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Schumpeterian Analysis of Catch-up and Catch-up Cycles  

Keun Lee      

Seoul National University 

Many industries have witnessed numerous changes in industrial leadership and successive catch-up by late entrants. The incumbent fails to maintain its superiority in production or market shares, and a latecomer catches up with the incumbent. The latecomer, who gains leadership, then loses to another latecomer. We call these phenomena of successive changes in industrial leadership as ‘catch-up cycles’, where catch-up means a substantial closing of the gap in market shares between firms in a leading country and those in a latecomer or follower country. This paper attempts to explain these phenomena in six sectors of cell phones, memory chips, camera, steel, mid-sized jets, and wine. These cases were analysed in view of the common theoretical framework on successive changes in the industrial leadership and a catch-up cycle proposed by Lee and Malerba (2015a) which is based on the notions of sectoral systems and the evolution of these systems over time (Malerba, 2002). Several discontinuities may occur during their evolution, which we call as ‘windows of opportunity’ which was first used by Perez and Soete (1988) to refer to the role of the rise of new techno-economic paradigms in generating leapfrogging by the latecomers who take advantage of a new paradigm and thereby surpass the old incumbents. We broaden the notion of windows of opportunity by consider more dimensions, and identify three windows, namely, technological, demand and institutional windows (Lee and Malerba, 2015a). With the notion of ‘windows of opportunity’, this study uses the concept of ‘response’ by firms and systems. A few firms from emerging countries and the sectoral system that supports them may respond to the opening of windows and rise to global leadership, whereas the falling behind of the current leaders from a certain country may be due to a lack of effectiveness in the response, often due to an ‘incumbent trap’ (Chandy and Tellis, 2000), by firms and by their sectoral system leading to misalignments to the new window. In sum, the gist of our theory is that diverse combinations of windows of opportunity and the responses of firms and sectoral systems of latecomers and incumbents determine the pattern of successive catch-ups that will most likely emerge in a sector. While we consider all these ‘three windows’ of opportunity, the final emerging picture is quite ‘Schumpeterian’ because we confirm the supremacy of technological innovation as the critical interface connecting the three windows. While the demand-related windows are important, they tend to have an influence on the forging-ahead stage primarily because they lead to demand-driven innovation and new investment or demand-driven adoption and diffusion of new technologies. Similarly, while the role of the institution and government window is ‘significant’ during the forging-ahead stage in several cases (such as Japanese steel), its actual impact is realized through the adoption or diffusion of new innovations. However, we have also proposed to qualify and specify the subtle nature of technological windows along the different dimensions of exogenous versus endogenous innovation and of competence-enhancing versus destroying innovation. However, the aforementioned distinctions must be complemented with the nature and types of capabilities and strategies of the incumbents and latecomers, as well as their sectoral system adequacies, alignment and responses.

June 29, 2015