ABSTRACT
The automobile industry offers strong backward linkages with key heavy industries and manufacturing sectors, and is as such often a central part of industrialization strategies in developing countries. However, in order to move beyond the basic assembly of imported vehicles, the domestic firm will need to acquire the necessary technology to develop indigenous design and manufacturing capabilities. This task is challenging in itself but is made even more difficult in the context of late industrialization where the latecomer will be constrained by its initial inefficiency until learning takes place. Domestic firms will also find it difficult to meet the substantial capital requirements for both technology acquisition and scale economies in a mature industry. It is for these reasons that countries attempting to industrialize will need to subsidize domestic firms for learning and eventual ‘catching up’. Technology acquisition is thus key to the development of a competitive domestic auto industry, but this can only take place if subsidies promote learning.
