STATE INTERVENTION AND INDUSTRIAL CHANGE 63 country experiences, which suggests that, for a number of reasons, industrial change is accompanied by a process of diversification, with the 'dynamic frontier' moving across industries as industrialization occurs and the production of particular industries following a logistic curve. At one level this could occur because of bottle-necks in factor supplies, limits on funds available for expansion as an industry grows or the slackening of technical progress as the potentialities of the basic innovation triggering productivity nears exhaustion. But at another level it could be the result of inevitable changes in demand patterns as income rises—a tendency captured in its rudimentary form by Engels* Law. Further, as the production of consumer goods increases in response to changes in demand, so does the derived demand for intermediates and capital goods, resulting in the more rapid expansion of intermediate and capital goods in the second phase of industrialization. The diversification of demand away from traditional products as income rises provides the basis for diversification as industrialization proceeds. Implicit in the above conceptualization is the view that domestic demand provides the signal for invention and profitable innovation, with exports being the spill-over from a saturated domestic market. This was the point of departure for the 'Product Cycle Hypothesis', which suggested that when such exporters find the market for their exports in particular countries adequately large, they choose to set up production facilities^abroad. And with development resulting in rising labour and other costs in the country which was the original investor, it begins to import the product concerned from the new hosts for investment, and moves on to the production of a new range of products. THE DEVELOPING COUNTRY CASE How relevant is this experience from the point of view of the developing countries? And what impact have these developments in the industrialized world had on the opportunities open to them? The assessment here is mixed. It remains true that in any newly industrializing country, the development of new industries would take place 'primarily in response to perceived movements in domestic demand, and the strategy of industrialization pursued in these countries has involved intervention to support such investment. Based on successful import substitution along these lines, some countries may diversify into exports. That is, real increases in income and productivity rather than relative prices are the major determinants of change, especially when scales of production, skill endowments and research and development significantly affect the quality and cost of a product. But with this the similarity ends. Access to an existing body of technical knowledge and the increased mobility of capital across countries permit newly industrializing countries to 'syncopate' stages of industrialization. And since the process of doing so involves large