How Do New Advanced Economies Maintain their Advanced Country Status?

Abstract

The main challenge for New Advanced Economies, the countries that have reached advanced economy status in the past four decades, is resilience, or maintaining their hard-earned position as the competitive environment changes. This paper examines resilience by gauging the capacity of local firms to generate innovation in the face of emerging industry paradigms. Using evidence from Spain’s and Korea’s automotive industries from the 1960s, this paper argues that firms’ innovation capacity is determined by the path-dependent organizational structure of the value chains in which they operate. The paper defines two types of value chains: regionally integrated (RI) and self-sufficient (SS). We argue that although in theory SS provide abundant opportunities for innovation, in practice, the inward-looking nature of SSs may prevent lead firms and captive suppliers from acting on them, threatening the survival of the whole value chain. Contrary to expectations, we also find that RIs provide significant opportunities for high value-added innovation to turnkey suppliers with established reputation. These findings caution against the common assumption that new advanced economies need to exercise control of the value chains in which they operate to ensure long-term competitiveness and that regional integration is a second-best option.