Incumbent Advantage, Barriers to Entry, and Latecomer Catch-up in the Global Automotive Industry

Incumbent advantages have prevented most latecomer firms from being successful in the automotive industry. The industry to this day is dominated by the first mover firms from North America and the fast followers from Western Europe and Japan. Many developing and emerging countries have significant automotive industries, but they are dominated by these incumbent foreign firms. Some of them have tried to prop up indigenous carmakers, but largely failed. In those few cases where firms managed to pursue some degree of catch-up with the US first mover automotive firms, government industrial policy played an important role, but this paper argues that the developmental state framework, emphasizing industrial policy, is insufficient in explaining catch-up by automotive firms. It presents what we call the Barriers to Entry approach, which focuses on the barriers to entry that latecomer firms face when trying to catch up in a given industry. These barriers to entry are constituted by the advantages of incumbent firms with accumulated knowledge, capabilities and a supporting nexus. The paper demonstrates these advantages but also how some firms successfully overcame them through firm cases in Japan, South Korea and China. It highlights the striking parallels between these cases and summarizes them in terms of our barriers to entry categories: closing the knowledge gap, closing the capabilities gap, building a supporting nexus, and commercializing new technologies. The evolutionary economics literature on latecomer catch-up has emphasized the importance of firm-level efforts in technological capability building as opposed to passively expecting technology transfer through foreign direct investment. Our Barriers to Entry approach builds on but extends this literature by specifying the nature of capabilities that latecomer firms needed to build in the automotive industry as well as the origins of their absorptive capacity (prior knowledge and intensity of effort) that drove them to indigenize automotive technology (scientific and tacit knowledge). In this context, we stress the importance of migratory knowledge through transnational networks as well as of role models for both industrial policymaking and firm strategies. The opportunities afforded to latecomer firms depend on the situation in a global industry at a certain moment in time, which is conditioned by foreign firms’ business strategies and incumbent countries’ government policies.