Knowledge, skills and organizational capabilities for structural transformation 夽

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ContentslistsavailableatScienceDirect

Structural Change and Economic Dynamics

jo u r n al h om ep a g e :w w w . e l s e v i e r . c o m / l o c a t e/ s c e d

Knowledge, skills and organizational capabilities for structural transformation ^夽

Mushtaq H. Khan

DepartmentofEconomics,SOAS,UniversityofLondon,UnitedKingdom

a r t i c l e i n f o

Articlehistory:

Availableonline28May2018

Keywords:

Organizationalcapabilities Skillstraining

Codiﬁedknowledge Tacitknowledge Politicalsettlements Industrialpolicy Garmentsindustry Bangladesh

a b s t r a c t

Structuraltransformationrequiresraisingproductivityandachievingcompetitivenessinincreasingly higher-valuedactivities.Thisprocesscanbeconstrainedbydifferenttypesofknowledgegaps.The importanceofcodifiedknowledgeandpracticalknow-howorskillsarewellrecognized.Butanothertypeof knowledgecriticallyaffectsthevalueofboth.Asocietymusthavefirmswiththeorganizationalcapabilities toorganizeproductioncompetitivelysothateducatedandskilledpeoplecanbeemployedprofitably.This isaspecifictypeofcollectiveknowledgedistinctfromthecodifiedknowledgeandknow-howembodied inindividuals.Withoutappropriateorganizationalcapabilities,investmentsinothertypesofknowledge canfailtoachieveadequatereturns.Therequiredorganizationalcapabilitiescanrangefrombasic,inter- mediatetodynamic,dependingonwhetherfirmsinthesectorarecatchinguporinnovating.Effective learningstrategieshavetoidentifyandtargetinterdependentknowledgegapsandtodothiseffectively, theyalsohavetorecognizedistinctinstitutionalandpoliticaleconomyproblemsofimplementation.The generalpointsareillustratedwithreferencetotheemergenceofthegarmentsindustryinBangladesh andthechallengesfacingitsupgrading.

1. Introduction

Sustainablestructuraltransformationrequiresraisingproduc- tivity acrossdifferentsectors and achievingcompetitiveness in progressivelyhighervalue-addingsectors.Theabsenceofappro- priatelevelsofknowledge,skillsandcapabilitiescanslowdown theseprocesses.Moststudiesofknowledgegapsignoretheinter- dependenciesbetweendifferenttypesofknowledge.Theeconomic effectsofinvestmentsinknowledgehaveusuallybeenstudiedby lookingatinvestmentsin formaleducation,or yearsof school- ing,asthemeasureoflevelsandincreasesinknowledge(Romer, 1986; Lucas,1990).Theimplicitassumptionisthatinvestments informal educationcorrelate wellwiththedevelopmentof all typesofknowledge,anassumptionthatIwillargueisverymis- leading.Thisassumptionissharedinmanyempiricalestimatesof knowledgegapswhichfocusonformaleducation.Forinstance,one studyestimatesthatby2020thegrowthofhigher-technologysec- torsislikelytobeconstrainedbyaglobalshortfallof40million college-educatedworkers(13percentofdemand)andthegrowth oflabour-intensivesectorsbyashortfallof45millionworkerswith

夽ThesupportprovidedforthisresearchbyDFIDBangladeshisgratefullyacknowl- edged.Iamalsogratefultotwoanonymousreferees.

E-mailaddress:mk100@soas.ac.uk

secondaryeducation(15percentofdemand).Atthesametime, thereislikelytobeanexcesssupplyof90–95millionunskilled workers(10percentofthiscategory)(Dobbsetal.,2012).

Iwillarguethattheproblemismuchmoreserious.Itisnotjust aquestionofchurningoutworkerswithsecondaryorhigherlev- elsofeducationintherightnumberstomeetprojecteddemands.

Theseworkersalsoneedtohaveappropriateknow-howtobeable tooperateexistingandemergingtechnologiescompetitively.Most importantly,well-organizedfirmshavetoemergetoemploythese personsathighenoughlevelsofproductivitytoachievecompeti- tiveness.Organizationalefficiencyisalsobasedonknowledge,but itisknowledgeofadifferenttype.Itisnotknowledgethatanindi- vidualhas,buttheknowledgethatalargenumberofindividuals haveabouthowtoeffectivelycooperateandcoordinatewitheach otherwithinanorganization.Withoutthelatter,investmentsin codifiedknowledgeandskillsmayachievelowreturns.Theabsence ofanyoneelementcanwipeoutpotentialreturnstoinvestments inothertypesofknowledge.Inparticular,intheabsenceofcapable firmsthatcanemployworkersproductively,investmentsineduca- tionandskillsmayonlyresultintheemergenceoflargenumbers ofunemployedpeoplewitheducationandskills.

Abetterunderstandingofthedifferencesintypesoflearning andtheprocessesthroughwhichtheyareacquiredistherefore essentialfor thedesign ofeffectiveknowledgepoliciesfor sup-

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portingstructuraltransformation.First,thepedagogicprocessesof knowledgeacquisitionaredifferentfordifferenttypesofknowl- edge. As a result the policy challenges can be very different dependingoninitialconditionsandthechoiceofsectors,which determinethe mixof knowledge that has tobeacquired. Sec- ondly,theimplementationofdifferentlearningstrategiesislikely torequiretheallocationofpolicyresourcestomeetrelevantknowl- edgegaps.Ifthesepolicyresourcesarenottobewasted,those receivingsupportfordifferenttypesoflearninghavetoachieve desiredstandards,otherwisesupporthastobewithdrawnorwith- held.Thefeasibilityofparticularstrategiescanthereforedependon theconﬁgurationoforganizationalpowerinthatsociety,its‘polit- icalsettlement’,whichcandeterminehowparticularpoliciesare likelytobeimplementedordistortedbypowerfulinterestswhoare beingassistedtosupportlearning(Khan,2013c,2017).Ifresources areprovidedtoindividualsororganizationswhocannotbedisci- plineddespitefailingtomeetminimumstandards,thestrategyis likelytofail.Aneffectivelearningstrategythereforehastoiden- tifyboththerelevantknowledgegaps,andthepoliciesthatcanbe effectivelyimplementedtoaddressthesegapsgiventhepolitical settlementinthatcountry.

2. Typesofknowledge

Codifiedknowledgeisknowledgethatcanbecommunicatedin wordsor symbols in traditional classroom teaching, textbooks, orvisualmedia.Formaleducationalestablishmentsaretheusual deliverymechanismforcodifiedknowledge.However,manytypes ofknowledge arenot codifiableorare onlypartiallycodifiable.

Typically,uncodifiableknowledgeisofthe‘knowing-how-to’vari- ety,embeddedinunconsciousandoftencomplexroutinesthatare understoodandinternalizedthroughlearningbydoingandprac- tice.Thesetypesofknowledgeare oftenequivalentlydescribed asskills,know-howor tacitknowledge.Thetransmissionof tacit knowledge requires learning-by-doing rather than, or in addi- tionto,traditionalteaching.Thedistinctionbetweencodifiedand tacitknowledgealsoinvolvesimportantpedagogicdifferencesin theprocessesthroughwhichtheknowledgeisacquired(Polanyi, 1967). Finally, organizational capabilities require knowledge of howtoeffectivelyorganizecollectiveactivitiesinparticulartech- nologiesand social and political contexts in ways that achieve competitiveness.Codifiedknowledgeandskillsaretypesofknowl- edgethatareembodiedinindividuals.Incontrast,organizational capabilitydescribesknowledgeheldbyacollective,embeddedin interactiveroutinesandpracticesthatarespecifictoanorgani- zation.Thisknowledgecanbeveryspecifictoorganizationsand maynotbeexactlythesameacrosssimilarorganizationsproducing similarproductsorservices.

Pedagogically,codifiedknowledgecanbetransmittedthrough formalteachingmethods.Butgenerallyskillscannotbelearntin thisway.Learninghowtodrive,forexample,isalmostimpossible byattendinglectures,readingtrainingmanualsorevenwatching videos.Thesecanhelptoimprovetheskillsofdriversbyprovid- ingthebackgroundcodifiedknowledgeforinformedresponsesin differentsituations,ortolearntrafficrules.Buttheonlyeffective wayoflearningtodriveistobeinacar withaninstructorand learnbydoing.Providedtheinstructorisskilledandthelearner putsinappropriatelearningeffortinrespondingtomistakesand feedbacks,aseriesofcomplexresponsesandcorrectivestepsgrad- uallybecomehabitsandroutines.Atsomepointsufficient tacit knowledgewillhavebeenmasteredtomakedrivingbotheffective andrelativelyeffortless.Learningcarpentry,bricklayingorstitch- inggarmentsissimilartolearningdriving.Thelearninginallthese casesislargelyaboutpractisingtheuseoftechniquestodevelop routinesand habitssupportingrapidcorrective steps,informed

responsestonewsituations, and soon.The know-howtype of knowledgethereforehastobeacquiredthroughpracticaldemon- strationandparticipationinactivityinapprenticeships,technical andvocationaltrainingprogrammesoron-the-jobtraining.How- ever,somecodifiedknowledgecanbeapreconditionforacquiring someskillsandcanalsoacceleratethelearningprocess.Skillsare alsousuallyveryspecifictoparticularjobsandtechnologies,and thetacitandcontext-specificnatureofthelearningmeansthatit canonlybeacquiredthroughlearning-by-doinginveryspecific settings(Lall,1992,2000a,2000b,2003).

Thethirdtypeofknowledgeisoftenignoredindiscussionsofthe knowledgerequiredforachievingproductivitygrowthandcom- petitiveness.Theproductivityofindividualsinafirmdependsnot onlyonthecodifiedknowledgeandskillsoftheindividualswithin thefirmbutalsoonhowefficientlycollectiveactivitiesareorga- nizedwithinthefirm.Inadditiontoindividualcodifiedknowledge and skills,individualsin anefficientfirmhavetoknowhow to respondeffectively toothersinthatfirmtomaximizethequal- ityandquantityoftheoverallgoodsandservicesprovided.This requiresanorganizationthatcanefficientlycoordinateactivities andincentivizesomeactionsandpenalizeotherstooptimizethe collectiveoutputsoftheorganization.Iusethetermorganizational capabilityasameasureoftheeffectivenessofanorganizationin coordinatingandoptimizingthesecollectiveactivities.Unlikemost skills that arebased onthetacit knowledge of individuals, the knowledgethatachievesahighleveloforganizationalcapability ofanorganizationisthecollectiveknowledgewithintheorganiza- tiontoimplementinteractiveproceduresrequiredfortheefficient operationoftheteam.Thisknowledgeisnotabouthowtooperate particularmachinesorequipmentbutknowledgeofhowtointeract withintheorganizationgivenitstechnologiesofproduction,orga- nizationalstructureandthecharacteristicsofotherindividualsin theorganization.Thisknowledgeispartlytacitandpartlycodified, butitisdistinctinbeingcollectively-heldknowledge.Everyonein aneffectiveorganizationdoesnothavetohavethesameorganiza- tionalknowledge,butallmembersofanorganizationneedtoknow theirpartoftheorganizationalroutinestoenabletheorganization tooperateoptimally(NelsonandWinter,1982;Dosi,1988;Perez andSoete,1988).

The pedagogic processes required to acquire organizational capabilitiesaredifferent,morecomplex,andvarybycontextand type of organization. Theenhancement of organizational capabilities may require the acquisition of both codified and tacit knowledge,but itismisleadingtoreducethis totheothertwo typesofknowledge.Theprimarydifferencebetweenlearningthat is individualandlearning that iscollectiveisthat inthelatter, theindividualshavetolearninteractiveroutinescollectively.The problemismuchsimplerifawell-workingorganizationalready exists,becausehereanindividualjoiningtheorganizationsim- plyhastolearnhowtoadapttheirresponsestothewell-working organization.Thisrequiresindividuallearning-by-doing.However, when the organization as a wholehas somethingmissing, the collectiveeffortoflearningismuchmorecomplexandrequires collectivelearning-by-doing,experimentationwithroutinesand adaptationtilllevelsofcompetitivenesscomparabletocompeti- torsisachieved.Thislearningprocessinvolvesamuchhigherlevel ofeffortandthechallengesoforganizingitcanbesignificant.The differencebetweenanindividuallearningindividualroutinesin analreadyefficientorganizationandtheorganizationcollectively becomingefficientbyadoptingappropriateroutinescanbeseen mostpowerfullywhen an individualfroma firm in a developing countrywithlow organizational capabilities migratestoan advancedcountryandjoinsafirmwithhighorganizationalcapa- bilities.Inaveryshorttime,themigratingindividualsignificantly increasestheirindividualproductivitybyadaptingtotheroutines of thefirmwithhighorganizationalcapabilities. Improvingthe

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organizationalcapabilityofthedevelopingcountryﬁrmasacol- lectiveisamuchmorecomplexcollectiveactionprocess.

A supply of entrepreneurs, managers and supervisors with highlevelsofcodifiedknowledgeandindividualknow-howisby nomeanssufficient fortheemergence ofa competitivefirm. If organizationalcapabilities are absent,theiracquisition requires acomplexprocessofcollectivelearning-by-doing.Achievingthis usuallyinvolvesatwo-stagelearningprocess.First,managersand supervisorshavetoacquireanunderstandingoftheinternalorga- nizationofcompetitivefirmsinthatsectorandthiscaninvolve acquiringboththerelevantcodifiedknowledgeandknow-how.

Secondly,theyhavetosuccessfullyadapttheseroutinesandsys- temstolocalconditionsinabroadercollectivelearningprocesstill theteamasawholeunderstandsandcanperformeffectivelywithin thatorganizationalstructure.Ateamthatisabletoimplementan efﬁcientorganizationalstructurethatispotentiallycompetitiveby adoptingandadaptingroutinesappropriatetothatcontextwill haveachievedcompetitivelevelsoforganizationalcapability.

Organizationalcapabilitiesarealwaysrelative.Ifanorganiza- tionwithsimilarhumanandphysicalcapitalasanotherimproves itsproductivitybyorganizingitsproduction moreefficiently, it achievesahigherorganizationalcapability.Wewillseelaterthat verysignificantdifferencesinproductivitycanexistacrossfirms usingsimilartechnologiesand withsimilarhumancapital as a result of differences in their organizational capabilities. While manydevelopingcountryfirmscanacquiremachineryformany basicproductionactivities,andtheyoftenhavesuppliesofedu- catedandskilledworkers,theylackthecapabilitytobringallthis togethertoproducecompetitivegoodsandservices.Animportant factorcomplicatingtheacquisitionoforganizationalcapabilities isthatthemosteffectiveorganizationaldesignforafirmandits internaloperatingprocedurescanbeverydifferentacrosscoun- tries,evenforthesametypeofproductandacrosssectorswithina country(Whitley,1992).Thisisnotonlybecausetechnologiesdif- fer,butalsobecausesocialhierarchies,normsofcollectivework, externalgovernancestructures,andsoonvarygreatly.Allofthis canaffectoptimalorganizationaldesignandtheroutinesthatcan beeffectivelyimplementedinthatcontext.Asaresultthesimple imitationofformalorganizational structuresfromanothercon- textwill not necessarily workand collectivelearning-by-doing isnecessarytoadaptthefunctionsofparticularroutinestosuit localcontexts.Thislearningprocessbecomesmorecomplexwith higher-valueproductsbecausemorecomplicatedtechnical,qual- itycontrolandorganizationalprocessesarelikelytobeinvolved toachieveefficientoutcomes.Thisimpliescorrespondinglymore challengingcollectiveorganizationallearning.

Anefﬁcientorganizationalstructuredoesofcoursehaveafor- malorcodiﬁedstructuredescribingitsorganizationalmap.Thisis aformaldescriptionofthefunctionsofresponsibleagents,their sourcesofinformation,theirlinesofmanagement,theirincentives andpenalties,andtheirdecision-makingandauthoritativepowers.

However,knowingacodifiedorganizationalmapisnotsufficient toachievecompetitivenessbecausetherealoperationalefficiency ofanorganizationdepends ontheactualbehaviourofitsman- agersandworkers.Whensufficientlyhighlevelsoforganizational capabilitieshavebeenacquired,mostindividualswithintheorga- nizationwillbeactingautomaticallyincollectivelyefficientways mostofthetime.Butadministrativestaffwillalsobeeffectively implementingorganizationalrulesforincentivesandpenaltiesto manageoccasionalfreeriding,internal conflictsorcoordination failures.Thisoptimizedcollectiveoutcomeisthereforebasedon amixofcodifiedandtacitknowledgespreadacrossallmembers oftheorganizationwhoarebehavingaccordingtovariousroutines andinteractiveprocessesthattheyhaveinternalized,togetherwith theirknowledge ofoperating physical systems of coordination, reporting,informationcollection,incentivesandsoonthatcanbe

embeddedinphysicalinfrastructurelikesoftware,reportingand monitoringsystems.Allofthisknowledgehastobeacquiredto raisetheorganizationalcapabilityofaﬁrmtoacompetitivelevel andislikelytobeacombinationofcodiﬁedandtacitknowledgeof intra-organizationalinteractionsthatarecollectivelyrequiredto achievecompetitiveness(Dosietal.,2000).

Theinterdependenceofourthreetypesofknowledgeissum- marizedin Fig.1.Sometypes ofcodified knowledgecan assist ormay beessential forthe acquisitionof someskills, andalso forenhancingorganizationalcapabilities.Similarly,skillslikethe knowledgeofhowtooperateparticularsoftwareprogrammesor operatemechanical,chemicalorelectronicprocessesmaybeapre- requisiteforacquiringfurthercodifiedknowledgeandsomeskills maybeaprerequisiteforengagingincollectivelearningtoenhance organizationalcapabilities.Finally,theknowledgeofhowtooper- ateinorganizationswithhighlevelsoforganizationalcapabilitycan beaprerequisiteforrealizingthepotentialofmanytypesofformal educationandtorealizethefullpotentialofskillsliketheknow- howofoperatingparticulartypesofmachinery.Developmentsin onetypeofknowledgecanalsospurdevelopmentsinothertypes inadynamicway.Forinstance,theapplicationofknow-howinthe workplacetoengageinprocessinnovationscanidentifyknowledge constraintsthatdriveresearchthatgeneratescodifiedknowledge thatinturnhelpstoovercometheseconstraints.

3. Competitivenessandtypesoforganizationalcapabilities

Theinsight that entrepreneursand ﬁrms play a critical role increatingcompetitiveadvantagehasitsrootsinseveralimpor- tantstrands ofeconomic theory.However,muchof this theory emergedtoaddressadvancedcountryquestionsaboutthecapa- bilitiesrequiredtoenhancecompetitivenessininnovativeways.

Thisunderstandingisveryimportant,butneedstobesubstantially modifiedtoincorporatethetypicaldevelopingcountryproblem of acquiring competitiveness in known and quite basic tech- nologies.InSchumpeter’s(1934) theoryof creativedestruction, entrepreneurs drive innovation by looking for ‘new combina- tions’,creatingnewproductsthatallowthemtoearntemporary monopoly profits. While Schumpeter focused on the role of entrepreneurs, theinternalorganizational capability offirmsto drivegrowthwas thesubject of Edith Penrose’s1959 book on thetheoryof growthofthefirm (Penrose,2009).In this semi- nalwork,Penrosearguedthatthegrowthoffirmswasdrivenby

‘managerialresources’.Firmsgrowwhentheyhaveunusedman- agerialresourceswiththeknowledgeandcapacitytoorganizenew projects.Thisenablesthefirmtodrivegrowthbydrawingonand extendingtheirknowledge ofprocesses.The Penrosiananalysis highlightsthespecificityofthesecapabilities.Theknowledgeof managersbasedontheirexperiencesishardtotransmitandcan- notbeboughtunlessmanagersthemselvesmove.Inotherwords, organizationalknowledge,inthiscasefocusingontheknowledge ofmanagement,istacitandspecifictothefirm.BothSchumpeter andPenroseindifferentwaysoverturnedthestandardeconomics treatmentofthefirmasablackboxthatrespondstomarketsignals.

Insteadtheyshiftedtheanalyticalfocustointernalentrepreneurial andmanagerialcapabilitiesasdriversoforganizationalevolution and productinnovation. For both, growthand innovationwere drivenbyentrepreneursseekingtoenhancetheircompetitiveness bydifferentiatingtheirproductsandservicesfromothers,thereby earningabove-normalproﬁts.

DrawingontheworkofSchumpeterandPenrose,aliteratureon thedynamiccapabilitiesofﬁrmsdevelopedtoanalysetheorgani- zationalcapabilitiesrequiredbyﬁrmstomaintainandextendtheir competitiveadvantage.Thesedynamic capabilities arerequired tobeabletorespondtomarket,technologicalandenvironmen-

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Fig.1. Typesofknowledgerelevantforcompetitiveness.

Source:Author.

talchangesandopportunitiesandtomeetcustomerrequirements innewways,allowingthesefirmstoearnrents(TeeceandPisano, 1994;Teeceetal.,1997;EisenhardtandMartin,2000;Zolloand Winter,2002;Cordes-Berszinn,2013).Researchondynamiccapa- bilitieshastriedtoidentifypatternsintheorganizationalpractices of successful firms that allow them to experiment, adapt and learnfromtheirexperiences,asthisisessentialtodriveorganiza- tionalandtechnicalinnovationstomaintainorextendcompetitive advantage.Alimitationoftheseapproachesfromourperspective isthattheirsubjectsarethemostdynamicfirmsinadvancedcoun- tries.Asaresulttheuseofthetermorganizationalcapabilitiesin thisliteratureseemstosuggestthatitisthecapabilitytoorganize technicalandorganizationalchange.Thiscanbeconfusingbutthe confusioniseasytoaddress.Organizingproductioncompetitively withgiventechnologyisclearlyanorganizationalcapabilitythatis criticallyimportantandmissinginmanysectorsinmanydevelop- ingcountries.Equallytheroutinesandcapabilitiesthatcanfurther modifytheseorganizationalandproductivestructurestoachieve furtherimprovementsincompetitivenessaresecond-orderorga- nizationalcapabilities,ofgreatsignificanceinadvancedcountries.

Foramoregeneralunderstandingoforganizationalcapabilitieswe needtoincorporatethesedifferencesandextendtheseinsightsin anumberofways.

First, we need to recognize that the dynamic capabilities requiredforinnovationarequitedifferentfromthe‘basic’orga- nizationalcapabilitiesnecessaryforoperatingfirmsincompetitive marketswithknowntechnologies.Forfirmstodevelopdynamic capabilitiesthatallowthemtodriveSchumpeterianorPenrosian growthand earnabove-normal profits, theymust already have highlevelsofbasic organizationalcapabilities sothatthebasic tasksofeffectivelyorganizingteamworkalreadyexist.Formuch of the world (including parts of advanced countriesthat have deindustrialized) the more relevant organizational challenge is tocreatefirmswithbasicorganizational capabilities,whichcan operatein competitive marketsand make normalprofitsusing knowntechnologies.Thisismainlyaboutabsorbingknownorgani- zationalroutinesfromcompetitivefirmselsewhereandadapting themtolocalconditions,hierarchies,andgovernanceconditions.

Itturnsoutthatthisismuchmoredifﬁcultthanisoftenassumed.

InnovatingfirmsearningSchumpeterianrentsareunlikelytospon- taneouslyemergeinacontextwherenormal-profitfirmsdonot exist.Theyaremorelikelytoevolvefromorbespunoutof,orbecre-

atedbyentrepreneursandmanagerswhocandrawonteamswith theexperienceofworkingincompetitiveorganizationsoperating inlessinnovativesegmentsofthemarket.Thechallengeofcreating firmswithbasicorganizationalcapabilitiesisthereforedifferent fromthatofdevelopingdynamiccapabilitiesbutmaybenoless difficult.Thischallengehasbeenthesubjectofthedevelopmental stateliteratureonlearningandcatchingup(Amsden,1989).But eveninthisliteraturethecomplexitiesofacquiringbasicorganiza- tionalcapabilitieshavenotbeenadequatelydiscussed.Incontrast, theSchumpeteriananddynamiccapabilitiesliteraturefocuseson advancedcountrieswheretheprimarychallengeistodriveinno- vation.Thetwostrandsofliteraturearerelated,andcanbenefit greatlyfromcross-fertilization.

Asecondfeatureoftheadvancedcountryliteratureonorga- nizational capabilities is that it hasgenerally given inadequate attentiontotheproblemofconflictsand free-ridingwithinthe firm.Thesehave,ofcourse,beenthesubjectofanextensiveinsti- tutionaleconomicsliterature(AlchianandDemsetz,1972;Jensen andMeckling,1976;GrossmanandHart,1986;Hart,1988;Hart andMoore,1990).Theproblemofrespondingtofree-ridingand ruleviolationswithinfirmsis anecessary conditionof enhanc- ingorganizationalcapabilitiessuchthatahigherjointoutputcan beachieved.Efficientroutinesforenhancingthecoordinationand efficiencyof collectiveworkmaynot workunlesswe alsolook atpossibleincentivesforinternalruleviolationsandfree-riding behaviour and how thesecan be organizationallycountered in specificcontexts.Inadvancedcountriesbasicorganizationalcapa- bilitiesarewidelyavailable,andmanyfirmsalreadyexistwhich havesuccessfullysolvedtheseproblems.Thedynamiccapabilities literaturethereforedoesnotgivemuchattentiontotheproblemof enforcingtheadherencetointernalroutines.Itismoreconcerned withtheidentificationofmoreeffectiveroutinesassumingthey willbeenforceable.

However,whencountriesaretryingtodevelopbasicorganiza- tionalcapabilities,theinternaladherencetoformalorganizational structuresisweakandhastobedirectlyaddressedintheorgani- zationaldesignoffirms.Itturnsoutthatdifferencesinsocialand political conditionscanhaveasignificanteffectonthetypesof organizationsthatappeartobeeffectiveinachievinginternalcon- trolandefficiency(Whitley,1992).Forinstance,insomecountries smallfamilyfirmsdominateatearlystagesofdevelopmentbecause largerfirmsareunabletodealwithfree-ridingandconflictsusing

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formalorganizational structures. Othercountries canmake the transitiontolargerformalﬁrmsat anearlierstage.The critical questionsofcontrollingfreeridingandconﬂictsareparticularly importantifpublicpolicyisbeingusedtoassistthedevelopment oforganizationalcapabilitiesofanysort,becausefree-ridingcan alsoleadtolowlevelsoflearningeffortthatcaneasilyderailpol- icyandresultinwastedresources.Iwilldrawonthesedifferent insightstodevelopamoregeneralanalysisoforganizationalcapa- bilitiesandpolicychallenges,withaparticularfocusondeveloping countriesattemptingtoachievestructuraltransformation.

Ageneralanalysisoforganizationalcapabilitiesthereforehasto distinguishbetweendifferenttypesoforganizationsandthecapa- bilitiestheyhavetoacquiretobecomecompetitive.Theproduction ofeventhesimplestproductsinfirmsexposed tointernational competitioncanrequirefairlycomplexorganizationalcapabilities thatIwilldescribeasbasic.Thesefirmshavetoachievethesecapa- bilitiesjusttogenerate‘normal’profitswithknowntechnologiesin competitivemarkets.Firmsengagedingarments,textiles,footwear andothertypesofnormal-profitproductiveactivitiesareinthis category.Remarkably,formostoftheworld,thereareaninade- quatenumberoffirmswiththesebasicorganizationalcapabilities, sothediscussionofanymoresophisticatedcapabilitiesisprema- tureinmostcases.

Attheotherendofthescale,wehaveorganizationsthatcan engageininnovativeactivitiestocontinuouslyupgradetheirexist- ingtechnicalandorganizationalcapabilities.Inotherwords,they havethecapabilitiestochangetheircapabilities.Thisallowsthem toprovideastreamofnewproductsandservicestoearnabove- normalprofitsbycontinuouslydifferentiatingtheirproductsfrom othersandcreatingoligopolisticmarketsforthemselves.Asthe SchumpeterianorPenrosiananalysisshows,thisrequiresorganiza- tionalcapabilitieswhichcanbedescribedasdynamic.Theseinvolve organizationalstructuresandprocesses,withassociatedroutines, thatallowthefirmtoinnovatenewproductsandprocessesand driveinternalorganizationalchangestodeliverinnovativeprod- ucts.Firmsinnovatingnewtypesofelectriccars,semiconductors orbatterieswouldbeexamplesofcontemporaryfirmsinthisseg- ment.

Finally,itisusefultodistinguishanintermediatetypeoffirm that is not necessarily engaging in significant product innova- tionbut isoperatinginsectorswhereongoingtechnicalchange ishappeninginleadcountriesandthesefirmsthereforehaveto continuouslyimitateandadapttomaintaintheircompetitiveness.

Theyareusuallysuppliersorassemblersindevelopingcountries forleadcompaniesthathavedynamiccapabilities,usuallylocated inadvancedcountries.Someoftheseintermediatecapabilitycom- paniesmayalsobeengagedinprocessinnovationsoftheirown.

Thesefirmsrequireintermediatelevelsoforganizationalcapabil- ities,somewhereinbetweenbasicanddynamic.Theyoperatein sectorslikeautomobileorelectronicscomponentsandassembly indevelopingcountrieswhereentirelynewproductsarenotbeing innovatedbythesefirms,buttoremainassupplierstoorassem- blersfordynamicleadcompaniesthatareinnovating,theyhaveto continuouslyupgradetheirownmanufacturingprocesses.These firmsthereforehavetokeepabreastoftechnicalandorganizational changeshappeningelsewheretomaintaintheircompetitivenessin supplyingorassemblingincreasinglysophisticatedorhigherqual- ityproducts.Thesefirmsareprimarilyimitatingandcatchingup withorganizationalandtechnicalcapabilitieselsewhere,asbasic firmsare,butheretheimitationisofamovingtarget,oratleast,a targetthatismovingmuchfasterthansayingarmentsorfootwear.

Theymaysometimesbemakinghigherthannormalproﬁtsbutthey faceintensecompetitionandmayoftenbeonlyearningnormal proﬁts.

Basic, intermediate and dynamic organizational capabilities aretherefore segmentsalong a continuum,but thedistinctions

betweenthem are importantfor policy.First, the feasibility of acapabilitydevelopmentstrategydepends oninitialconditions.

A strategycan failif it triestodevelop organizationsrequiring dynamicorintermediatecapabilitiesincontextswherebasiccapa- bilitiesaremissing.Failurecanincludecasesof‘success’wherea smallislandofﬁrmsarecreatedwithhighorganizationalcapabili- tiesbutwhichdonotresultinimitationorclusteringbecausethe averageorganizationalcapabilityofthesocietyistoofarremoved.

Thisdoesnotmeanthatthewaytodevelopanautomobileindustry istofirstdevelopagarmentsindustry.Firmsmakinggarmentsdo notnecessarilyevolveintomakingautomobiles.Butitdoesmean thatifaregiondoesnotyethavetheorganizationalcapabilities todevelopagarmentsindustry,attemptingtodevelopclustersof automobilecomponentsproducersislikelytobeverydifficulton anyscale.Secondly, theemergenceofalargenumberoflower- technologyfirmsisagoodwayofensuringthatgrowthisinclusive andcreatesmanyjobs.Thesefirmscanbecomponentsuppliers whocreatejobsindevelopingcountriesevenifthevalueadded andprofitsarehigherintheleaddynamicfirmsthatareengaged indesignandproductdevelopmentinadvancedcountries.Ifwesee developmentastheorganizationaltransformationofasociety,the emergenceoflargenumbersofbasicandintermediatecapability firmsisthemosteffectivewayofmovinglargenumbersofworkers fromagricultureandinformalsectorsintoorganizedmodernfac- toryproduction.Finally,associetiesdevelopmoresophisticated intermediate-capabilityfirms,conditionsarecreatedfortheemer- genceof firmswithdynamiccapabilities.These firmscandrive innovation,buttheirdevelopmentaleffectsaregreatestifbasicand intermediate-capabilitycomponentsuppliersandsubcontractors existtolinkwiththemintheirvaluechainstocreatemanymore jobsandentrepreneurialopportunities.Thisisthedesirablepath ofindustrialization,ratherthanonewhereafewhigh-capability firmsexistasislandswithfewemploymentspillovers.

Howimportantareorganizationalcapabilitiesforproductivity?

Itturnsoutthatevenbasicorganizationalroutineshaveanout- sizedimpactontheproductivityofafirm.Forinstance,ifamachine breaksdownandasolutionisnotrapidlyfound,thiscanhavecas- cadingeffectsthroughouttheproductionline.Therapidresolution ofthisproblemrequiresanorganizationalresponsethatislikelyto involveothersbeyondtheworkersoperatingthemachine.Effective routinesandresponsestodifferenttypesofbreakdownscanhave alargeimpactonoverallproductivity.Similarly,withoutroutines formaintainingqualitycontroltheremaybehighlevelsofoutput rejectionthataffectmeasuresofaggregateproductivity.Poororga- nizationofinventories,poorcoordinationacrossproductionlines, thefailuretoidentifyandresolvebottlenecks,thefailuretoidentify absenteesorthoseoffsickandtofindimmediatereplacements,or poorordermanagementareallexamplesoforganizationalfailures thatcaneachresultinproductionslowdowns,workstoppagesand lowthroughputrates.Organizationsalsoneedtofindcombinations ofcarrotandsticksolutionstofreeridingbehaviourandinternal conflicts.Thisisessentialnotonlytomaintaincollectiveoutput, butalsotopreventlowmoraleleadingtomorefreeriding.Afirm thatispoorlyorganizedalonganyofthesedimensionscanregister significantlylowerproductivityevenwithverysimpletechnolo- giesanditcanfailtobecomecompetitiveregardlessoftheskills andknowledgeofindividualworkers.

Thestaggering scale of productivitydifferences acrossﬁrms producingthesameproductswiththesamemachineryandcom- parablehumancapitalcanbeseenintheexampleoftheIndian textile industry in Clark and Wolcott (2012). Huge productiv- itydifferentials betweenIndiaand othercountriesmeantIndia couldnotdevelopacottontextileindustryforalongtimedespite lowerwagescomparedtocompetitors.However,ClarkandWol- cott’sexplanationofthisproductivitygapisnotconvincing.They arguethatIndianculturalattitudessustainedpoororganizational

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behaviour.A more plausibleexplanation is that India failedto developorganizationalcapabilitiesintextileﬁrmsforalongtime.In thelatenineteenthcenturyBritishIndiahadnopublicpoliciesto supporttheacquisitionoforganizationalcapabilities.Despiteusing exactlythesamemachinesasglobaltextileleadersinEnglandand elsewhere,anddespitethesectorrequiringrelativelylowlabour skills,IndianproductivitywassolowthatlowerIndianwagesdid notcompensateandthesectorremaineduncompetitive.Proﬁtabil- itywasverylowanddisappearedentirelywhenJapanenteredthe cottontextilemarketin1924(ClarkandWolcott,2012:Table4).

Morethanfifty yearslater,and despitesignificantpost-colonial policiesforsupportinginfantindustries,therelativeproductivity problemhadonlymarginallyimproved.SomeIndiantextilepro- ductionbecameprofitable,butin1978outputperworker-hourin cottonspinningintheUSwasstill7.4timeshigherthaninIndia usingthesamemachinery.Whatcouldpossiblyexplainproductiv- itydifferentialsofthismagnitude?EvenifAmericanworkershad higherlevelsofformaleducation,thiscannotplausiblyexplainwhy usingthesamerelativelysimplemachinerythatdoesnotrequire highlevelsofcodifiedknowledgeorskills,theywerestillproducing 640%moreoutputeveryhour.

ClarkandWolcott’s ownexplanationgoespartlyintheright directionbutisultimatelynotsatisfactory.Theiranalysis,inthe institutionaleconomicstradition,arguesthatmodernfactorypro- ductioncreatesanon-separableoutputthatcanresultinfree-riding behaviour(AlchianandDemsetz,1972).Non-separabilitymeans thatthecontributionofanindividualinanorganizationdepends onwhatothers aredoing. Theimplication isthat ifanindivid- ualdecidestofreeridebyworkingalittlelessitisnotpossible todetectthisbylookingattheoutputoftheindividualbecause theoutputisajointproduct.Fortheoutputoftheorganization toremainhigh,theorganizationhastoensurethatindividualsdo notfreeride.Thisinsightfocusesourattentionontheorganiza- tionaldesignthatcancounterfree-ridingbehaviour.LikeAlchian andDemsetz,ClarkandWolcottarguethatfreeridingandoppor- tunisticbehaviourarethemajorcausesoforganizationalfailure, resultinginhighlevelsofshirkingandacollapseofthecollective output.Inmyview,poororganizationalroutinescanresultinlow collectiveproductivityforanumberofotherreasons,suchasthe failuretocorrectbreakdownsrapidlyortomaintainqualitycontrol, whicharenotnecessarilyconnectedtofree-ridingbehaviour.But thisisnotmymajorcriticismofClarkandWolcott’sexplanationof lowproductivityintheIndiantextileindustry.Therealproblemis thattheyattributeopportunisticbehaviourwithintheﬁrm(which issurelypartoftheproblemofloworganizationalcapability)tothe absenceofa‘gift-givingculture’incountrieslikeIndia.Theyargue thatcooperativeproductivebehaviourisonlysustainableincul- tureswhereindividualsaregenerousingivingwithoutexpecting.

Thisenablesemployersandworkerstotrusteachotherandmakes themonitoringofindividualsintheorganizationcheaperandmore effective.Thisexplanationmakesorganizationalcapabilityentirely dependentonacultureofgift-givingwhichisnotplausible.Organi- zationalcapabilitiescanbeacquired,andindeedIndiamanagedto improvethesecapabilitiestodevelopacompetitivetextileindustry despitepersistentproductivitygapswithcompetitorcountries.

ClarkandWolcottdomakeitclearthatthisculturalproblemis notinanywayinnateingeneticsordeeplyheldgroupattitudes, butisratheradescriptionofabehaviouralequilibrium.Whena criticalminimumnumberofpeopleinasocietybecomegenerous, itcanbecomerationalformostindividualstobecomegenerous andviceversa.Indeed,theypointoutthatwhenIndianworkers migratetotheUStheirproductivityimmediatelyimprovesbecause theycanworkinﬁrmswithgreatertrustandtheirownbehaviour changes.Infact,theirmajorpolicyrecommendationistoencour- agemigrationwithinandbetweencountries.Evenifweacceptfora momentthatopportunismandfreeridingaretheprimarycausesof

organizationalfailure,andthattherearedifferentlevelsoftrustin societies,ClarkandWolcotteffectivelyruleoutthepossibilitythat organizationaldesignandlearningisonewayinwhichcooperative behaviourcanbeinculcatedwithinorganizationsandultimately societies.Inotherwords,theyignorethepossibilitythatdesign- ingorganizationsandimprovingtheirinternalroutinesisawayof changing‘culture’withintheorganization,deﬁnedasabehavioural equilibrium.However,theevidenceacrosscountriesshowsthat organizationalcapabilitiescanbeacquired,thatbehaviourwithin organizationscanchangethroughthelearningofnewroutineswith appropriatecarrotsandsticks,andthatthisisamoreeffectivesolu- tiontolowproductivitythanmigration.Thedramatictake-offin thegarmentsindustryinBangladeshinthelate1970sthatwelook atlaterwasnotprecededbyanychangeinthenationalculture oftrust,orevenbyanysigniﬁcantskillsprogrammesforworkers.

Itwasentirelydrivenbytheacquisitionofcriticalorganizational capabilities.

4. Learningorganizationalcapabilities

The policy challenges of developing organizational capabilities in developingcountrieshasbeenan importantquestionin thedevelopmentalliterature.Inherseminalwork,AliceAmsden (1989)questionedtheadequacyoftheSchumpeterianmodelof innovation for developing countries and argued that for them growthwasbasedon‘learning’,theprocess throughwhichfol- lower countries adopt technical and organizational capabilities frommoreadvancedones.TheimportantpointthatAmsdenmakes isthatwhiletherearesigniﬁcantdifferencesinthetechnicaland organizationalrequirementsofdifferenttechnologies,byandlarge, developingcountriesarelearningtoproduceproductsthathave already beenproducedsomewhereelse. Innovationonlybegins whenﬁrmshavetheorganizationalandtechnicalcapabilitiesto innovateentirelynewproducts.Amsdenwasdirectingattentionto whatIhavecalledbasicandintermediateorganizationalcapabili- ties,whicharethecriticalorganizationalcapabilitiesfordeveloping countries.

Fig.2combinesAmsden’sinsightsonlearningandinnovation withourearlierdiscussion.Thechallengefordevelopingcountries istomovealongthefirstrowofFig.2,fromthecreationofabroad baseof competitivelower-technologyfirmstoa growingnum- berofintermediatehigher-technologyfirms.Formostdeveloping countries,thecreationofabroadbaseoffirmswithbasicorgani- zationalcapabilitiesisthemostimportantchallenge.Adesirable trajectoryoforganizationalcapabilitydevelopmentandindustrial upgradingisshownbythegreyarrowinFig.2withanintegrated modernproductivesectorgraduallydeepening(Khan,2015).Truly innovatingfirmsonlyemergewhensomeofthemoreadvanced higher-technologyfirmsachievesufficienttechnicalanddynamic organizationalcapabilitiestodrivetheirowninnovation.

Thenumberoffirmsthatcandriveinnovationinacountryis likelytobelowtillthecountryasa wholehasadvancedtothe pointwherethesocialinfrastructuresupportssignificantexpendi- turesonformaleducationandonresearch.Innovationbydynamic firmscanalsohelpothertypesoffirmsbycreatingdemandfor newcomponentsproducedbylower-technologyintermediateand basiccapabilityfirms.Organizationallearning,asshowninFig.2 isthereforeanongoingprocess.Themostappropriatecapability- developmentstrategyforacountrywilldependonitsinitialmix ofcapabilities,butinmostdevelopingcountriessupportforthe developmentofbasicorganizationalcapabilitiesislikelytobean importantpartofthemix.Thelessdevelopedacountry,themore importantitistoraisetheaveragelevelofsocialorganizationby supportingthedevelopmentofabroadbaseoffirmswithbasic, andeventually,intermediateorganizationalcapabilities.

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Fig.2. OrganizationalCapabilities,LearningandInnovation.

Publicsupportforcapabilitydevelopmentcanbewastediffirms failtoachieveimprovementsinproductivity.Thisisavariantof afree-ridingproblemwhere organizationsreceivingsupportto developproductivitywasteitordivertittootheruses.Theimpor- tanceofdiscipliningisnotdisputedbutwhatitmeansisoftennot clear.Therearesomebroadanswersinthedevelopmentliterature, buttheproblemisthatthedesignofpolicy,andthegovernanceof disciplining,dependsontheproblemsthathavetobeaddressed and therelative powerof firms and government agencies that determinethefeasibilityofdifferentstrategies.Statesarenotuni- formly‘strong’or‘weak’.Apparentlyweakstatesmaybeableto carryoutsometypesofdiscipliningifpoliciesaredesignedinways thattakethedistributionofpowerintoaccount.Amsden’sinsight wastoremindusthatthemarketcannotdisciplinefirmsreceiv- ingsubsidies(becausefirmsreceivingsubsidiesarebydefinition insulatedfromthemarket),sothestatehastoensurethatfirms failingtoraisetheircapabilitiesshouldatsomepointlosetheir subsidies(Amsden,1989:3–20).SouthKoreaandTaiwaninEast Asiaachievedsuccesswiththeirindustrialpoliciesbecausetheir statescouldprovideexantesupporttofirmswithcredibledisci- pliningthatresultedinawithdrawalofsupportifperformancewas poor(Amsden,1989;Wade,1990;Lall,1992,2000b,2003).Policy supportcameinavarietyofformsincludingtariffs,exportsub- sidiesandlowinterestloans.Performancewasobservedexpost andcompulsionsforrapidlearningoforganizationalandtechni- calcapabilitieswerecreatedbysignallingthatsupportwouldbe withdrawnfrompoorlyperformingfirmsorsectors.

However,whilethisworkedin EastAsia,thedevelopmental stateliteraturedidnotprovideafullexplanationofwhyitworked andwhatthepolicylessonsareforcountrieswherethesamepoli- ciesworkedlesswell.InAmsden’sanalysis,productivitygrowthis drivenbyoutputgrowthasintheKaldor-Verdoornmodel(Amsden, 1989:109–12).Inheranalysis,thediscipliningofsubsidiesinSouth Koreaensuredthatbusinessorganizationsdeliveredgrowth,and thisgrowththendroveproductivity.Thebigbusinessgroupswho weresupportedbecame competitiveasa result ofproductivity growthand hadlittlereason tocolludeor seektoprotecttheir subsidies.Competitionandcompetitivenesswerethereforecon- sequencesofgrowth(Amsden,1989:150).Ifthismechanismwas generallyeffective,theroleofdiscipliningwouldonlybetoensure thatsupportedﬁrmsactuallydeliveredoutputgrowth.Productiv- itygrowthwouldautomaticallyfollowthroughlearning-by-doing andwouldleadtotheachievementofcompetitiveness.Theexpec- tationthatoutputgrowthresultsinproductivitygrowthcanbe justiﬁedifthemostrelevantknowledgegapwasmissingtechni- calknow-how,andAmsdensuggeststhiswasindeedthecase.If

so,outputgrowthwouldensurethatmanagers,supervisorsand workersgottheopportunitytoworkonproductionlinesandtheir learning-by-doingwouldleadtoproductivitygrowth.

However,ifthemissingknowledgewasoforganizationalcapa- bilitiesthecollectivelearningprocessismuchmorecomplexeven thoughtheproductivitygainheremaybehugeanddecisive.The monitoring and disciplining required to ensure a high level of effortin anexerciseof continuousorganizational experimenta- tion and collective learning can be complex. Without effective strategies for ensuring high levels of effortin improving organizational capabilities,subsidized firmscan in principledeliver outputgrowthwithoutachievinganyimprovementintheirorga- nizationalcapabilitiesandthereforeanysignificantproductivity growth.IndeedthisisexactlywhathappenedincountrieslikeIndia andPakistanwhoseindustrialpoliciessupportedgrowthindiversi- fiedbusinessgroupsinthe1960sandgeneratedhighratesofoutput growth(includingexportgrowthinPakistan),butwithalmostzero productivitygrowth(Ahluwalia,1991;Khan,1999).Mostpolicy- supportedfirmsandbusinessgroupsnever becamecompetitive (Khan,1999,2011,2013b).

Discipliningfirmstoimprovetheirownorganizational capa- bilitiesmayappeartobeunnecessarysincefirmsshouldbenefitby improvingthesecapabilities.Thismaybetrueifthefirmsreceiving supportbelievetheycanachievecompetitivenessrelativelyeasily bysimplyproducingmoreoutputorbyimprovingtheirorganiza- tionalroutinesinsimpleways.Otherwise,puttingalotofeffort intoacquiringneworganizationalcapabilitiesmaynotbethemost rationalstrategy.Theeffortrequiredcanbeveryhighiftheini- tialproductivitygapis significant.Internal conflictshave tobe managedashierarchiesandresponsibilitiesarerestructuredand newwaysofworkingroutinized.Comparedtothecost,theprize maynotnecessarilybeattractive,particularlyifitmeansthatthe firmachievingcompetitivenessinthiswayis‘rewarded’bylosing itspolicysupportand havingtofendforitselfinaharshglobal competitiveenvironment. Withoutcompulsiontodo otherwise, therationalbehaviourofindividualsandmanagerswithinthefirm maywellbeto‘satisfice’,inthesensedescribedbyHerbertSimon (1956,1983).Therationalsatisficingstrategymaytokeepproduc- ingwithexistingorganizationalstructuresandallocateeffortto rent-seekingactivitiestoprotecttheirpolicyrents.Asaresult,if thepenaltiesfornon-performancearenotsignificantorcredible relativetothedifficultyoftheorganizationallearning,thelikely outcomemaybefailure(Khan,2013a,2013c).

The relatively simple disciplining strategy in East Asia with its focus on output and export targets achieved both a rapid acquisitionoftechnicalknow-howandsigniﬁcantimprovements

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inorganizational capabilities becauseofexceptional conditions.

AlthoughAmsden’stheoreticalargumentfocusesonthelearning oftechnical know-how, herdetailed descriptions oflearning in automobiles,shipbuildingandsteelshowthatrapidimprovements inproductivityactuallyoccurredthroughtheimplementationof neworganizationalroutines(Amsden,1989: 175–80,272,80–6, 305–16).Comparing theorganizational transformation in these SouthKoreancompanieswiththerelativeorganizationalinertia incomparableIndianorPakistanionesoftheperiodleadsustoask whyoutput-promotingstrategiesworkedtoinduceorganizational changeinonecasebutnottheothers.

Twoimportant and exceptional characteristics ofEast Asian statesandsocietiesprovideatleastapartialanswer.First,inthe 1960sEastAsiancountrieswerejustaspoorasSouthAsianonesbut theyhadrelativelyhigherinitiallevelsoforganizationalcapabili- tiesinmanufacturingandasupplyofdomesticentrepreneursand managerswithanunderstandingoftheproblemstheyhadtosolve.

Japanesecolonialismhadintroducedaggressiveindustrialization inbothSouthKoreaandTaiwanandlocalmanagerswhoworked inmodern Japanese firmsunderstoodfirm organizationand its importanceforefficiency.Secondly,themacro-leveldistribution oforganizationalandpoliticalpowerwithinthesecountries(their political settlements)allowedtheirstates toprovide andwith- drawsupportfrombusinesses(Khan,2009;KhanandBlankenburg, 2009).ThistoowasrelatedtothenatureofJapanesecolonialism, whichruledinKoreaandTaiwanwithbruteforce,andmadenouse ofclientelistpoliticalorganizationsthatmediatedsocialconflicts bydistributingrents.Incontrast,SouthAsialikemuchoftherestof thedevelopingworld,inheritedpowerfulclientelistpoliticalorga- nizationsfromBritishcolonialtimesandtheseorganizationscould laterbeusedbybusinessorganizationstoprotecttheirsubsidies forashareoftherents.

Boththesefeaturesplayedanimportantroleinexplainingwhy technicalandorganizationalcapabilitiesimprovedwhensupport waslinkedtooutputperformanceinEastAsiabutnotSouthAsia.

SouthKoreanmanagersknewthattheydidnothavethepolitical networkstobargaintomaintaintheirlevelsofsupportortoblock thewithdrawalofsupportiftheirperformancewaspoor.Ifsubsi- diescouldbewithdrawnandifoutputgrowthhadtobesustained withoutadditionalsubsidies,theonlyoptionwastoimproveboth technicalandorganizationalcapabilities.Atthesametime,man- agersalsobelievedthiswasfeasibleandhadsomeideaofwhat this entailedbecausetheyhadworkedin competitiveJapanese organizationsintherecentpast.

Incontrast,incountrieswheretheinitialorganizationalcapabil- itieswerelowandpoliticalconditionswerelessfortuitous,support foroutputgrowthdidnotcreatestrongpressuresforproductiv- itygrowththroughtheacquisitionofdifﬁcultneworganizational capabilities.Organizationswithlowerinitialcapabilitiesneeded toputinmuchhighercollectiveefforttoachievecompetitiveness andtheeffortrequireddidnotmakesensegiventherelativeease withwhich subsidiescouldbeprotectedthroughallianceswith clientelistpoliticalorganizations.Therelevantlearninggapcould havebeenreducedwithabetterunderstandingoforganizational capabilitiesandbysupportingbusinessorganizationswhoseinitial capabilitieswereclosertothecompetitiverequirementsforusing particulartechnologies.Atthesametime,thepoliticalsettlements inthesecountriesmadeitunlikelythatexantesubsidiescouldbe easilywithdrawneveniforganizationalfailureswerepersistent.

Otherformsofprovidingsupportmayhavebeenmuchmoreeffec- tive,aswewillseeintheBangladeshigarmentindustryexample.

ContrarytotheEastAsianexperience,SouthAsianﬁrmsthatwere supportedinsimilarwaysinthe1960sachievedoutputgrowth, butproductivitygrowthwaslow becausetheyfailedtoachieve higherorganizationalcapabilitiesandinsteadrenegotiatedlevels ofsupport,failedtorepaybanksandevenevadedbankruptcylaws.

Adifferentdesignofpolicyinstrumentsthattookbetteraccountof initialconditionsmayhavedeliveredbetterresults.Ifskillswere theonlyfactordeterminingproductivity,theoutputgrowthshould haveresultedinlearning-by-doingandproductivitygrowthinthe wayAmsdensuggested.Butonceweunderstandtheinterdepen- denceofdifferenttypesofknowledgerequiredforcompetitiveness, itbecomespossibletoexplaintheSouthAsianexperience.

5. EvidencefromthegarmentsindustryinBangladesh

ThepoorperformanceofindustrialpolicystrategiesinPakistan inthe1960sleftthenewstateofBangladeshthatemergedin1971, whenEastPakistanbecameindependent,inaveryvulnerableposi- tion.Itsmanufacturingsectorwassmallandnotverycompetitive andthedominantjuteindustrywaslosingitsglobalimportance.

However,outof theeconomicchaos, thegarments andtextiles industryemerged inthelate1970s andrapidlyachievedglobal competitiveness.Withinthreedecadesitemployedalmostﬁvemil- lionworkersandcontributedalmost80percentofthecountry’s exportearnings.Thegrowthofthelabour-intensivesectoralsohad ahugeimpactonpovertyreductionasGDPgrowthratescreptup fromaround5percentayearin2000toaround6.5percentinthe 2010s.

Thegarmentsindustrytake-offinBangladeshinthe1980sis usuallyattributedtolowlabourcostsandtheliberalizationthat began in thelate 1970s. These factors,it is argued,helped the countrybeneﬁtfromtheglobalopportunityingarmentsproduc- tion.Butmanyothercountrieswithlowlabourcostsandaccessto worldmarketsdidnotsucceedinthegarmentsindustry.Thecriti- calelementinBangladeshwasastrategyforﬁnancingthetransfer oforganizationalcapabilitiesthatcreatedtherightincentivesand compulsionsfor a rapidacquisition ofthese capabilitiesby the emergingBangladeshiindustry.Acriticalcomponentofthisstory wastheMulti-FibreArrangement(MFA),whichcreatedpotential rentsforgarmentsproducersin less-developedcountriesif they couldproducegarmentsofacompetitivequalityandatacompetitive pricewithintheadditionalmarginsallowedbytheMFA.

TheMFAemergedin1974drivenbyUStextileandgarments interests.ItspurposewastoprotecttheAmericangarmentsand textileindustryfromcompetitionfromcountrieslikeHongKong, SouthKoreaandTurkeythatweremorecompetitivethantheUSA inthesector.Itimposedquotasonimportsofgarmentsfromthese countriestotheUSA,andasaconcession,leastdevelopedcountries (LDCs)weregivenquotafreeaccesstotheAmericanmarket.NoLDC atthattimehadanycapacityincompetitivegarmentsproduction, sothiswasarelativelysafecompromisefromtheAmericanper- spective.Thepolicydidhowevercreatepotentialquotarentsfor theseless-developedcountries,whichtheycouldcaptureifthey managedtodelivergarmentsoftheappropriatequalityataprice thatwaslowerthanthepriceintheprotectedAmericanmarket.

Onceestablishedexportershadﬁlledtheirquotas,suppliesinthe US marketdriedupandthelocalpriceof garmentsrosetothe levelwherelocalUSproducerscouldbegintosupply.Thiswasthe intentionafterall.TheunintendedconsequencewasthatifLDC exporterscouldachievequalityexportsatorbelowthisinternal Americanmarketprice,theycouldearnarentrelativetotheglobal competitiveprice.Thiswasthequotarent.

Thisonitsown would nothave beensufficient becausethe low level of basic organizational capabilities in LDCs including Bangladeshmeantthattheycouldnotproducequalitygarments evenatthequotaprotectedUSmarketpriceandevenwiththeir very low wages. Here, the role of the Bangladesh government wasimportantinbackingafinancialagreementthatfundedthe acquisitionoforganizationalcapabilitiesandagreeingtofast-track criticalregulatorychanges.Thefinancialagreementwasbetweena

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Bangladeshicompany,Desh,andaSouthKoreanchaebol,Daewoo, wheretheacquisitionoforganizationalcapabilitieswasﬁnanced withoutexantesubsidiesbeinggiventotheBangladeshicompany.

The terms of the deal were that Desh would invest in the machineryandlabour requiredforsetting upa large-scalegar- mentsoperationinBangladesh.Daewooundertooktoinvestinthe organizationallearningprocessbyhostingaround130Bangladeshi managersandsupervisorystaffatitsfactoryinBusantolearnthe relevantorganizationalandtechnicalknow-howonsite.Daewoo’s rewardwouldbean8%royaltyontheeventualsalesofDesh.In termsofthemarginstypicalintheindustrythiswasahugereturn toDaewoo,anditwasonlypossiblebecauseoftheexpectationthat DeshwouldcaptureanMFAquotarent.Thedealeffectivelypassed thepotentialquotarentstoDaewooasexpostrentsrewardingtheir effortandinvestmentsinthetransferoforganizationalcapabilities totheBangladeshiside.Thisexpostrentcouldonlybeaccessedby DaewooifDeshsucceededinexportingtotheAmericanmarket.

Theresultswerespectacular.Theorganizationalandtechnical learningthatwasplannedtotakemorethantwoyearsinBusan wasfinishedinlessthanone.Theincentivesonbothsideswere togetthetrainingandlearningdoneassoonaspossiblesoboth sidescouldstartmakingmoney.ThemanagerstrainedinBusan camebacktoBangladeshwithagoodinitialknowledgeoftheorga- nizationaloutcomesrequiredand begantoadapt SouthKorean organizationalroutinestoBangladeshi conditions.Deshexports grewatcloseto100%ayearforthenextfewyears.Ofthe130mid- levelmanagerswhowenttoBusan,115setuptheirownfactories withintwoyears.Deshdidnotpreventitsmanagerssettinguptheir ownfirmsfortworeasons,apartfromthefactthatitwouldhave beenpracticallydifficulttopreventthemdoingso.First,oncethe competitiveorganizationalstructureofthefirmwasestablished,it didnotmatterifoneortwomanagersoccasionallyleft.Secondly, italsobecameobviousthatasmoregarmentsfactorieswereset up,moreforeignbuyerscametothecountry.Imitationandclus- teringwerethereforeadvantageoustofirstmoversandtheymade noattempttopreventimitation,contrarytotheexpectationsof theHausmannandRodrikdiscoverymodel(HausmannandRodrik, 2003;Khan,2013a).

Imitation was rapid because the first movers adopted effi- cient organizational routinesand adapted them to Bangladeshi conditions. The organizational capabilities required to become competitivecouldbeacquiredbyimitatorsatrelativelylowlev- elsofexperimentationandeffortbecausetheorganizationalforms were not too far distant from the initial capabilities of many Bangladeshientrepreneursandmanagers.Nevertheless,without theinitiallearninganddemonstrationofeffectiveorganizational structures by the first movers, it is unlikely that the organizational capabilities would have spontaneously emerged, and indeedgarmentsindustriesdidnotspontaneouslyemergeinother LDCs.Theadditionalproductivitygrowththatwassubsequently achievedbyfurtherexperimentation andrefinement oforgani- zationalstructuresandroutinesandskillsdevelopmentthrough learning-by-doingwassufficienttomakeBangladeshnon-reliant onMFAwithinafewyears.

TheBangladeshigarmentsindustrythusbecamegloballycom- petitivebyadoptingstrategiesforacquiringbasicorganizational capabilities of quality control, inventorymanagement and cost management. A substantial amount of growth could then be achieved through horizontal imitation. This horizontal growth is still continuing four decades later. However, as parts of the Bangladeshgarmentsandtextileindustrybegantomoveupthe valuechain,theneedforintermediatelevelsoforganizationalcapa- bilitiesandskillsemerged,tooperatemorecomplexmachinery, maintainhigherlevelsofqualitycontrolandmanagemorecom- plexproductionprocesses.Employersandpolicy-makersobserved thedifﬁcultyofraisingproductivityandattributedthisquiteaccu-

ratelytoknowledgegapsconstrainingthebroad-basedupgrading oftheindustry.However,thenatureoftheknowledgegapsand theirinterdependentnaturewasonceagainnotfullyappreciated.

Instead,theconventionalwisdomisthatimprovingtechnicaland vocationaleducationandtraining(TVET),togetherwithimprove- mentsinformaleducationwouldhelpBangladesh(andcountries likeit)upgradetheiremergingmanufacturingsectors(ADB,2015a, 2015b).

Surveysofemployersappeartosupportthisinterpretationsince employersthemselvesaretypicallyunawareoftheirownmissing organizationalcapabilities.Theyaremostlikelytoattributetheir lowproductivitytoknowledgegapsintheirworkforce.AnILOsur- veyonskillsgapsinBangladeshiﬁrmsfoundthatthethreemost importantgapsreportedbyﬁrmswere‘basicknowledge’reported 46timesinthesample,‘jobskills’reported29timesandtheabsence of‘industrialbehaviour’reported44times(Rahmanetal.,2012:

Table10.4.8).Thefirsttwogapsclearlycorrespondtogapsincod- ifiedknowledgeandskills.Thethirdgap,amysteriousabsenceof industrialbehaviourthatBangladeshiemployersattributedtotheir workers,isreminiscentofthebehaviouralshortcomingsofIndian workersidentifiedbyClarkandWolcott(2012).Thisbehavioural deficiencyismorelikelytobeareflectionoftheloworganizational capabilitiesofthefirmsthemselves.Theinterdependenceproblem meansthattheprovisionofeducationandskillswithoutclosing theorganizationalcapabilitygapislikelytodeliverpoorreturns.

Indeed,despitemassiveinvestmentsinTVETandsecondaryedu- cation,themovementupthevaluechainhasbeenveryslowinthe Bangladeshigarmentsindustry.

Nevertheless, there areexamples of successfulupgradingto intermediatelevelsinBangladesh. Theseexamplesdemonstrate therelevanceoforganizationallearningforachievingfurtherpro- ductivity improvementsasthe countryattempts tomovefrom basictointermediatelevelsoforganizationalcapabilities.TheGer- manInvestment andDevelopmentCorporation,DEG,supported and later evaluated an internal skills upgrading programme of a Bangladeshi garments manufacturer, JMSHoldings Ltd. (DEG, 2016).JMSisoneofthelargergarmentsgroupsinBangladesh,with atotalemploymentofaround6300workers,around70%ofwhom arewomen.LikemostBangladeshigarmentsmanufacturers,the grouphadbasicorganizationalcapabilitiesandwascompetitivein relativelylow-endproductswithlowlabourproductivity.Between 2012and2014itengagedinasigniﬁcantinternalupgradingand capacityexpansionplan,partiallyﬁnancedbyDEG.Theprogramme engagedaninternationaltextileconsultingcompany,Gherzi,who hadexperienceintheTurkishtextileindustry,toassistwiththe upgrading.Thetraining involvedaconventional TVEToperation thatassistedskillsdevelopment,butalsoandcritically,anorga- nizationalrestructuringofproductionlines.Thetotalinvestment wasUSD1.5million,ofwhichUSD820,000wasinvestedinskills upgrading.

The results were ‘tremendously positive’, with productivity goingupby37%andoutputby74%intwoyears.Thequalityof productsimprovedandinputwastagedeclinedbymorethan80%

justbetween2014and2015.ProﬁtsincreasedbymorethanUSD1 millionsince2012.AccordingtotheconsultantsfromGherzi,only aroundthree-tenthsofthetotalproductivitygrowthof37%could beattributedtotheTVETorskillstrainingpartoftheprogramme.

Theotherseven-tenthswereduetothe‘optimizationofthepro- ductionlayout’andnewequipment.Thestudyconcludedthat“the mostimportantproductivityleveristheoptimizationofproduc- tionlayout,followedbythetrainingofemployees,andlastlythe usageofnewmachines”(DEG,2016:7).Thecontributionofnew machinerywasthereforeevenlessthanthethree-tenthsattributed toskillstrainingimplyingthatthebiggesteffect,possiblyaroundhalf ofthetotalproductivitygrowthwasduetobetterproductionorga- nization.Theimprovedorganizationandmanagementofamore

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sophisticatedproductionprocessisanimprovementinorganiza- tionalcapabilitiestowardsintermediatelevels.ThisallowedJMS toengageinhigher-valuedgarmentsproductionthatrespondedto ongoingimprovementsindesign,qualitycontrolandproductivity, therebyenhancinglocalvalueaddedandproﬁtability.

TheJMS upgradingexperienceagainunderlinesthe interde- pendenceofskillstraining andtheacquisitionoforganizational capabilities.Moreover,onceagainthiswasachievedbyincentiviz- inganexternalcompanytotransferorganizationalcapabilitiesto aBangladeshicompanyratherthanprovidingexantesubsidiesto theBangladeshicompanytoraiseitsorganizationalcapabilitiesin itsownway.Theseexamplesunderlinetheimportanceofpolicies addressingspecificcombinationsofknowledgegaps.Theyalsosug- gestthatpoliciessupportinglearningwillonlyworkiftheyinduce appropriately highlevels of learning effort.In countries where politicalsettlementsdonotallowcrediblediscipliningoffirmsthat aregivenexantesubsidiesforlearning,subsidypoliciesarenot likelytobeeffectiveininducingimprovementsinorganizational capabilities.Butthisisnotanargumentforleavingthingstothe market.Withoutthestrategyofre-allocatingMFArentstoDaewoo intheinitialDesh-Daewooexample,orthelowinterestloanspro- videdbytheDEGintheJMSexample,therelevantorganizational capabilitiesmaynothavebeenspontaneouslyacquired.Thereis thereforeasignificantpotentialroleforgovernments,butitsrole istoprovidepolicysupportthatmimicstheincentivestructuresin thesuccessfulexamplesdiscussedabove.

Theinterdependenceofknowledgegapscanhelptoexplainwhy internationalevaluationsofskillstrainingprogrammesﬁndthat theygenerallyhavealowimpactonproductivity.AWorldBank reviewofalargenumberofevaluationsoftrainingprogrammes acrossboth advanced and developing countriesconcluded that theseprogrammesgenerallydidnothaveahighimpactonwages(a measureofincreasedproductivity)thoughtherewassomeimpact onemployment(Betchermanetal.,2004:53).Theperformance oftrainingprogrammeswasevenpoorerindevelopingcountries.

Thegenerallypoorresultsreportedcouldbeduetotwosortsof reasons.Itcouldbethatthedeliveryofthetechnicalknow-how wasitselfweak.Butmoreplausibly,giventhepoorperformance acrosssomanycountriesandprogrammes,itismoreplausiblethat thecomplementaryorganizationalcapabilitiesrequiredforutiliz- ingtheseskillseffectively andallowingproductivitytoincrease weremissing.

EstimatesofthereturnstocodifiededucationinBangladeshand otherdevelopingcountriesalsoshowlowratesofreturn.TheWorld BankestimatesthatreturnstoformaleducationinBangladeshare 3.6%forprimary,6%forsecondaryand9.2%forundergraduateedu- cation,reflectingtherelativelylowimprovementsinincomesasa resultofeducation(Dohmen,2009:15).Thesefiguresseemtobeat oddswiththewidelyreportedshortageofcollege-educatedwork- ersinfirmsforsupervisoryandotherrolesandtheoutmigration of individuals withformal knowledge tomore advanced coun- trieswheretheyearnconsiderablyhigherreturns.Butthefigures areeasilyexplicableifwerememberthatwithoutsimultaneous investmentsinorganizationalcapabilities,thepotentialofformal educationcannotberealizedwithinBangladesh.Inotherwords,the returnstobothskillstrainingandformaleducationmaycritically dependona simultaneous upgradingof organizationalcapabilities.Ironically,thisinterdependenceisnotfullyrecognizedeven incountrieslikeBangladeshwhichhaveachievedsomesuccesses indevelopingbasicandsomeintermediatelevelsoforganizational capabilities.

Finally,ouranalysiscanshedlightonwhyitissodifﬁcultto raisethequalityofschools,collegesandskillstraininginstitutesin countrieswhereorganizationalcapabilitiesarelow.Highcapability ﬁrmsarecriticallyimportantnotonlyforcreatingjobopportuni- tiesforskilledandeducatedworkers,butalsobecausemanagersin

well-workingorganizationsareabletodiscriminatebetweenwell- trainedand badly-trainedapplicants.Managersinwell-working organizationsknowwhattypeofpersontheyarelookingforina particulartaskandcanusuallyquicklyidentifywhenthatperson’s trainingisinadequate.However,whentheoverallproductivityof anorganizationislowbecauseofpoororganizationalcapability, an individualskilled worker is unlikely tohave anyimpact on productivityorprofitability.Thesefirmsthereforefindithardto discriminateaproperlyeducatedortrainedworkerfromothers, andarelikelytopayallworkersalowsalaryorwage.Thiscan destroyincentivesfortrainingprovidersofalltypestomaintain qualitysincethereisnopremiumforprovidingqualityeducation andskills.Theresultcanbeaviciouscyclewherepoororganiza- tionalcapabilitiesresultinlowstandardsofformaleducationand skillstrainingthatinturnmakeitdifficulttoraiseorganizational capabilities.

6. Conclusion

Structural transformation raises signiﬁcant challenges for investmentsinknowledge.Thechallengesarealsodifferentacross countrieswithdifferentinitialconditions.Theargument inthis paperisthatitisimportantforpolicytorecognizeandrespondto theinterdependenceofformalknowledge,skillsandorganizational capabilities. Secondly, while the importance of organizational capabilitiesisrecognizedintheadvancedcountryliterature,the importanceofbasicandintermediateorganizationalcapabilities hasoftenbeendownplayedinfavouroftheanalysisofdynamic organizationalcapabilities.Thistooisamistake,notonlyinthecon- textofdevelopingcountries,butalsointhecontextofregeneration challengesindepressedregionsandsectorsofadvancedcountries.

The moreunderdeveloped theinitialorganizational capabilities andthemoredifficultitistodisciplinefirmsgiventhecharacteris- ticsofthepoliticalsettlement,thelesslikelyisitthatgeneralized policiesofsupportforfirmswillbeeffectivein achievingcompetitiveness. Yet,theexperienceof successfulimprovementsin organizationalcapabilitiesinthegarmentsindustryinBangladesh, aleastdeveloped countrywithaclientelistpolitical settlement, showsthatappropriatelydesigned supportpoliciescanworkin developingskillsandorganizationalcapabilitiestocreatecompet- itiveindustries.

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