Introduction

• Contrasting levels of performance between Chinese and Japanese silk-reeling directly linked to differential decline in barriers to learning and transaction costs

  • Due to divergent political and economic changes

• Silk was the leading export in Japan and China between 1850 and 1930 (Yamazawa and Yamamoto 1979)

• Japan rapidly overtook Chinese raw silk production during their time of modernization around the turn of the 20^th century

  • China had historically been the leader in silk production

• Chinese silk was favoured due to:

  • Geography

  • Factor endowments

  • Global reputation

• Market for sericulture was free and integrated

Stylized Facts and Framework

• Chinese technology for sericulture moved to Southern Europe

• Then Italian and French innovated subtle changes that led to them being world leaders

• These innovations came back to East Asia around 1850 allowing China and Japan to once again take the lead

• 4 new features came from Southern Europe

  • 1) Rigid-axis and cogwheel to more efficiently drive the belt that had been adopted from China

  • 2) Design of an additional twisting mechanism to cross silk threads dry

    • Allowing for higher quality thread (Zanier 1994)

  • 3) Use of a centralized steam boiler

    • The most important innovation from Europe

  • 4) Mechanization

• The last two innovations were more difficult to implement

  • Led themselves to factory style production

  • Silk-reeling was a relatively small scale operation

    • Dispersed locations

    • Low capital intensity

• European style silk became popular due to evenness and uniformity

  • Demanded a higher price than traditional hand-reeled silk (up to 40% more) (Fujino et al. 1979)

• Even by 1920, machine reeled silk still only accounted for half of silk exports from Shanghai

• Why did hand-reeled silk persist in China?

• Factory based production results in higher transaction costs

  • Higher operating costs (marketing, distribution, procurement etc.)

  • Higher institutional costs (taxation, security, contract enforcement)

• Production models lead to the result that hand-reeled and mechanized production may have produced the same profit equilibrium

  • Machine-reeled:

    • Higher TFP

    • Higher price demanded

    • But more expensive machines

    • Additional costs

    • Higher transaction costs

• Increases in any of the costs of the machine-reeled silk led to increased profitability of the hand-reeled silk

  • Allowed hand-reeled silk to maintain it’s appeal

• Was difficult to diffuse the technology from Europe to East Asia

  • High learning effort required

  • High capital investment costs would be incurred

  • In contrast, labour was cheap in East Asia and therefore hand-reeled silk maintained it’s popularity in the region

  • Centralizing production would require social and economic structure to change

European Technology in Nineteenth Century East Asia

• The lower Yangzi was a main area for sericulture in China

• Jardine, Matheson and Co. introduced the first European sericulture technology

  • Empirical evidence from records (Brown 1979; Ishii 1998)

  • Construction of ‘Ewo Silk Filature’ began in 1860 in Shanghai

  • After 2 years was producing silk to European standards

  • Size of factory doubled in 1863

  • Fatal error was in assuming easy procurement of silk cocoons from the hinterland

    • In Europe, the factories were set up close by to the sericulture regions

    • Shanghai was 100 miles from the sericulture region

  • Difficult to setup a stable procurement network due to foreign investment being banned outside of the treaty port

    • Relied on diplomatic pressure to allow a stable procurement network

  • Major (who managed the operation in China) believes that locals were bribed to oppose him and his efforts to establish sites outside the treaty ports, and within in the sericulture region (Brown 1979)

    • His houses were continually burnt down

    • Those who helped him were put in chains

  • Closed in 1870 a year after Major died

    • Had been operating a constant loss from the beginning

    • Fixed costs of setting up infrastructure for a single factory was too high (Brown 1979)

  • Over the next decade, innovations in drying and...

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