| dc.description.abstract | Rosenstein-Rodan and Nurkse laid the foundations for what came to be “the Big Push Theory”. A major concern for developing countries is low purchasing power and small markets for consumption goods that follows from this. The markets are therefore not able to attract investments, because no firm alone will be able to survive in the market. Rosenstein-Rodan’s main argument was that what holds for a single firm alone, does not have to hold for many firms investing simultaneously. The Big Push theory argues that there are several channels outside of just profits through, which spillover effects can work from one firm to another. In an indirect way, these external economies lead to higher profitability, and several firms will be able to be profitable together. Inducing a coordinated large-scale investment into several complementary industries, which reflects the consumption pattern in the market, will push the economy into industrialization. The workers of the firm will be the consumer of its goods, as well as others, creating a larger market for all.
Murphy, Schleifer and Vishny (1989) analyzed more formally how the spillover effects and expectations of industrialization created a situation with multiple equilibria. When for instance higher wages are paid in the industrialized sector, this results in higher purchasing power. The assumption that consumption patterns are diversified, will lead to increased demand for different complementary consumption goods. This enhances the incentives of firms from several sectors to establish production and pay wage-premiums, further enlarging the market. The theory argues that there is a coordination failure in the market, when the unindustrialized countries do not reach the better equilibrium of higher economic growth. The coordination failure occurs, since the firms are not able to industrialize simultaneously on its own under such circumstances. It opens for a normative role as social planner, who coordinates the agents in such a way that the economy reaches the desired equilibrium.
This thesis discusses how Development Finance Institutions (DFIs) possibly can coordinate and influence the chance of achieving a push in the economy. DFIs are risk-capital investment funds, which invest in the private sector of developing countries. The objective is to create sustainable businesses and impact the development process in the countries through its investments.
The first issue that I discussed is the inability to industrialize, because of coordination failure between firms and producers of social overhead capital. Social overhead capital is important for enabling the market to function, when at the same time the producers are met by unsecure demand in the future. DFIs can influence both parties by acting as a relatively large company that enters the market first. More specifically, they can demand a minimum amount of social overhead capital for a high price, such that production of social overhead capital is sustainable for the producer.
Furthermore, the fund can be a credible first mover into the market. Through its investments and willingness to take risk, the DFI signals how it perceives the expected returns in the market in general. This can alter expectations among other potential investors.
Technology and knowledge spillovers impact far beyond just the production taking place within the firm. DFIs and its co-investors are able to transfer new production methods and innovations to an economy characterized by primitive and low-efficient production. Liu (2004) points out that FDI have different impacts in the short-and long-run, and that the long-run costs incurred in the beginning stages are outweighed by the long-term benefits. The vertical effect is more uncertain, since sophisticated inputs take time to establish and depend on the scale of production. Impacts within the labor market are also important for the level of purchasing power within the economy. Nonetheless, if economic growth is spurred by increase in productivity, then the amount of working opportunities are not as large as it might seem prima facie from such a development.
Although the possibilities are many, attempts to initiate or contribute to such a process, does not come without challenges. It rests on the assumption that the spillover effects are strong enough to influence the perceptions and expectations that are present among the businesses. If the assumption that industrialization happens simultaneously is not upheld, firms may wait until the first one, possibly the DFI, succeed. Investors will not be willing to set forth their own investments until they see success. Introducing the aspect of time into the Big Push model is one of the elements that can make the theory fall apart. | eng |