in Korea they make up a mere 16% of industry exports. In spite of extensive trade liberalization in the course of the 1990s, the country has remained almost impervious to foreign imports, with an export surplus of nearly two thirds of total trade (see also Lee 1997). In both Mexico and ECEs vehicle exports also contribute positively to the overall trade balance, but while in Mexico this advantage has been somewhat eroded in recent years, the ECEs have experienced a tremendous growth in export competitiveness (Figure 6.3).

Overall, it would appear that as far as export upgrading and competitiveness are concerned, the hyper-integrationist variety of late development has served the ECEs exceptionally well. They have managed to build up a solid trade advantage in a mere decade, and there are definite signs of upgrading of the end products as well as of the production process, as reflected in the composition of component exports. On both accounts, ECEs perform as well, or better, than some of the most successful examples of other development types.

However, their method is clearly different from that of the paragon of independentist development, South Korea, which concentrates primarily on exports of locally developed finished vehicles. By contrast, ECEs have focused more on conquering the international markets

“from below”, gradually appropriating higher production competences within the automotive value chain. However, the example of Mexico shows that this process is not irreversible.

Although Mexico is still one of the most successful automotive exporters among developing countries, growing integration has eroded rather than enhanced its export advantage, and has pushed Mexico more strongly towards specialisation in low value-added inputs.

All of this suggests that hyper-integrationist development can be an efficient way to achieve external competitiveness and growth, but also that these measures can reflect different constellation of underlying factors. In other words, in a world of strongly integrated transnational production networks, the complexity of output is not necessarily a meaningful sign of overall upgrading of the domestic production factors: the same outcome can be achieved by countries with very different skill levels and technological capabilities. The problem becomes

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180 obvious once we compare our examples of different development varieties on the dimension of functional upgrading. As already noted in Chapter 4, although the structure of output in ECEs is very similar to that of the core European producers, the level of innovation in the sector is very low. ECEs are able to quickly transpose new technologies through the multinationals’

production networks, but produce practically none of their own, with barely one patent per 1000 workers per year. The rate of innovation in Mexico is even worse, with about one patent for every 30 000 workers. South Korea, on the other hand, shows very strong signs of domestic innovation, with almost as many automotive patents as Germany relative to the size of the workforce²³. The difference is easily explained by the structure of incentives for the lead firms in the two models. South Korean automotive industry is dominated by indigenous firms whose own profitability depends on their ability to develop new higher value-added products. In the process of hyper-integrationist development, such firms are pushed to the margins through high-level competition with the more productive foreign firms. Multinationals which dominate production networks in ECEs and Mexico do not face the same urgency to invest in technological developments in host locations, since these can be easily imported from their home countries. In other words, the very same process of substitution that accelerates upgrading in production seems to be responsible for the disappointing performance with regard to technology. This is not to say that functional upgrading in the independentist development model is simple or automatic: late developers, almost by definition, are strongly constrained by limited availability of local resources. In the hyper-integrationist development model, an equally important constraint lies with the overall, externally determined strategy of the lead firms.