THE GLOBAL RESTRUCTURING OF THE STEEL INDUSTRY ppt

C ONTENT SExcess capacity, maturity, and Japan ese restructuring 72 Conclusion 80 5 Technological change and institutional challenges in Introduction 82 State-led capitalist industrializ

THE GLOBAL RESTRUCTURING OF

THE STEEL INDUSTRY

The ste el industry is one of man y maj or worl d industries exte nsively

restructured in this era ofgloba lizatio n The Global Restructurin g of the Steel In du stry explains how and why the steel industr y has shifted from

adva ncedcapita list countriestolat e ind ustria lizing countries

Drawin g uponcase studies of the steel industr yin theUS,Japan , South

Korea,Brazil and India, Antho ny P.D'Costa examines therelationshipbetweenindustri al cha nge and institution alrespon sestotechn ological diffusion He

revealsthat govern ments' and firms'differin grespon sesto innovatio ns lead

to an uneven diffusionof techn ology and industrialreorgan izati on Moreover,

whenit becomesclearthat existinginstitutio na larrangements nolon ger serve

theindustr y well, new arrangements are mad e which allow for innovati ve

beh a viour Ofte n this ha s created op po r t uni ties for techn ol o gic al

"leapfrogg ing" and the emergenceof newtechn ologiesin unexp ected places

The steel industry hascon sequ entl yknown anewdynam ism and the o

pen-ended nature of capitalistcompetiti onhasbeenfirmlyunderscored

The Global R estru ctu ring of th e Steel In du st ryis atimely addi tio n totheliterature of world industries andoffersvalua ble insight sintothenewdynamics

ofindustria l capitalism in the globa lizedage

Anthony P.D'Costa is Associat e Professor of Compa ra tive Internat ion al

Development at theUniversity of Washin gt on ,Tacom a,USA.Hehas written

o ind ustria l restructuringinAsia,Lat inAmerica and theUS andiscurrentl y

researchingtechn ologyleapfr oggingin theIndian software industr y

2 MULTIN ATION AL RESTRUCTURIN G, INT ERN ATI ONALI Z ATIO N

AND SMA LL ECONOMIES

Th e Swedish case

Thomas Andersson, Torbiorn Fredriksson and Roger Svensson

3 FOREIGN DIRECT IN VESTM ENT AN D GOVERNMENTS

Ca talysts for econo mic restructuring

Edited by John H.Dunning and Rajneesh Naru la

4 MULTIN ATIONAL IN VESTMENT AND ECONOMIC S T RUCTURE

Glo balizat ion and competitiveness

Rajneesh Naru la

5 ENT REPRENEURSH IP IN A GLO BAL CONTEXT

Edited by Sue Birley and Ian Macm illan

6 THE GLO BAL S TRUCTURE OF FINANC IAL MARKETS

An overview

Edited by Dilip K.Ghosh and Edgar Ortiz

7 ALLIANCE CAPITALISM AND GLOBAL BUSINESS

John H.D unning

8 MULTIN ATIONAL ENTERPRISES FRO M T H E NETHERLANDS

Edited by R oger van Haese! and Rajneesh Naru la

9 COMPETITION, GROWTH S TRATEG IES AND TH E GLOBALIZATION

OF SERVICES Real estate advisory services in Jap an , Euro pe and the United States

Terrence LaPier

10 EUROPEAN INT EGRATIO N AND FO REIGN DIRECT IN VESTMENT

IN THE EU

T he case of the Korean consu mer electro nics ind ustr y

Sang Hyup Shin

11 NEW MULTINATIO N AL ENTERPRISES FRO M KOREA AND TAIWAN

R oger van Haese!

12 CO MPETITIVE IND USTRIAL DEVELOPM ENT IN THE AGE OF

IN FORMATIO N

Th e role of co -operat ion in the technology secto r

Edited by Richard ].B raudo and Jeffrey G Macintosh

13 THE GLOBAL RESTRUCTURIN G OF THE S TEEL IND USTRY

Innovati on s, institu tion s and ind ustrial cha nge

Anthony P.D 'Costa

14 PRIVAT ISATION AND LIBERALISATIO N IN EURO PEAN

T ELECOMMUNI CATIO NS Comparing Britain , the Netherlan ds and Fra nce

Willem Hulsink

THE GLOBAL RESTRUCTURING OF

THE STEEL INDUSTRY

Innovations, institutions and industrial change

Anthony P.D-'Costa

London and New York

F irst p ublished 1 999

b R outl edge

11 N ew Fe tter L an e, L ond on EC 4P 4 EE

Thi s e dition p ublished in t he T aylor & F ra ncis e- Libra ry, 200 3

S imu lta neous ly p ublished in th e U SA a nd Ca na da

b R outl edge

2 W est 3 5th Str eet, New York , N Y 10001

© 1 999 Anth on y P D ' Co sta

All ri ghts r eserved No p art o f thi s b ook m ay b e r eprinted o r

r eproduced o r u tilised in a ny f orm or b y a ny e lectro nic,

m echanic al, o r o ther m ean s, n ow kno wn o r h ereafter

in vent ed, i ncludin g ph otoc op ying a nd r ecording, or in a ny inform ati on sto rage o r r etri eval sys tem, w itho ut p ermi ssion in

writin g from th e publi shers

B ritish L ibrary Ca taloguing in P ublication D ata

A cata logue r ecord f or thi s b ook i s ava ila ble from th e Briti sh Libr ar y

L ibrary of Congress Ca taloguing in P ubli cation D ata

D' Costa , Anth on y P 1 95

7-Th e g lo bal r estructuring of th e s teel indu str y : inn ovati on s,

in stituti on s, a nd indu stri al ch an ge/Anth on y P D ' Costa

p c m.

Incl udes bibli ogra phic al ref erences a nd ind ex.

1 S teel ind ustr y a nd tr ade 2 S teel ind ustr y a nd tr ad

e-Gove rn ment p olicy 1 Titl e

TO AVERIC, CAMILLE, AND THEIR

GRANDPARENTS

Int rodu ction 1

Ex plaining in dus trial r estru cturin g 2

Outlin e o f c hapters 8

2 An institutional interpretation of steel industry

Int rodu ction 11

Th e r estru cturin g is sue 12

Tec hno logy a nd r estructurin g: a n an alyti cal fr am ew ork 21

Co nclusion 28

3 Technological change and crisis in the American steel

Int rodu ction 3

Str ategic ado pt ion o f n ew inn ovation s 37

Th e c risis co m po unde d 4

Cr isis-inspired r estructuring: d isinvestme nt a nd in stitutional c hange 4

Co nclusion 55

4 Technological change and rapid industrial development

Int rodu ction 5

St ate-led l ate indu strializati on 5

In stitutional r espon se t o n ew inn ovati on s 6

C ONTENT S

Excess capacity, maturity, and Japan ese restructuring 72

Conclusion 80

5 Technological change and institutional challenges in

Introduction 82

State-led capitalist industrialization 83

Overcoming structural dependence 88

Institutional challenges to industrial restructuring 95

Technology diffusion and capability in Brazil, India, and Korea 109 Conclusion: institutional capacity and industrial restructuring 117

6 Technological change and the internationalization of the

Introduction 119

US imports and the changing international division of labor 120

Cost of production and labor productivity 125

Global realignments in th e steel industry 128

Th e diffusion of new technologies and restructuring 155

Conclusion: new technologies and industrial restructuring 165

8 Interpreting technological change and industrial

Introduction 169

Restructuring and capitalist industrialization 170

Institutional chang e and restructuring 173

Technology, strategy, and the international division of labor 177 Conclusion 182

Appendix: institutions visited and/or contacted for data collection 200

3.2 Unit opera tio nsin steel ma kingsequence:integra te d blast

furnace-b asic oxygen furnace-continuou scastin g and

3.3 Adop tionof basic oxygenfurnace(BO F)and continuou s

3.4 Lar ge-sizedblastfurnacesin the worl d 42

3.6 Relat iveprofitabil ity of theUS steel industr y(% ofequity) 44 3.7 Financinginvestm ent in theUS steel industr y 45 3.8 Excesscapacit yin theUS steel industr y 4 3.9 ARMCO's plantimbalanc es and rounding-outprocess 50 4.1 Kor eaninvestm ent in the steel industr y 60 4.2 Increasing size of blastfurnaces (BFs) and basic oxyge n

5.4 POSCO 'slearningcurvesfor blastfurnace (BF)opera tion 113 6.1 The cha ng ing division of lab or on theUS west coast 131 6.2 Cha nging pattern of Jap an ese expo rts 133

7 1 Risingtrendin Jap an 's electricarc furnace (EAF)size 145

7.4

8 1

LI ST OF FIGU RES

Ispat 's expa ndingsteel business

Plannednewplants and newtechn ologies in India

Demand andsupp lyofsteel scra p in Korea

161

16 3

179

5.3 Compa risonof integr at ed greenfiel dsin Brazil,India,

5.5 Diffu sion of mod erntechnology:basic oxyge n furnace (BO F)

7 1 The diffusionofelectricarc furnace (EAF) technology 142 7.2 Average size of minimillplants in theUSand Jap an 144 7.3 Recent technologicalbreakthrough sinalternative

7.4 Greenfield investm entcosts:minimilland integr at edin

7.6 Diffu sion of newminimilltechnology in the US 157

LIST OF TABLES

8.1 Forecasts of Korean steel industry ('000 tons of crude steel) 171

8.2 India's supply and demand position in 2001-2 ('000 tons) 178

Steel and steel-based engineering have long been regarded as the thews andsinews of modern industrial and military power This was apparentlydemonstrated yet again in what the Japanese call the Pacific War of1941-5,where the overwhelming US superiority in ships, airplanes, and armamentsgave it victory over the indomitable Japanese soldier, prepared at all times tokill or to die for his country or Emperor-right or wrong Governments whichhave deliberately embarked on a plan for industrializing their countries,therefore, have paid special attention to the development of an indigenoussteel industry

This book provides a fascinating analysis of the reasons for the staggeringsuccess of the post-World War II Japanese steel industry until it was over-taken in international competitiveness by the Korean industry, and also aconnected account of the much more mixed record of the Brazilian and Indiansteel industries All these four histories are strongly influenced by stateintervention, but with very different outcomes, the reasons for which D'Costasets out in this book His analysis is not limited to explaining the differentialfates of the late, and late late, industrializers He sets them against thebackground of international competition in prices, costs of production,technology, investment, and capacity-building, and provides a succinct account

of the doings and the causes of the downfall of the once-mighty US steelindustry

Most processing technologies connected with steelmaking were andcontinue to be characterized by strong economies of scale Add to that thefact that large amounts of finance are needed to implement best-practicetechnologies on scales that yield the lowest cost, and that steel is a majorinput in most capital goods and is likely to experience strong ups and downs

in demand, the need for large firms in the industry becomes a matter ofsheer common sense The controllers of the US industry realized it betterthan others, and through mergers they created the first billion-dollar firm

in the world, the US Steel Corporation After that, the steel industry in the

US went from strength to strength and emerged as the leading producer ofsteel, with a very big gap between it and the rest of the producers, at the

en d of World War II However,a captiveandenorm ous domestic marketand the oligopolistic structureof theindustry produceda complacentand

lethargicattitudetowards technicalchange.Four decadesago, W.E.G Salt er

ex plode d the myth that in advanced capitalist countries most firms use

best-practicetechnologymost of thetime.Leadsand lags in thediffusion

of technology,industry structureand various kinds of protectionor subsidies

en joye d by the firms can gen erate a large spread of technolo gy andproductivity.But the USsteel industryseta recordof delayed adoption of

best-practicetechnologyby setting up most of the44 million tonsof newcapacity in the shap eof openhearthfurnaceswhenthebasicoxygenfurnace(BOF) had alreadyproved itself as the best-practice technology for steel

sme lt ing The en orm o usam ount of US aid to theallies and somedevelopingcountries,often em bodied in high-cost products tied to aid, contributedtothis development, along with therisk-avers e divisions of an oligopolisticindustrycocoonedin a protect ed domestic market

However,as soon as theJapaneseand theGerman steelindustriessetup

enough capacitywith BOF and continuous casting (C C)technologies,theUSindustry lost its dominance in the exp ort market and found its hometurfthreatened b importsof foreign steel and enginee ring products.Thelaterhistory of theUS steelindustry is oneof painful and halting adjustmentanddownsizing,with variouskindsofgovern ment helpsumm oned to prop up anailing giant

Although this story seemsto bebut a repetition,onalarger scale, of whathappenedto manysegmentsof British industryin anearl ierer a with thethen

newlyindustrializedcountries emerging to overtakethepioneer,theJapaneseand theKoreanchallengeto the US and many segments of theEuropeansteelindustry seems to have imparted a new quality of aggressiven ess to thecompetitive race This new quality inheres in thefact that, while partsofBritish, American or even continent al European ex port demand for steeloriginatedin colonial or dependent economies with somecushionfor higherpricesor lowerquality,theJapaneseand theKorean ex ports havedependedalmostentirely on competitivenessin price,quality,customer suitability, anddeliverytime

D'Costaprovidesa fascinatingand convincingaccount of why,out of thethreecountries-Brazil, India, and South Korea-whichcan be said to havemountedastate-led programof developmentof theirrespective steel industries

in the post-war period (although in the case of Brazil, this effort actually

beganin the1930s),onlyKoreahasbeenableto develop an industrywhich

iscompetitiveby globalstanda rds Thiscontrastin theactual outcomeof the

state-led development drive, of course, appliesmore or less to the entire

spectru m of industri esand to the economy ingeneral and hasdeep social andpolitical roots; but it also deri ves partly from differenc es in geopolit icalconjuncture

Thegovernment sof those states which man aged successfully to promote

FOREWORDindustrialization also managed to keep a distance between themselves andparticularistic economic interests Even if they strove to promote capitalism,

it was the interest of the capitalist class and the economy, rather than of aparticular section, that the state promoted By contrast, in the states whereintervention produced only mixed results, particular sections of capitalistsmanaged to influence the decisions of the state, which often turned out to beinefficient, contradictory, and time-inconsistent State autonomy, of course,has deep political and social roots One major condition was that in theinitial or heroic phase of industrialization, foreign capitalist interests played

no role in government decisions Another condition was the elimination of alandlord class which had often proved a hindrance to the full functioning ofmarkets and the release of entrepreneurial energy even as it acted as an ally

of foreign capitalists interested in exploiting the domestic market formanufactures in return for securing markets for landlord-controlled primaryproducts A successful developmental state also sought to educate the wholepopulation, since learning how to learn has been one of the key conditionsfor industrial success in the modern world

The implementation of an industrialization plan requires "social capability"

on the part of entrepreneurs and politicians while it also requires

"macroeconomic capability" on the part of the managers of national financeand investment In the case of South Korea, the task of macroeconomicmanagement was considerably eased by the availability of enormous quantities

of untied aid and military assistance from the US and her allies down to the1970s But the government of that country made sure that, even if initialinvestments inpasco were subsidized, they generated increasing surplusesover time, and thus did not become a drain on public sector resources Moregenerally, the continued generation of a surplus by the public sector,complemented by balance of payments surpluses in the long term, seems to

be a necessary attribute of the macroeconomic capability of a developmentalstate By contrast with South Korea, both Brazil and India were hampered by

a shortage of foreign exchange when shopping for the best technology.However, the difficulties of the latter were greatly compounded by theirdeficiencies in learning and decision-making They generally planned for plants

of suboptimal scale, burdened the companies with large interest payments,allowed gestation lags to grow beyond the norm, failed to recover subsidiesdoled out by the public sector, and devoted too little time, decision-makers'attention and resources to the absorption of new technologies and theirupgrading through continuous learning

The last deficiency can be illustrated by the contrasting strategy adopted

by the Japanese to absorb BOF technology for steel smelting When theJapanese found out about the BOF technology invented by an Austrian stateenterprise, they sent out several teams with representatives of industry, theMinistry of International Trade and Industry (MITI) as well as steeltechnologists, in order to try and absorb the invention as thoroughly as

FOREWORDpossible They also quickly invested large amounts in setting up BOFs InIndia, even when the Germans set up the Rourkela plant with BOF technology,the learning process was tardy and halting, with inefficient investmentdecisions continually spoiling it In both Brazil and India, but more damagingly

in the latter, the inefficiencies of small, long-gestation, high-cost plants werecompounded by low rates of utilization which blocked opportunities forlearning and incremental productivity improvements The entry of new privatefirms setting up minimills has only mitigated the problem, but full adjustment

to new technologies and fiercely competitive global conditions will requirevigorous and efficient government decisions as well as new entrepreneurialdrives The enforced economic liberalization both these countries have gonethrough has made the state less capable of decisiveness and autonomy, even

if more private entrepreneurship may be waiting for a suitable opportunityfor investment and profit-making

D'Costa has managed successfully to weave the stories of growth andreadjustment of a major industry in the developed market economies withthe emergence and faltering of new players from developing countries Hehas thereby demonstrated that trajectories of development and under-development of international capitalism are intimately connected His analysis

of the rise of POSCO and the South Korean steel industry as a major player

in global competition also indicates that, despite its recent troubles, theremarkable growth of the South Korean economy was not a fluke, but wasbased on vigorous decision-making, shrewd bargaining, and assiduous learningduring the whole period of its twenty-five-year-old history

I hope other readers interested in the subject of development and development will find this book as instructive and enjoyable as I havefound it

under-AMIYA KUMAR BAGCHIReserve Bank of India ProfessorCentre for Studies in Social Sciences, Calcutta

To write a book on the steel industry at the turn of the twenty-first centurymight seem like academic lunacy After all, steel was the heavyweight of thelate nineteenth and early twentieth-century industrial capitalism in Britainand the US With the proliferation of high-tech industries in our time, steel is

no longer the center of attention Fortunately, the industrial ascent of Japanand later South Korea in the second half of the twentieth century and numerousscholarly studies conducted within the broader field of economic developmenthave provided intellectual justification to carry out this study The near limitlesshelp from the industry representatives around the world-providing logisticalsupport and supplying data-contributed to my sanity in bringing this project

to a close

I embarked on this study as part of my PhD dissertation at the University

of Pittsburgh soon after the devastating 1982 recession in the US My arrival

in Pittsburgh at that time was an eye opener Accustomed to the typicaldeveloping country problem of "how to increase industrial output" I was notprepared for the idea that industrial development was not simply a matter ofcapacity expansion but also included cutbacks and reduction How to relatethe two became my central intellectual concern Already ImmanuelWallerstein's "global" perspective had made inroads into established academiaand provided me with an avenue for adopting a "holistic" approach to explainglobal restructuring But the broad sweep of the Wallersteinian approachwas unable to capture the micro-level details of industrial change There waslittle room for agency in his larger system

Those working within the statist framework provided a welcome breakfrom this macro-structural perspective in understanding how social actorsare able to shape developmental outcomes The work of Peter Evans andAlice Amsden, among others, showed how industrial change could beinstitutionally planned and consciously implemented Others, such as AnnMarkusen, who was instrumental in many ways in supporting my study,sought to empirically establish industrial restructuring as an importantcomponent of regional industrial shifts in the US, including the steel industry.That innovations at the micro level had an immense role to play in industrial

ACKNOWLEDGEMENTSchange was best conceptualized by Nathan Rosenberg's pioneering work ontechnology By systematically breaking away from mainstream economics,Rosenberg provided an alternative perspective to understanding thetechnological basis for industrial change Finally, in India, Amiya KumarBagchi's long-standing critical, historical scholarship on Indian developmentand Ram Prasad Sengupta's command of the Indian steel industry wereinspirational in carrying out this study Our many conversations over theyears gave me a clearer view of industrial change in the local context I amalso grateful to Dr Bagchi for his willingness to write the foreword to thisbook.

In addition to the intellectual debt owed to the academic community,acknowledged in citations throughout the text, Bob Erickson of Tri-StateSteel Conference-a community-based organization that addresses theproblems of industrial dislocation-has been not only a good friend andsupporter of many of the ideas presented here but also a supplier of reams ofindustry-related data Most of all I am indebted to the numerous industryand government officials in India, Japan, Korea, Brazil, and the US who gave

me their time with no expectations whatsoever.Itis not possible to mentionall of them and most of these individuals would prefer to remain anonymous.However, I feel it would be fit and proper to acknowledge some of theinstitutions they represent for accommodating my many requests for dataand plant visits

The fieldwork was done in several phases (see the Appendix).Itbegan in

1987 when I visited India, South Korea, Japan, and Brazil Subsequent work

of shorter duration was carried out throughout the 1990s In 1987, ArvindPande, then the Head of Corporate Affairs, Steel Authority of India Limited,arranged for the logistical support to carry out interviews with the industrystaff, including plant visits in Durgapur and Burnpur In 1997, as the Chairman

of SAIL, he was kind enough to send me additional statistical information onthe Indian steel industry In 1996, M.N.Dasturand Company, well-establishedsteel consultants in Calcutta, also provided research materials

The Korean Iron and Steel Association arranged my discussions with thePohang Iron and Steel Company and plant visits in Pohang and Kwangyang

in 1987 In 1995, S.B.Hong, Vice-President of POSCO, was instrumental inarranging the logistical support to meet company officials, inside and outside

of POSCO Since then, he and his staff have always responded enthusiastically

to my follow-up data requests Joohan Kim of the Korea Institute for IndustrialEconomics and Trade was also kind enough to send me recent data on theKorean industry

Shinichi Yasuda of the Japan Iron and Steel Federation and TadamasaSakonji of Nippon Kokan have been my principal contacts to obtainmaterials on the Japanese industry In addition to organizing my meetingswith other firms and the Keihin Works, over more than a decade I havemaintained a professional relationship with both of them, exchanging

ACKNOWLEDGEMENTSinformation on the industry Nozumo Kawabata of Tohoku University wasvery generous in sending me Japanese government-published statistical data

on the industry

In Brazil, through the good offices of Luiz Bresser Pereira, then the FinanceMinister of Brazil, I had the good fortune to be formally affiliated in 1987with the Economics Department at Fundacao Getulio Vargas in Sao Paulo.Friends and acquaintances provided infrastructural and social support to carryout fieldwork in Brasilia, while SIDERBRAS, now defunct, arranged for thenumerous interviews and visits to Acominas in Belo Horizonte and Usiminas

in Ipatinga The staff at the Institute Brasileiro de Siderurgia in Rio de Janeirovery willingly sent me the data I requested

A project of this nature is inconceivable without the financial support ofthe many institutions that extended their limited resources I am especiallygrateful to the Center for Latin American Studies, University of Pittsburgh,which administered the Tinker Foundation's small travel grant for my Brazilfieldwork As a fellow of the Fulbright program (Washington, D.C.) and theAmerican Institute ofIndian Studies (Chicago) in 1991 and 1992 respectively,

I was awarded funds for a project on the restructuring of the Indian autoindustry I was able to carry out some follow-up interviews on the steel industry

in India and Japan during this time as well In the summer of 1995, a KoreaFoundation Fellowship (Seoul) allowed me to update my work on the Koreansteel industry, while the Korea Development Institute provided me with acongenial intellectual atmosphere A fellowship from the Korea Program ofthe Social Science Research Council, New York, enabled me to write up some

of the research carried out in 1995 Makoto Kojima of Chiba University ofCommerce invited me to Japan as a Visiting Scholar at the University's Institute

of Economic Research During that brief visit in December 1996 I was able

to update my data on the Japanese industry My university in Tacoma hasbeen supportive of my work, even with increasingly tight budgets A smallgrant in 1995 enabled me to meet several foreign steel technology firms inPittsburgh In 1996, the Founders' Endowment Fund of the University ofWashington, Tacoma awarded me a summer travel grant to carry outadditional research on the Indian steel industry

The bulk of the writing was done in 1997 at the National University ofSingapore where I was a Senior Fellow at the Department of Economics andStatistics The tropical weather and the freedom from administrative dutiescertainly made writing a pleasure With the arrival of our daughter in late

1997 I had to postpone completion of the manuscript Work continued inFayetteville, Arkansas, and Minneapolis in the extremely hospitable homes

of my in-laws and relatives A second fellowship from the American Institute

of Indian Studies allowed me to wrap up the final chapter in the warm andfriendly environs of the city of Bangalore-before the full-scale launching of

my research into the Indian software industry Perhaps a bridge has indeedbeen created between the late nineteenth and early twenty-first centuries!

A CK N OWL ED GEMENTS

For every author there isalways,I hope, a solid sounding board In mycase,Janett e Rawlingshas been morethan that Shenot only put up withreading severa l vers ions of a rather dry, perc entage-driven manuscript-meticulously editing thedocument lineb line-butalsoprovidedinvaluablesuggestions to improve theanalysisb detecting inconsistenci esand othershortcomings that typically get conveniently hidden from the author Myhat' soff to herfor herpatient efforts to improvethemanu script.Myparent sdeserve a special thank you for their unstinting support in my academicendeavors,even ifat timesit wasnot alwaysclearto themwhereit wouldalllead I am grateful for theirpatience an d under standing.In the end non eof

these individu als or institutions are responsible for any of the err ors andomission s

A.P.D.Bangalore

1 THE RESTRUCTURING OF THE

STEEL INDUSTRY

Introduction

Pitt sb urgh in thenineteenth andearly twenti eth centu rieswas the epicenter

ofgloba lsteel produ ct ion Ithou sedUS Steel, the world's firstbilliondollar

com pa ny.Seventy-fiveyears later,the Americansteel industr y was inadeep

crisis Nearly 46millionton s (rnt)ofsteelcapacity duringthe1978-88periodwas phased out,athirdofwhichwasin thePittsburghregion alone In 1988

Carnegie MellonUniver sityin Pitt sburghreceived a million dollar sfromthe

Poh an gIron andSteel Com pa ny (pa sco)- thesta te-ow ne dSouth Korean

firm-formetallurgicalresearch Technicalsta ff from newlyformednat ion s

in the1950 s and 1960s weresent to Carnegie Mellonfor trainingin the art

an dscienceofsteelma king At thetimeKorea was toopoor and polit ically

disorgani zedto even contemplat econ structing a steel mill Tod ayp a scois

the world's second lar gest steel firm with a annual revenu e of over $10

billion Thusthe endowment to Carnegie Mellon wasmorethan a gift; itwas

amark of commercialclout andind ustria lsuccess Itsfin anci al and techn ical

collab or ati on with US Steel was ano ther sign ofshifting industri al power

The industry hadcom efull circle withUS Steel's preeminent globa l position

nowreduc edtonumber six

In the1980 s othercha ngeswere in the offing Kenn ethIverson ofNUCOR,

a steel industr y maverick, challenged US Steel and other lar ge Americanproducer s on their own turf byriskingnewtechnologiesto produce sma ller

volumes of low valuesteel efficiently.Thediffusion ofanew genera tion of

minimill s in theUS andelsewhere injected anewlease of lifefor theindustr y

as a who leand reduc ed entry barriersfor capita l-scarceecono mies Halfway

aro und the world, theMitt albrother sfromIndia were busy expa n ding their

steel business, not only in India, but in overseas markets as well Sta rting

withsma ll plants in Indon esia an d India, since the1980 stheMitt al fam ily

hasbeen investin gin newtechnologies and acq uir ing steel millsin Mexico,

Cana da, Ireland , Germa ny, an d Kazakh st an Entrepren eur ial ism an d

innova tions in the steel industry arealiveandwell in new andoften unexpected

places

THE RESTRU CTURI N G OF THE ST EEL INDUSTRY

The 1980s also marked the en d of the tradition of the state-ownedsteel industry The aggres sive privatization of Brazil's integrated steelindustry initiatedby Presid ent Collor deMello in thelate 1980s transferrednearly 80 perc ent of Brazilian steel output to private ent it ies In 1991,India for thefirst timein thepost-independenc eperiodis privatizing publicsectorfirms, including steel, and has open ed theintegrated steelsectortoindividual entrepreneurs With freer play of market forces, thegigantic,oligopolistic industry, once a favorite sector of governments fortransforming economies, is now under competitive pressure No longerinsulated, the heavy industry is finding ways to become leaner Foreignpartners arewelcome in sh ar ing projects and on thewhole the industryhas becomemoretrans nationalized

Thepurposeof this study is to ex plain three main developments in theindustry that haveled to thecontinuous restructuring of steel productioncapacity (seeD'Costa 1995a).This isessentially a process of reorganizingand adjusting capacity under changing conditions Thefirst developmentis aspatial one Global steel production is no longer confined to the US andWestern Europe (see Table 1.1) Lateindustrializers such as Japan, Brazil,and Koreahavebroken the monopolyof US dominance.More importantly

therehas been an absolute declin ein steelmakingcapacity in the US Thiscalls for anexamination ofex pansion and contraction of industrial capacity

in theworldeconomy asexemplified by theascent of Korea's pasco and

b acknowledged Thethird new development is institutional change Nolonger aregovernments as deepl y engaged in theindustryas theyhavebeensincethe post-war period(seeTable1.1).Increasingl y entre prene urs and theprivate corporate sector around the world are entering the industry andinternationalizingit in an unprecedentedway

Explaining industrial restructuring

A popular explanation for industrial restructuringis changing comparativeadvantage(Lawrence1984; Balassa 1985) As wagesincrease,costs of producingsteel increase in the US, making low-wage developing areas formidablecompetitors.Thus shifts in industrial production aredrivenb changing prices

A more institutionally driven perspective also ex pla in s the changinginternationaldivisionof labor on thebasisof low wages(Froebele t at.1981).Multinational capital in searchof low wages reorganizesits manufacturing

Table1.1Changingstructure ofglo balsteelproductio n( % of total)

1976-1987-1996

industry, recently privatized)

intervention)

Western Europe 45.22 38.59 35.04 32.99 35.48 British Steel: 4-3-3 (now private)

Usinor-Sacilor (France): 12-2-4(state-owned)

World capitalist 241.06 418.44 461.05 492.62 458.50b

production (rnt)

Sources: America n I ron a n d St eel I nstitut e,Annu al Statisti cal Repo rt, v arious yea rs; Int ern ation al Ir on a nd St eel I nstitute,Int ernat ional Iron

an d Steel Sta tistics, var iou s y ea rs

No tes

a = ne g li g ibl e

b ex cludes fo rmer Eas t E uro pean bl oc, S oviet Uni on, C hina, a nd N orth K or ea, t ot al o utput may va ry du e t o diff erent cl assification o f co unt ries in

d ifferent pub lic ati on s

m t =m illion me tric t ons

NA = not a p p li ca bl e

THE RESTRUCTURING OF THE STEEL INDUSTRY

activities on a global basis Persuasive as they seem, these explanations areinadequate to account for the changes in the steel industry Steel is neither alow-wage product nor is its price determined by the logic of the market.There is very little multinational ownership of the industry In addition,government intervention has been common, distorting prices in significantways.Ifchanging comparative advantage is indeed behind the industry's globalreorganization and low wage is not a factor, then something other than wagecosts must give rise to changing advantage It is also common knowledgethat comparative advantage can be constructed by government investmentsand technology policy (both are non-market interventions) Both have theeffects of raising productivity and shifting production costs favorably.Therefore, rather than rely on the market-based price-driven argument inwhich the role of technology is assumed away, I will advance an institutionalunderstanding of technological change in the larger capitalist context toexplain changing industrial competitiveness

We live in a capitalist world and industrial production is driven bycommercial motives In this world we can only assume that industrialexpansion is a good thing and industrial contraction is a problem Technology

is a key determinant of industrial production I argue that the uneven spread

of steel capacity is a consequence of the uneven diffusion of technology Thosewith superior technology are able to out-compete their rivals, leaving thelaggards in considerable disarray Firms and entrepreneurs of course makestrategic choices, circumscribed no doubt by the commercial and institutionalenvironment in which they operate Past choices and future expectations alsodictate current technology choices Innovations are not exogenously givenbut are integral to capitalist competition Thus restructuring is driven bydifferential access to technology and is subject to the imperatives of capitalistcompetition and the idiosyncratic nature of technological change To explainwhy the US, the industry leader, can get technologically behind while lateindustrializers like Japan and Korea can forge ahead, a more nuancedunderstanding of technology strategy in its proper institutional setting must

be sought

Like any system, capitalism is subject to crisis.Falling demand or excesssupply are typical problems of capitalism Adjustment to imbalances is atypical response But adjustments are not instantaneous, which smoothlyfunctioning markets would predict Strategic considerations are paramount.Even if technological change is a structural requirement for capitalistcompetition, some firms find it "rational" not to innovate, while othersmake do with selective investments.This could render firms technologicallaggards Also governments are often forced to subsidize their failing nationalindustries, thus prolonging ageing industries for political reasons Still others,wishing to exploit commercial opportunities or developing countrygovernments wanting to join the industrial club, aggressively invest inproduction capacity, seeking out new, cheaper technologies In this scenario

THE RESTRU CTURI N G OF THE STEEL INDUSTRY

supply and demand never quite match as innovations and firm strategycontinuouslyintroduce disequilibrium, making restructuringan on-goingactivity.Industrial crisisandex pansion is ther eforepart of thesameprocess

of uneven capitalist development, inevitably influenced b the unevendiffusionof technology

Wecanex plain capacityshifts by (a) show ing how strategic technologychoicein thelarger institutional settingof theUS settheAmericanindustry

on a differenttechnologicaltrajectory;(b) how lateindustrializing states,bmobilizing capital and technology,addedto global steelmakingcapacity;and(c) how new entre preneur s arereconfiguringtheindustry in new ways In

each casetechnologicalchange, with its attendant responses b firms andgovernments, shapes the structure of the global industry It is possible to

demonstratethedeep connectionbetweentheUS industry's responseto anindustry crisis leading to a delay in innovation and rapid ex pans ion of

steelmakingcapacityin lateindustrializing countries.Theindustry-wid ecrisiscould be systemic-structuralor cyclical-exac erbatedb lateindustrializingstates' aggressive approach toward transforming their national economicstructures.Wecan also theor eticallyposit that competiti veindustrialex pansion

is not inevitable Not all statessucceed in econ omic transformation Thosestatesthat areinstitutionallycoherentand not subject to political exegesis

can better cope with new innovations for capitalist development Others

merelymuddlethrougheven as theyadd to industrial capacity.Technologicaltrajectoriesarethusheavily influenced b institutionalresponsesto chang eand the institutional capability for harnessing that change (Amsden 1989;Lall1996)

Thediffusion of technologyis alsoconditioned b systemicfactors Thepost-World War II high econ omic growth wasconduciveto innovation-led

economic changein the capitalist countries but was particularly unhelpfulfor developing countries wishing to esta blish technologically complexindustrieson theirown terms.With weakdomesticdem and,limited capital,infrastructuralbottlenecks,and governmentregulations,developingcountries

werenot attractivesites for technology transfers However, systemic crisis

leading to slow-gr ow ing industrial demand led sever al steel technology

suppliers to selltechnologyto developingcountries The"boomerang " effect

wasinevitable:technologyrecipientsbecamefuturecompetitors States that

wer e institutionally coher ent and aggressive could ex plo it syste m icopportunitiessuch as a glut in the eq uipment market to acquiremodern

technologies.Thediffusion of technologyis conditionedb both growth andcrisisin thecapitalistsystem

Ifinnovation is a structural requirementfor capitalistcompetitionit is notunreasonableto expect newtechnologiesthatlowercosts andenhance quality.The history of industrialization is replete with such exam ples Which new

technologiesaredevelop edand whytheydevelop introducefurtherelements

of strategicchoicein an otherwisehighlyabstractcapitalistsystem(seeRuigrok

THE RESTRUCTURING OF THE STEEL INDUSTRY

and van Tulder 1995) Itis not the systemic nature of innovative behaviorthat is of interest here, but rather the effects of innovations on the users ofprevious technology New technologies need not displace existing production;that is determined by the institutionally driven diffusion process Rather, it isthe creative tension between the old and new technologies that sets therestructuring process in motion in new directions There is also the possibility

of technology leapfrogging on the part of latecomers to the industry Whetherleapfrogging actually takes place is dependent on the institutional capacity

to absorb new technologies and the national economic and policy environment

in which they are adopted Thus innovation and uneven development areinextricably linked, making the restructuring of the industry significantly open-ended

The capitalist system is global but it takes on particular national features.Thus Japanese capitalism is different from its US or Korean counterparts,even if they all share the institution of private property What differentiatesthem is the policy environment and the ways by which national capitalism isregulated Self-regulation has been common in American industry, whereasstate regulation of private capital has been typical in most late industrializingcountries However, as capitalism itself changes, institutional arrangementsgoverning capitalist regulation also must change (Aglietta 1979; Gordonet

at. 1985) Restructuring thus can be interpreted as part of a larger institutionalshake-up, from the breakdown in the Keynesian consensus to coping withmass production systems in volatile markets (Piore and Sabel 1984; Morales1994).Ittherefore should come as no surprise when the state intervenes in anattempt to resolve the industrial crisis Conversely, persistent losses by thestate sector could also prompt the privatization of production units and theemergence of entrepreneurs bent on commercial profits It is this understanding

of institutions that allows us to differentiate an otherwise unified economicand industrial system undergoing change Here too there is strategic choice,inducing gradual institutional changes to stabilize the national version of thecapitalist system There is also an open-endedness as new institutionalarrangements shape the evolution of the industry

By contextualizing the restructuring process in the larger capitalist systemwith technological change as driving industrial contraction and expansion,

we are able to move beyond the logic of the market to explain thereorganization of production capacity in the world economy This is not toreject the comparative advantage argument or dismiss the importance of prices

in industrial change Rather, the market mechanism with its attendant shifts

in economic variables, when analyzed in conjunction with softer aspects ofinstitutionally driven technological change, provides a much richerunderstanding of industrial reorganization in general and steel restructuring

in particular

THE RESTRUCTURING OF THE STEEL INDUSTRY

A note on methodology and data sources

I examine the restructuring process by analyzing technological change inthe steel industry in general and in the US, Japan, Korea, Brazil, and India

in particular Rather than interpreting industrial restructuring as simply aconsequence of changing prices, I see it as a ceaseless process of capitalistexpansion in which strategies and institutions interact to diffuse technologiesunevenly I develop an interdisciplinary analytical framework of restructuring

by combining the macro dimensions of capitalist development with theinstitutional aspects of late industrialization, focusing on technologicalchange and the on-going evolution of the industry More importantly, Iallow the data to "speak" for themselves in developing this framework Bytracking the historical conditions, subsequent development, and recenttrajectory of the industry in the five countries I am able to capture therestructuring process spanning nearly half a century in a multitude ofinstitutional contexts

The choice of countries has been made to reflect both industry crisis,successful industrial expansion, and cases in between The US represents a

"hard" case of crisis Japan and Korea are considered "hard" cases ofsuccessful expansion, with Japan replicating the American crisis on a smallerscale State intervention notwithstanding, Brazil and India, unlike Korea,illustrate "soft" cases of industrial change Institutional differences accountfor the less robust industrial expansion However, when more recentinnovations and their diffusion are examined, both the US and India displayconsiderable dynamism in introducing new innovations Neither Japan norBrazil has been aggressive with new technologies, while Korea continues tomaintain its strategy of keeping abreast of most technological breakthroughs.The development of the steel industry as presented in this study is dividedinto several discrete phases and country groups:

• The US and Japan are seen as mature economies However, they areseparated by the timing of their industry crisis, with the US preceding themore recent Japanese difficulties by nearly a decade and a half.Technologically, Japan has transformed itself from a follower to leadershipstatus

• The 1950s to the 1970s is considered to be the first phase of restructuring.Both the US and Japan are on an expansionary path in this phase, albeit

on fundamentally different technological trajectories

• Japan and Korea are an integral part of an expansionary restructuringprocess, sharing in different ways a highly interventionist state Korea'ssuccess in the steel industry shows few signs of crisis associated withindustrial maturity

• Korea is also grouped with Brazil and India as a late industrializer, sharingagain in varying degrees an activist state in industrial transformation

THE RESTRUCTURING OF THE STEEL INDUSTRY

Their industrial performance is ranked in that order More recently Indiahas been more aggressive than Brazil with new technologies and hasspawned internationally successful entrepreneurs

• In the second phase, from the 1960s to the 1980s, the three developingcountries experience capacity expansion

• India and Brazil exhibit similar trajectories in industrial evolution, withthe Brazilian industry far more transnationalized than India's

• With new innovations, continuing industrial adjustments, and integration

of the global economy, the 1980s to the 1990s is seen as the third phase

Outline of chaptersChapter 2 develops an analytical framework for examining the restructuringprocess of the capital-intensive steel industry.Itbegins by critically examiningthe "logic of the market" explanations for industrial restructuring It identifiesthe omission of technological change as a serious flaw in explaining shiftingcompetitiveness A number of perspectives are synthesized to develop aframework that can account for technological change and uneven diffusion.Restructuring, or the changing international division of labor, is a consequence

of strategic responses to innovation by both private firms and lateindustrializing states

Chapter 3 presents the technological evolution of the US steel industry.Itcovers the historical development of steel technology and its diffusion in the

US.The production process is described so as to identify technology as amajor determinant of competitiveness The chapter demonstrates the slowdiffusion of modern technologies in the US, exposing US firms to competitivepressures For the US the crisis of overcapacity is treated in conjunction withthe constraints of cost of technology, declining productivity, and competitionfrom other producers The results have been technological obsolescence,mounting debts, and imbalances in plant and equipment

The fourth chapter introduces the rapid expansion of the steel industries

in Japan and Korea The two countries are paired to examine the second" approach at work The historical background of technological

"fast-THE RESTRUCTURING OF "fast-THE STEEL INDUSTRY

capability is also examined The chapter shows that competitiveness can bechanged by waves of investment in modern technologies Learning-by-doingadds further to technological capability The waves of investment mobilized

by the state adds to the global capacity Japan, like the US, is confrontedwith the challenges of excess capacity and the need to restructure Thischapter shows that systemic crisis is possible under different institutionalarrangements

Chapter 5 brings in the three late industrializing countries to discussrestructuring, specifically the role of the state Only Korea is shown to possessthe institutional capacity to mobilize investment funds and introduce moderntechnologies Though Brazil and India have been able to overcome the initialbarriers to technology and expand capacity their industries have been fraughtwith difficulties For example, construction delays, cost overruns, mountingdebts, faulty technologies, and poor project planning have been common inboth the Brazilian and the Indian steel industries Technology diffusion hasbeen slow In these two countries institutional arrangements, such as industrialrelations, were not conducive to high productivity and competitiveness, unlikethe Korean case This chapter demonstrates that state intervention does notguarantee industrial success; rather, thequalityof that intervention is critical

in maintaining technological capability

After examining the evolution of steel technologies in the five countries,Chapter 6 charts the changing composition of US imports to indicate howthey have shaped the international division of labor As some countries, such

as Japan, moved ahead technologically, US firms have been unable to competewith foreign exporters in certain product and regional markets To rejuvenatethe industry and meet shortages of certain steel products in the US, newinstitutional arrangements, such as joint ventures, between US and Japanesefirms became inevitable Likewise, privatization in Brazil and the opening up

of the Indian industry to private capital have been introduced to strengthentheir respective industries Institutional changes accompanying therestructuring of the steel industry have pushed state-led capitalist regulation

to the background

The seventh chapter presents new innovations in the industry as the basisfor another round of restructuring Modern minimills capable of producingsteel cheaply have opened up opportunities for entrepreneurs The diffusion

of this technology is discussed in terms of comparative costs-both capitaland operating-and product markets In keeping with the reduced role of thestate, these innovations have also accompanied new institutionalarrangements, such as entrepreneurialism and flexible industrial relations.With lower entry barriers several players have entered the fray, making theindustry even more competitive The restructuring has taken on a new direction

as several smaller firms with new technologies challenge the establishedindustry with low cost output This chapter confirms the centrality ofinnovations in the open-ended capitalist industrial system

THE RESTRU CTURING OF THE STEEL INDUSTRY

Rather than summarize the salient dynamics of the industry's evolution,the last chapter brings up several interrelated issues at the systemic andindustry-specific levels.Based on the empirical materials presented in thisstudy, the final chapter raises some questions on the contemporaryrelationship between capitalist industrialization and restructuring andaccompanying institutional changes By focusing on possible innovationsand industry strategy it also presents some predictions on the direction offurther restructuring

AN INSTITUTIONAL INTERPRETATION OF STEEL

INDUSTRY RESTRUCTURING

An analytical framework

IntroductionThe objective of this study is to explain the global reorganization of the steelindustry, away from advanced capitalist centers to newly emerging ones.Rather than simply viewing this process as a consequence of changingeconomic forces, I show that the reorganization of production capacity isrelated to technological change and its uneven diffusion The diffusion process

is influenced by institutional responses to technological change Hereinstitutions include mainly capitalist firms organizing production forcommercial gain and states pursuing capitalist industrialization The analysis

of steel industry restructuring is driven by two key questions:

• What is the larger context in which restructuring is taking place?

• What are the mechanisms-economic, technological, and

institutional-by which the industry is being organized at the global and nationallevels?

This chapter presents "restructuring" as an organizing concept to analyzecapitalist development in general and reorganization of industrial capacity inparticular In this study, global restructuring refers to the process by whichsteelmaking capacity is being spatially reorganized across nations (see Ballanceand Sinclair 1983; Fagan 1989) Restructuring also refers to the various ways

by which a national industry adjusts to the capitalist imperatives ofcompetition, profitability, market control, and national development (D'Costa1989) More specifically, restructuring is viewed as a complex process bywhich the steel industry is evolving as a result of technological developments,corporate strategy, and government policies With innovations and thediffusion of technology at the core of capitalist industrialization, restructuring

of the steel industry globally can be conceptualized in terms of differentnational technological trajectories By juxtaposing the factors that lead

INSTITUTIO NAL I NTERPR ETATION OF R ESTRU CTURIN G

innovating countries like the US to fall behind technologically with themechanisms by which lateindustrializing countriesacquiretechnologieswecan est a blis h the uneven diffusion of technology and the process of

restructuring

I develop an analytical framework b first outlining the standard

econ omicexp lanations advancedfor exp laining industrial restructuring.InaddressingtheseissuesI brieflyreviewthe"logic of themarket "argument,consider ed integr al to the dominant paradigm for ex plain ing recentindustrial chang e.Ish ow that thelogic of themarket, though per sua sive,

doesnot adequatelycapture some of the dynamics of technological changeand industrial restructuring Cons istent with the em pir ical materialsat the

in d us t ry level, I proceed to syn t hes ize eco n o m ic reason in g with

institutional interpretation s of technolo gical change and industrial

developmentin both advanced capitalist countries an d lat eindustrializingcountries to provid e a multilayer ed understanding of the restructuringprocess.' Thelast section develop san analyticalframeworkfor expla iningglobal restructuring and industry-specific dynamics in the five countriesunderinvestigation

The restructuring issue

Therestructuring of theindustr ycan be seen asthecontractionof industri al

cap acit y in theadvanc ed capitalist countries, such astheUSand WesternEurope,and expansion in lateindustrializingcountries, such as ap an andBrazil.Byaddressingwhyinsome countriescapacityfalls,whilein othersit

rises,therestructuringprocesscanbe viewed aspartof thelargerprocessof

uneven (capitalist) developmentin which technologicalchangeplays alargepart (Cyph er 1979; Markusen 1979;MandIe1980; Warren 1982; Browett1985; Hamilton 1986; Bryan1987;Abramovitz1989).Historically,industri al

chang e,thematerialisttransformation ofsociety, hasbeen a consequ enc eof

the expa nsion of the capitalist mode of production (Bagchi 1984a) Theunceasingpursuit of profit-makingthrough production andsubsequent market

excha nge istheprocessof capitalaccumulation bywhich theoriginal value

of invested capital is glo bally reproduced andex panded Successful capitalaccumulation proceed s either through low wagesand long hoursof work or

b introducing new innovationsthat increaselabor productivity.' However,this self-expansion of capital is subject to constraints, such aslabor resistanceand competition among capitalists, resultingin varying rat esof industri alchange (Baumole tat.1994:12)and theuneven spread of industri alization

over space and time(Boyer1996:31 ).3The globa l reorganizationof the steelindustry can be located in the larger accumulation process in which

technolo gicalchangeplays a significant role

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

The logic of the market

The dominant paradigm of changing comparative advantage purports toexplain global industrial shifts Rising costs (or changing relative prices),resulting from market forces, are said to cause industrial decline in the USand Western Europe, and more recently Japan Similarly, "right"marketoriented policies, "correct" prices for labor and capital, and "realistic"exchange rates are said to be behind East Asia's industrial expansion (Balassa1981a, 1981b, 1985; Bhagwati 1985) With free trade, changing factor prices(mainly high wages) is seen as driving the industry away from advancedcapitalist countries (Anderson and Kreinin 1981) In this mode of reasoning,industrial restructuring is natural and inevitable, with firms using least-costcombinations of factors of production, costlessly substituting them when priceschange, and maximizing output With shifting costs, firms are expected todeploy their capital in other profitable activities, leaving the production ofsteel to more cost-efficient producers, such as those in the newly emergingmarkets of Korea and Brazil

Another variation on the comparative advantage theme is advanced fromthe demand side Developed capitalist countries are adjusting industrialcapacity downward as a response to a decline in demand, whereas risingdemand in late industrializing countries is prompting additions in capacity.The decline in demand in mature economies is due to shifts in the structure ofthe economy (Barnett and Schorsch 1983; Lawrence 1984; UN EconomicCommission for Europe 1984) Heavy industry is less important as "steelintensity" (the ratio of apparent steel consumption to GDP) has alreadyreached high levels Technological change substituting steel with lighterproducts has also compounded the declining trend in steel demand Economicmaturity has also meant excess capacity, that is, production capabilityexceeding consumption requirements Accordingly, restructuring incorporatingthe downward adjustment of production capacity, in line with demand, is anatural response to changing economic circumstances

The economically driven argument, whether from the supply or the demandside, is valid Changing comparative costs and demand shifts are bound tohave a bearing on the pattern and magnitude of production However, thereare several deficiencies in this mode of reasoning First, we cannot assumethat the market mechanism, operating through the system of price signals,will necessarily adjust supply capacity even if changing economic conditionsdictate such a step (see Evans and Alizadeh 1984; Kaplinsky (ed.) 1984;Edwards 1985; Colclough and Manor (eds) 1991) Firms can deploy excesscapacity as a strategy to deter entry of rivals or to flood the market to driveout competitors (Baden-Fuller 1990:5) Second, given the static nature of thecomparative advantage argument, it is impossible to evaluate the longtermeffects of an investment (Schmitz 1984:6-7; Chang 1993:134-7; Moreira1995) The dynamic efficiencies and externalities that result from lumpy

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

investments are difficult to predict Thus an investment may appear to beunjustified at a point in time when there is comparative disadvantage.Third, there are political reasons why the dictates of comparative advantageare difficult to follow (see Barry Jones 1986; Jones 1986; Meny and Wright1987; Caporaso and Levine 1992) Institutional impediments, such as thereluctance of national governments to layoff politically mobilized factoryworkers (Daems 1990) is one example Fourth, from the demand side,economic maturity implies declining consumption of steel This view, however,overstates the trend since it does not capture the changing composition ofdirect imports of steel nor does it account for consumption of imported steel

embodiedproducts, such as autos and consumer appliances (Locker! AbrechtAssociates Inc 1985) Fifth, and most importantly, the logic of the marketargument assumes away innovations Consequently, the creation ofcomparative advantage by strategic investments in technology is not captured

by the freely functioning market system

Even if well functioning markets exist, late industrializing countries cannot

be assumed to adjust passively to shifting costs (see Hobday 1995) Steelproduction is capital-intensive, with significant technologies embodied incapital equipment How late industrializing countries mobilize resources andacquire technology is not explained Similarly, why firms in industrializedcountries would suddenly change from being dominant players to inefficientones is only explained in terms of changing prices Tyson and Zysman(1983:24), critiquing the market-based approach, conclude that governmentpolicies shape national comparative advantage Thus the argument is notwhether costs change but rather why and how they change Competitiveness

is not driven by changing prices but by technological change (Dosi and Soete1991; Hart 1992).Ifpolicies influence technological outcomes then there is astrategic element to be considered This follows Marx's as well as Schumpeter'sunderstanding of capitalist dynamics, where changing the means of production

is the basis for reproducing the capitalist system as a whole, and individualcapitalists in order to compete deploy, innovations in anticipation of monopolyrents (Schumpeter 1975; Cooper 1993)

To understand the restructuring process it is therefore imperative to centerour analysis on changing innovations and their diffusion as the basis forcompetitiveness Given the serious omission of technological change, except

in some abstract optimizing behavior of profit maximization or costminimization, market logic understates the strategic nature of technology inaltering competitiveness (Rosenberg 1976:61-6; Nelson and Winter 1982).4The logic also eschews state intervention since it is tantamount to pricedistortion, ignoring the possibility that prices can be deliberately manipulated

to obtain predetermined outcomes In fact, one important facet of the globalrestructuring process has been precisely state involvement in deliberatelycreating steelmaking capacity even when the prevailing comparative advantagedictated otherwise (see Malecki 1995)

INSTITUTIONAL INTERPR ETATIO N OF RESTRU CTURIN G

An alternativeinterpretationof restructuringimpliesthat productionorientedfirms strategically invest in technology whilemost states try to manipulateprices to fosternational capital accumulation (Hamilton 1983, 1986; Limquecoand McFarlane(eds) 1983; Fransman 1986a; Deyo(ed.) 1987) Whilepricecompetitiontodayis an important featureof thesteelindustry,fewgovernmentshaveleft the fateof theindustry to market forces An oligopolistic industrystructure, significant economies of scale, and various policy-induced entrybarriershavemadepricecompetitiona c onsequ enceof past strategicinvestm ent

in technology.' From an industrial development point ofview, theadvantages

emerge not from low wagesalone,as predict edby thecomparative advantageargument,but from thepositive extern alities associatedwith technology(Enos1991; Arthur 1994) As an intermediateinput, thesteelindustry, with its denseintersectorallinkages(a f aHirschman), hasbeenthe erfectindustry for strategic

investmentb late industrializing countries,thus altering theglobal distribution

of steelmakingcapacity.Theor etically,restructuringis thereforea result of aconscious investmentand innovation strategyand not just a matterof adjustingpassivelyto marketforces

By addressing who invests , in which technology, why, and howinvestment funds are mobilized we will obtain not only an institutionalunderstanding of technological change and its diffusion but also thesociopoliticalcontextin which industrial investm enttakesplace.Generally,

developingcountries because of their economic backwardness areimmunefrom the "contagion" effect of technology transfer (Baumol 1994:73),implying a significant institutional effort to secure modern technologies

Technologicalchang eis integr alto capitalistcompetitionbut it maynot beprofitablefor all firms at all timesto adopt new technologies.Thestrategic

decision not to innovatecould lead to competitive problem s."In the same

vein, to escape from econ om ic backwardness, the project of industrial

tran sformation calls for stra tegic investm ent b the state (Ger schenkron1962) However,sincelate industrializingcountriesareborrowersof know-how, accessto foreigntechnologiesand theinstitutional capabilityto acquire

them becomes an important link to the advanced capitalist countries(Amsd en 1989).7 Also, as the technolo gy ga p widen s the need forgovernment interv ention in lateindustrializing countries increases (Hikinsand Amsden 1994) However, given individual firm strategiesand different

state capabilitiesin orchestrating economic transformation, wecan ex pectlags in the diffusion of modern technologie s The resulting unev en

development and possible productivity converg enc e in certain industrial

sect ors between forerunner s and latecomer s through learning inducescapitalist competition sever e en o ugh to warrant the reorganization ofnational production Technological breakthroughs could further alter the

st r uct ure of the industry Restructuring is therefore industrial change

resulting from the different national technological trajectories as well asfrom theirinteractionin theglobal economy (seeShin 1996)

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

Technological change and industrial strategy

Thestructural requirementof a competitive capitalist system is technologicalchange."With private property relations integral to the capitalist system,innovations ensure monopoly appropriation of economic benefits (Kay1975:155-6) Brenner captures this dynamic rather well when he writes:[it is] only where capitalist property relations prevail that all theeconomic actors have no choice but to adopt as their rule forreproduction the putting on the market of their product (whatever itis) at the competitive, i.e., lowest price.Itis only in such an economythat all economic actions are perpetuallymotivatedto cut costs

(Brenner 1986:34, emphasis in original)"However, with oligopolistic firms, characterized by imperfect markets,economies of scale, and high investment costs, the firms may not be motivated

to innovate and cut costs Instead competition could be regulated either byjoint actions of member firms, say by an informal cartel led by US Steel in the

US, or by the state, as in Japan This kind of sector regulation is normal incapitalist development when overproduction, arising from individual firmsmaximizing their market shares, especially in an economic downturn, has to

be avoided to prevent a price collapse (Best 1990).The decentralized nature

of capitalist decision-making is inherently destabilizing, thus necessitatingsector regulation for industry stability The tension is apparent: collectiveeffort in maintaining industry stability versus the individual firm's desire toinnovate and stay ahead of rivals

Whether a firm will adopt an innovation or not will depend on the perceivedcosts and expected benefits of new technology.10A long-term outlook will bemore conducive to new technology adoption than short-term profitexpectations, especially when the gestation period for capital-intensive, heavy-industry projects tends to be several years The industry-wide effect of newtechnology is the lowering of (relative) productivity under the old technology.Increasing capital intensity means increasing investment costs and replacingold technology with the new." This also implies that existing plant andequipment must be devalued even when its useful economic life may nothave ended In such a situation firms are "locked in" by historical events andinstitutional inertia (Arthur 1994; Nelson and Wright 1994: 133) This poses

an adoption dilemma for firms that have been dominant under the oldtechnology.12

Ifthe profit outlook for the industry is grim, extrapolated from recentexperience and changing competitiveconditions, firms will be reluctant tomake new investments by devaluing existing assets The oligopolistic industrystructure ensuring significant collective control over the market is also likely

to discourage innovation Instead, firms will try to prolong the use of old

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

technology In trying to maintain its political legitimacy the state may becompelled to prop up technologically inefficient capital through subsidiesand protectionist policies.Itis therefore logical to expect the coexistence ofdifferent vintages of technology in the industry and varied commercialperformance This sets the stage for increased mobility of capital, either asreinvestment in the same industry or investment in other industries andeconomic sectors An industry crisis is likely to encourage diversification ofassets

Industrial restructuring in the advanced capitalist countries has been aninstitutional response to systemic and industry-specific crisis (Weeks1981:215) The systemic crisis has been precipitated by technological change(Boyer 1996:41,54) The innovation cycle has been shortened, technologiesare seamlessly transferred in different locations, and automation has increasedlabor redundancy As a result, existing institutions are unable to cope withincreasing market volatility In capital-intensive, heavy industries, theslowdown in investment was exacerbated as the post-war high growth eracame to an end (Aglietta 1979; Mandel 1980a: 31,1983; Gordonet at.1985;

Boyer 1990) The internationalization of capital contributed further to theinvestment crisis (Jenkins 1985; Bryan 1987:273) With other profitable sectorsaround, steel firms have been slow to introduce expensive new innovations.Instead, capital flight has been common, providing industrial capital withthe option of diversifying out of their main line of business into finance orinvesting in low wage areas (Bluestone and Harrison 1982).13 The exhaustion

of post-war institutional arrangements, such as Keynesian-type demandmanagement and state welfare programs, introduced an institutional crisisand triggered a fundamental realignment of the economy (Gordonet at.1985).

The crisis put a prolonged brake on expanding and reproducing capital,represented by the falling rate of profit, technological obsolescence, plantshutdowns, and slow growth in productivity (Bradbury 1987) The structuraltransformation of the US economy from heavy industry to services,accompanied by manufacturing investments abroad by US-based transnationalcorporations, and the rise of new competition from East Asia marked thebeginning of a new capitalist epoch (Marshall 1987; Kotz 1990)

Long waves and industrialization

At the macro level investment behavior is also influenced by "long waves"(Marshall 1987).14 The post-war period witnessed vigorous capitalaccumulation leading to increased profits (Mandel 1983:108-46) Theeconomic upswing, however, was followed by a downswing, accompanied

by overcapacity in industry and declining profitability Imbalances ininvestments in consumer and capital goods sectors result in surplus capacity(Mandel 1980b; Forrester 1981; Freeman (ed.) 1986) Surplus capacity is atypical outcome of capitalist competition When the climate for investment is

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

favorable, firms, in a herd-like manner, invest in fixed capital, resulting inovercapacity." This behavior also leads to the cyclical nature of capitalisteconomies Even where investment is coordinated, whether by cartels or bythe state, technological change (with attendant rising minimum efficient scale)can contribute to overcapacity Specifically, overinvestment in fixed capital

in the upswing is accompanied by technological change The ensuingintercapitalist rivalry can reduce profit rates (Devine 1983) The profit squeezecan also arise due to increased bargaining by labor (Glyn and Sutcliffe 1972).Whatever the causes and duration of these swings, they are not limited toanyone variable, nor is their periodicity fixed (Gordonet at 1985:22-41;

Wolff and Resnick 1987:185-92; Rosenberg and Frischtak 1994) However,

it is important to recognize the massive restructuring built into the cyclicalswings of the capitalist system.I" Thus in a downturn we can expectdevaluation of existing capital and disinvestment in specific industrialbranches, often resulting in mergers, joint ventures, and diversification

At the industry level, economic downswings in capitalist centers couldalso result in the transfer of standardized technologies to less developed areas.Following the logic of the product cycle (Vernon 1966), Markusen (1985:27-42) suggests a link between long waves and the profit cycle.Ifthe generalizedprofit crisis (downswing) coincides with mature markets (stagnant demand)then standardized technologies (signaling loss of monopoly rents) could bedeployed in new markets where profit rates are higher (Robles 1994) Thespatial implication is apparent: under competitive pressure production capacity

is likely to be diffused, with original centers being abandoned (Markusen1985:43-50) The global restructuring of labor-intensive industries such asgarments, footwear, and microelectronics (Froebel et al. 1981; Nash andFernandez-Kelly (eds) 1983) are typical examples of new production centers.'?

To maintain commercial viability, under duress firms from mature economiestransfer technology to late industrializing countries for "harvesting" profit(Markusen 1985:35) Many latecomers to industrialization which meet thepreconditions for capital accumulation emerge as new markets and new centersfor production, displacing older industrial sites (see Nelson and Wright 1994).Accordingly, industrial maturity almost always guarantees foreign competition

in the more standardized products and processes, as home demand experiences

a declining trend and higher profits are expected in new production centers

State-led capitalist development and technological change

To catch up with forerunners, the state strategy in late industrializing countrieshas been to maintain a high rate of investment and to secure moderntechnology, often pursued through debt-based financing (Soon 1994:128)

At the systemic level, maturing markets and profit crisis in advanced capitalisteconomies theoretically make it easier for late industrializers to acquiretechnologies The state in these areas is able to exploit the windows of

INSTITUTIONAL INTERPRETATION OF RESTRUCTURING

opportunity for sponsoring capital accumulation, especially those that linkcapital and intermediate goods sectors (Desai 1979:39-46; Marx 1981:565-98; Lichtenstein 1983:91 ).18At the early stages of industrial transformationthere is systematic state intervention for industrial upgrading (see Evans 1985).The presence of a weak capitalist sector and an entrenched land-owning class

is not conducive to dynamic industrial change Access to foreign technologyremains critical to industrial restructuring, with significant institutionalinvestments to ensure the flows of technology and mobilization of savingsfor industrial investments (Jones and Sakong 1980; Sen 1983; Jones 1987;Larrain 1989).19

All states are assumed to intervene in one form or another, although theydiffer in their style and effectiveness in bringing about structuraltransformation (Evans 1995:10) Far from the crude Marxist conceptualization

of the state as the "instrument of the bourgeoisie," the role of contemporarystates is contested The state's interest may deviate from the interests of capital(Scokpol 1985), pursuing expansionary accumulation purely as part of

"national" interest (Miliband 1983; Sen 1984) The state may even competewith private capital (Laux and Molot 1988).20 Its effectiveness will depend

on its relative autonomy from various social groups (Poulantzas 1973) EastAsian states are characterized as "developmental," possessing "a bureaucraticelite capable of administering the [economic] system, and [insulating] itsbureaucrats from direct political influence so that they can functiontechnocratically" (Johnson 1987:142) The state in this instance acts as a

"surrogate entrepreneur," socializing risks for national private capital (Evans1992:147) States intervene more readily in late industrializing countries partlybecause of their overdevelopment relative to society (Alavi 1972, 1975) andpartly because "the required level of capital for some activities can be reachedonly by the state" (Corona 1986:211) The state supports capitalist expansionthrough fiscal and economic policies, such as maintaining low energy prices,subsidizing industry, and controlling wages The state undertakes andunderwrites risky capital-intensive industries with long gestation periods.These are also industries with significant backward and forward linkages(Hirschman 1958; Gerschenkron 1962; Anglade and Fortin (eds) 1985; Evansand Rueschemeyer 1985)

State autonomy does not mean complete insulation from societal forces(Evans 1995).Ifremoved from the larger social context the autonomy of thestate could result in rent-seeking activities that are detrimental to expansionaryaccumulation (see Calder 1993) Therefore, to be effective the state mustwork with private capital The state must be "internally coherent" and be

"externally connected" (Evans 1992:176) States that are pulled and pushed

by various social groups, as in India, do not have the capacity to maintain ahigh investment rate (Bardhan 1984) Internal coherence translates intoadministrative capability in designing and implementing national goals forindustrial transformation (Wade 1990; Haggard1992)YMost states are not

INSTITUTIO NAL INT ERPR ETATION OF RESTRU CTURIN G

internally coherent because of constraints imposed by the larger nationalinstitutional context.Multiple econ omic, political, and regionalinterestscanunderminethenational decision-makingprocess(seeHerb ert-Copley1994).Therefore,to be effective the statemust beresponsiveto privateaccumulation

needs, just as it must besufficiently independent to pursue the project ofnational industrial transformation "

It is clearthat an industrial policyis necessar yto developlocal technologicalcapability, capture extern alities, and attain ex port competitiveness (Chang

1993).What is not so clearis which industrialization strategyis preferable,one based on trade,that is,ex port-oriente d industrialization (EOI), or one

center ed on domestic production for the home market, that is, substitution industrialization (lSI) Thetransitory nature of policies makesuch rigid ISI/EOI classific ations problematic and em p ir ica lly oftenunrecognizable(Weiss1991:32-4 1 ) What is incontrovertibleis theevidence

import-ofeconomic difficulties, especially in the extern al sector,confrontedb thosecountries which have pursued autarki cindustrial policies for a prolonged

period This has littleto do with theroleof thestatep er s esince a capablestate is still necessaryto administerandexecute outward-orienteddevelopmentpolicies (seeManor 1991:312) Thedecisivefactor in successful industrialpolicy has been a trad epolicy that maintained a competitive exchange rate(Sachs 1985) and stimulated ex ports without necessarilyremoving import

restrictions (Moreira 1995),23

Eventhough "economicbackwardness" prompts statesto takean activeinterestin fosteringcapital accumulation onlya few statessucceed " Statesthat are institutionally weak or whose political legitimacy is in doubt areunable to marshal thenecessary financial and infrastructural resources toacquiremoderntechnologiesor inducelocal technologicaldevelopment Thediffusion of foreigntechnologyrequiresthe evelopmentof absorptivecapacity

on the part of the recipient Past investment, technological en de avor s,accumulated ex pertise,an d a technologypolicy areall critical for acquiring

bestpracticesand for their effective utilization(Okimoto 1989:37; Chesnais1991:144; Hatzichronoglou 1991:196-7,206-11) Thus eco n o m ic

"backwardness"p er s eisnot a preconditionforsuccessful intervention(Boyer

1996:39) Rather, institutionalcoherenc eallows the state to set industrial

developmentprioritiesandexecute themwith importedtechnology.As Elster(1986:63) notes,in a different, but relevantcontext:

[S]uccessful learning and borrowing requires that the backwardcountryb just a littlebehind, since otherwisetheprerequisitesformaking good use of the advanced technology will be lacking [Therefore] we [cannot] assum e that diffusion of technology willtakeplace whentheconditions for acceptingand usingit areabsent

The "advantages of backwardness" sh ould be relegated to theirproper place