Paper short abstract:

Why do certain business groups become producers of complex products, whereas others survive on political rents? The paper argues that the persistent threats to survival lie the heart of the question, and are key to overcoming the problem of the middle-income trap.

Paper long abstract:

The middle-income trap has been referred to as the "product trap" as countries that are trapped in the middle-income trap show an inability to shift from highly diversified to a more specialised structure to develop complex products that require advanced firm capabilities. At the heart of the is issue lies in understanding the strategies and behaviour of the dominant form of economic organisations in the middle-income countries; namely, the large, highly diversified, private (family-owned) business groups.

Hence, the paper draws on the state-business relations to examine why certain business groups undertake the risky and challenging task of re-investing their profits into building and upgrading capabilities through product and skills development - and thus, becoming the agents of diversification and producers of complex products - whereas others survive largely through political rents.

Through a comparative case study of the changing dynamics of state-business relations in an arrived case (South Korea) and a trapped case (the Philippines), the paper finds that the persistent threats to survival experienced by business groups to be the key in unpacking the question. Interestingly, the threat comes less from the state and its' power to discipline the private sector, but from the market in the form of oligopolistic competition in local, and international markets. The story of business groups and their role in building a complex market economy is one less told in development studies, but an important one for many middle-income countries.