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State Capacity and the Role of Industrial Policy in Automobile Industry: a Comparative Analysis of Turkey and South Korea

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Abstract

Automobiles account for a significant share of global output and trade. Since automobile manufacturing is widely considered to be an engine of economic development, a number of countries, including Turkey and South Korea, have pursued industrial policies in the automobile sector, with mixed success. While the two countries started from similar initial conditions and both devised and implemented automobile industrial policies, the outcomes were very different. The Korean automobile sector has far outperformed its Turkish counterpart. The difference in policy outcomes begs an obvious question of why that happened. This paper’s central objective is to find answers to that question by analyzing and comparing industrial policies in the automobile sector. To do so, we develop a list of qualitative and quantitative criteria in order to assess and explain the different outcomes. We base our analysis on a review of the historical development of the automobile sector and policies in both countries. Our analysis suggests that differences in state capacity and hence quality of industrial policies help explain the differential performance of the automobile industry in the two countries.

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Change history

  • 27 January 2020

    Corrections are needed in the original article. The authors would like to correct the email address and affiliation of the first author Murat A. Yülek.

Notes

  1. Maloney and McLaughlin (2005:2), Rushen (1998), West (2002), Dilk et al. (2008), Okada (2004), Pavlínek et al. (2009), Segal and Thun (2001).

  2. Barnes et al. (2004), Eun and Lee (2002), Miozzo (2000), Jenkins (1995), Arnold (1989), Black and Mitchell (2002), Richet and Ruet (2008), Zhang and Taylor (2001), West and Burnes (2000), Eklof (2002); Fisman and Miguel (2010).

  3. Jee and Mah (2017).

  4. Wang (1995), Almond and Powell (1966), Katzenstein (1977), Zysman (1983).

  5. For example, Bockstette, Chanda and Putterman (2002); Chanda and Putterman (2005).

  6. Cammett and MacLean (2011).

  7. Skocpol et al. (1985), Wang (1995), Fukuyama (2004), Centeno and Portes (2006).

  8. In welfare economics, at a broad level, government’s intervention is allowed either when there are market failures (such as externalities or presence of market power) or when markets are incomplete. In such cases, a competitive free market system does not produce the maximized efficient outcome thus argument for industrial policy can be one of the options to counteract such events. The arguments supporting industrial policy mostly are firstly the presence of knowledge spillovers and dynamic scale economies; the second curtails from the existence of coordination failures and lastly the informational externalities.

  9. As cases seen as Brazil and Venezuela, states can extract oil resources effectively from their territory while the result of such intervention created a devastation of the country

  10. Wang (1995).

  11. Cingolani, L., Thomsson, K., and de Crombrugghe, D. (2015)

  12. Weiss (1998: 5).

  13. Johnson (1982), Amsden (1989), Wade (1990).

  14. Yulek (2018).

  15. While our study focus on the state capacity comparison between Turkey and Korea, there are a number of studies analyzed the public sector efficiency across the countries. A typical example is Afonso et al. (2005) argued that the most efficient government sectors are those in the US, Japan, and Switzerland while France, Italy, Sweden, and Greece are less efficient where their governments are big and bloated.

  16. Otokar is a Turkish buses and military vehicles manufacturer located in Sakarya, Turkey and a subsidiary of Koç Holding.

  17. Otokar Otobus Karoseri Sanayi is an automobile manufacturing company domiciled in Turkey.

  18. Yaşar (2013).

  19. Yaşar (2013).

  20. Yaşar (2013).

  21. Yaşar (2013).

  22. Yaşar (2013).

  23. Yaşar (2013).

  24. Jee and Mah (2017).

  25. The subtitle of the long-term plan was “volume production of Korean-type passenger cars” (MCI 1973).

  26. The unexpected oil crises of 1973–1974 and 1979–1980 in the world shifted global car demand towards small sized and fuel efficient models. Thus, the policy guideline was partly conducive to increasing car exports.

  27. Higher prices of locally produced cars compared to the international price level of the same model was regarded as one of the most serious obstacles to increasing demand. For example, locally produced Chevrolets 1700 of GM Korea and Cortinas of Hyundai were priced at $4160, and $4235, respectively, while each of the same models was being sold at $1776 and $1996 (MCI 1974).

  28. Three “lows” of a weak won, relatively cheap oil, and low interest rates in the mid-1980s changed to three “highs” of rising labor and oil cost and won in the late 1980s, leading to the erosion of the Korean cost advantage.

  29. Kia and Daewoo.

  30. Jee and Mah (2017).

  31. Jee and Mah (2017).

  32. Yülek (2016).

  33. Here the state capacity is defined as the ability of a government to administer its territory effectively. In other words, state capacity describes the capability of a state to collect taxes, enforce law and order, and provide public goods. In macroeconomic view, wealthy societies are derivative of the states that institute peace, administer opposing groups for raising taxes, and protect contracts and property rights (Besley and Persson 2011). On the other hand, a variety of micro-analyses views that good state alleviate poverty and pursue pro-growth policies (Barber et al. 2011). The states with high capacity can provide the institutional conditions that either enable growth and innovation to take place or at least prohibite their devastation through warfare or rent-seeking. That indicates that state capacity in the form of steering (policy) capacity is a major determinant of industrial and ultimately economic development.

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Authors and Affiliations

  1. Center for Industrial Policy and Development, Istanbul Commerce University, 34445, Istanbul, Turkey

    Murat A. Yülek

  2. Korea Institute for International Economic Policy, Sejong National Research Complex, 370 Sicheongdaero, Sejong-si, 30147, South Korea

    Kwon Hyung Lee

  3. Department of Economics and Trade, Sejong University, Changeui building 208, Neungdongro, Kwangjin ku, Seoul, 05006, South Korea

    Jungsuk Kim

  4. Economics Research and Regional Cooperation Department, Asian Development Bank, Mandaluyong, Philippines

    Donghyun Park

Authors
  1. Murat A. Yülek
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  2. Kwon Hyung Lee
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  3. Jungsuk Kim
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  4. Donghyun Park
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Correspondence to Jungsuk Kim.

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Yülek, M.A., Lee, K.H., Kim, J. et al. State Capacity and the Role of Industrial Policy in Automobile Industry: a Comparative Analysis of Turkey and South Korea. J Ind Compet Trade 20, 307–331 (2020). https://doi.org/10.1007/s10842-019-00327-y

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