State, firms and the process of industrial upgrading: Latin America's variety of capitalism and the Costa Rican experience

Abstract

This article explores the usefulness of the varieties of capitalism approach to explain Latin America's failure to secure industrial upgrading. Based on the analysis of Costa Rica's partial success in developing high-tech sectors, the article makes two arguments. First, the hierarchical market economy model discussed by Soskice and Schneider in this special issue contributes to our understanding of some of Latin America's problems. In particular, the model's accent on negative complementarities between large business groups, transnational corporations and the labour market explains the persistent lack of innovation and the maintenance of structural heterogeneity. Second, however, the recent expansion of new production activities in Costa Rica signals the limitations of the model and the need to incorporate the state as a central variable. It was bureaucratic leadership and not private-sector demands that triggered the expansion of social spending and the attraction of more dynamic foreign investors that were behind the emergence of new sectors. In the conclusion, the article extends this argument to the rest of Latin America and calls for an approach that combines the incentive structure of firms and the behaviour of the state.