Production Complexity as Expropriation Protection

• In Event: Firms and Political Risk

Abstract

Do firms in developing countries strategically manipulate production complexity in response to the threat of state extraction of their assets? Increasing global production complexity has changed the strategic interaction between states and firms regarding extraction of firms’ assets. For states, production complexity creates opportunities to extract assets from firms using less visible and more varied strategies. For firms, production complexity can allow firms to protect themselves from asset extraction by making the production process less legible, thus increasing the cost of extracting and repurposing assets. The implication of this strategic interaction is that firms have incentives to maintain production complexity even when it is inefficient, in order to make extraction—and, at the extreme, expropriation—less attractive. In this paper I introduce the concept of strategic industrial upgrading, the idea that firms strategically choose whether to adopt technology and innovate, and argue that firms do this to protect themselves from asset extraction by the state. I use several approaches to demonstrate that production complexity is malleable, that firms use that malleability to protect themselves, and that state extraction pressure responds to this strategy. I draw on original data from Vietnam and China, including in-country interviews, firm-level survey experiments, and firm case studies. Together these methods reveal how the changing landscape of global production technology has altered the tools firms in developing countries can use to protect themselves from state asset extraction.

Author

• Marnie Ginis, Columbia University