Industrialization by Fitting in: Acquiring Technology through Collaboration and Subcontracting

Abstract

Since the 1950s, Pakistan has been trying to industrialize by investing in industries that have low value-added, notably cotton textiles. Here, low value-added means that the export value of the cotton textiles less the value of the raw cotton used to make them was low relative to the cost of the investment needed to make the textiles, i.e., contrary to the usual assumption, cotton textile manufacture was capital-intensive. The cause was the protection of the importing countries. But goods with high value-added in this sense required advanced technical knowledge, which is mostly the proprietary knowledge of the firms whose research and development (R&D) has generated it. Over time, all the production of goods that do not require such technical knowledge has passed to low-wage countries whose mutual competition keeps the value-added low. Since Pakistan cannot compete in high-value-added goods, it must emulate the East Asian economies by collaborating with firms in high-wage countries—i.e., subcontracting them to make simple components—and progress through such collaboration to receiving the knowledge and training to making components with higher value-added.