Manufacturing and developing countries
Introduction
According to a University of Melbourne study, manufacturing facilities in developing nations offer more potential competitive advantages over their industrialized counterparts than merely reduced costs.
According to the report, businesses in emerging and developing regions of the world have the ability to increase costs, service quality, service delivery, and flexibility more quickly and effectively than those in developed nations.
The expansion of manufacturing in emerging nations like Brazil and India as well as regions like Eastern Europe and SouthEast Asia, according to researchers, is evidence of this as businesses turn outside of developed nations like the US for their manufacturing operations.
Professors Damien Power and Daniel Samson from the Department of Management and Marketing in the Faculty of Business and Economics at the University of Melbourne, as well as scholars from Michigan State University, co-authored the study.
"Organizations in China, Vietnam, the Philippines, and other emerging and developing economies should continue to increase their standard of excellence, adaptability, and innovation. Given the cost advantages their operations have, this makes it much more difficult for us in Australia, "Professor Samson said.
Professor Damien Power asserts that a combination of cost advantages and the opportunity for rapidly enhancing capabilities in terms of quality, delivery, and flexibility make it more alluring for multinational corporations to establish operations in such nations.
"The need for innovation and the need to improve manufacturing processes can be costly, complicated, and time-consuming, which is an essential concern for enterprises as they decide on the location of their manufacturing activities, which are becoming more and more global," he said.
"Such innovation may be hampered in an industrialized economy by enterprises that have already exceeded the inherent limits of return on asset investment. These are restrictions that new players or greenfield businesses in underdeveloped economies may not always experience."
The study showed that industrialized enterprises would struggle to develop their skills in comparison to local rivals since those rivals are likely to have made similar advancements and, as a result, to be at comparable levels.
Professor Power predicted that as enterprises in those emerging nations continue to raise the bar above and beyond cost competitiveness, the challenge of globalization and manufactured goods will only worsen.
WHY IS MANUFACTURING IMPORTANT TO THE ECONOMY?
The nine justifications for the significance of manufacturing for growth are briefly discussed in the sections that follow.
First, there is empirical evidence linking per capita income in developing nations and the level of industrialization. There is a striking correlation between the two if one graphs per capita incomes against the manufacturing portion of commodities production. The relationships are rarely perfect, but the least industrialized countries are almost always the poorest, while the most prosperous developing nations are at the top of the scale.
Second, manufacturing has a higher rate of productivity than agriculture. A structural change bonus results from moving resources from agriculture to manufacturing. Our analysis of the sectoral productivity levels in 19 Latin American and Asian economies revealed that, between 1950 and 2005, manufacturing value added was almost always much higher than agricultural value added (Szirmai, 2008, table 5).
A perplexing result was that value created per worker in services was higher in post-war Latin America than in manufacturing. As a result, it is possible that the structural change bonus for services was even higher than for manufacturing. After 1980, when manufacturing productivity levels surpassed those of services, this effect vanished.
Third, a further argument for structural change bonus relies on sector dynamics. Compared to other sectors, manufacturing is thought to be more dynamic. Growth is facilitated by the shift of productive resources to more active industries. Here, the evidence turned out to be a little contradictory (Szirmai, 2008, table 6). Manufacturing productivity did increase more than agriculture between 1950 and 1973. However, this was changed after 1973.
Similar to developed nations, productivity growth in agriculture is typically higher than in manufacturing in developing economies. Manufacturing continues to do better than agriculture in terms of output growth in both developed and developing nations, notwithstanding manufacturing's declining overall economic share.
Fourth, the structural change burden brought on by the shift of resources from manufacturing to services takes the shape of Baumol's sickness. The growth of the overall per capita will tend to slow as the share of the service sector rises. Developing nations will expand more quickly than sophisticated service economies if they have larger manufacturing and smaller service proportions.
This broad thesis has been qualified in recent years. Although Baumol's law may still hold true in industries like education, healthcare, or personal services, other service industries have experienced significant growth, including finance, computer and software services, transportation, and distribution.
Fifth, the argument goes, the manufacturing sector offers unique chances for capital accumulation in comparison to agriculture. Manufacturing that is spatially concentrated can achieve capital accumulation more easily than agricultural that is spatially distributed. This is one of the factors contributing to the importance of manufacturing's rise in terms of growth and development.
There are relatively few sectoral capital stock estimates for emerging nations, but the statistics that are available show that manufacturing is, in fact, significantly more capital intensive than other industries since 1950. (Szirmai, 2008, table 8). This demonstrates how crucial manufacturing is to accumulation. However, manufacturing's relative capital intensity does decrease over time. By 1990, manufacturing's capital intensity was roughly equal to that of the entire economy.
Four further justifications for the potential significance of manufacturing are offered in the secondary literature: Engel's law, linking effects, technical advancement, and economies of scale.
Sixthly, the manufacturing industry provides unique potential for economies of scale that are less common in agriculture or the service industries. Although scale effects in manufacturing have clearly been significant, they are now not just relevant in that industry because of the development of new ICT technologies. As the marginal costs of additional units of service approach zero, economies of scale has taken on a significant role in some ICT-based service sectors.
Seventh, there are unique potential for embodied and disembodied technical advancement in the manufacturing sector (Cornwall, 1977). The manufacturing sector is where technological advancement is centered, and it spreads from there to other economic sectors like the service sector. Although the pace of technical development in the service industries is accelerating, this industrial component is still crucial for developing nations playing catch-up.
Eighth, manufacturing has higher linkages and spillover effects than farming or mining. Direct backward and forward links between various sectors are referred to as linkage effects. The disembodied knowledge that moves between sectors is referred to as spillover effects. Manufacturing is thought to have higher linkages and spillover effects than other industries. spillover effects and connections between manufacturing and other industries, including services.
Last but not least, according to Engel's law, as per capita earnings rise, the share of spending on manufactured products rises and the share of spending on agriculture drops. Agriculture and primary production-focused nations will not benefit from growing global markets for manufactured goods.
The Price a Product Really Costs
International businesses market their goods all over the world, yet many of them produce their items in underdeveloped nations. These nations have lower manufacturing costs than the United States and other industrialized nations due to cheaper land costs, electricity costs for factory lighting, and labor wages. Additionally, governments in developing nations frequently provide advantages to foreign businesses, such as cheaper taxes and less regulations, to entice them to open factories.
The world's largest manufacturer is China. Since the 1980s, its government has provided incentives to foreign companies to promote economic growth, and Chinese labor and materials are inexpensive. The United States, Japan, and Hong Kong were the top three countries that purchased Chinese goods in 2006.
However, the advantages for businesses and the Chinese economy are frequently accompanied by environmental damage, air pollution, and unfair labor practices. In regions where the land cannot support intensive use, the production of raw materials for manufacture, such as cashmere, wood, and agricultural products, accelerates desertification and erosion. One-third of China's land is now desert due to overgrazed grasslands in the northwest of the country. From there, enormous dust storms can spread pollution throughout the nation, all the way to Beijing and even the west coast of the US. Eroded ground is vulnerable to flooding in more productive locations, which has wrecked parts of China.
16 of the 20 most polluted cities in the world are located in China, which is largely due to the air and water pollution caused by coal-burning factories. Each year, pollution-related health issues kill or make millions of Chinese people ill. The cost of clean-up and other charges has increased in recent years, costing China's economy at least $64 billion annually in economic damage.
Some manufacturers violate labor rights in an effort to reduce prices, in addition to contributing to environmental issues. They employ kids, who are frequently paid less for the same work as adults. Or they could refuse to pay their workers overtime or provide them with social security benefits.
So China's factories are to blame for all environmental and social harm brought on by manufacturing? Well, if the Chinese government had more control over factories, they would not be able to operate in this manner. By levying penalties or shutting down the facility for violations, local authorities are meant to enforce regulations. However, officials are frequently under pressure to attract businesses and jobs to their areas from higher-up authorities as well as the local populace.
Do people in rural areas bear some of the burden? According to studies, China's poorest regions also have the worst environmental issues. They destroy too many forest trees, keep too many goats for grazing, or plant more crops than the soil can support.
So, are multinational corporations at fault? There isn't a global standard that businesses may adhere to for environmental and labor practices in foreign manufacturing. Reebok's Compliance Performance Resolution is an example of a company that occasionally develops its own standards. Other businesses may use third-party monitors like AccountAbility's AA1000 or the International Organization for Standardization. However, because the companies are occasionally unable to adopt improvements and are not always transparent about their production procedures, monitoring can be challenging.
Companies may continue to produce in countries with lax regulations because investors are pressuring them to earn a profit and compete with businesses that produce comparable goods.
Could you also be accountable? Through supply and demand, consumers have a significant impact. Customers from the United States and other major markets keep the demand for goods created in developing nations high, whether they are plastic pens or luxury handbags.
Getting everyone accountable involved and committed to solving the problem is necessary to clean up the messes left behind by industrial processes and prevent more issues. Environmental and labor norms can be better established and upheld by governments in emerging nations. Factories can follow the established guidelines. International businesses can monitor production conditions more closely and demand higher standards. Local governments can inform rural residents about excessive grazing and cultivation. Through initiatives like providing subsidies to plant particular crops, they can attempt to restore local ecosystems.
Customers can opt not to purchase goods produced using dubious manufacturing techniques by remaining aware about where and how they are made. The Internet is a terrific resource for learning about product manufacturing processes and for joining campaigns that encourage multinational corporations to enhance their business practices. We can all feel good about the items we purchase with this kind of cooperation and shared accountability.
What Advantages Do Offshore Manufacturers Enjoy?
A manufacturing company's executive team will eventually gather in their conference room and discuss the big question: "Should we think about outsourcing production?
You could be considering outsourcing your production, but you're not sure the advantages outweigh the drawbacks. According to the most recent Reshoring Index from global strategy and management consultant A.T. Kerney, offshore manufacturing by American corporations has surpassed "reshoring" for a third consecutive year, tariffs or no tariffs.
The principal advantages of moving your manufacturing overseas, which may help to explain Kearney's finding, are as follows:
cost reduction
Saving money is the primary driver for businesses to outsource their production. This is not shocking. You may significantly reduce the cost of your products and pass those savings down to your customers, boost your margins, or do both by outsourcing assembling and other pricey production operations. Start with the end in mind; you want to assist your clients stay fiercely competitive. Because they do not have international facilities, your competitors might charge more. While they may be able to provide shorter lead times than domestic clients, they might not have access to the trained workforce, suppliers, and sourcing alternatives that you do when you manufacture abroad.
Expert Labor
According to the most recent data, there will be a sizable talent gap for American manufacturers over the following ten years. Nearly 2.4 million manufacturing jobs are anticipated to go unfilled between 2018 and 2028, according to the study. Retirement of baby boomers and a lack of millennials interested in making manufacturing a long-term career are also contributing factors. You may access a large, skilled labor pool with lower wages than in the US by moving your production elsewhere.
Dedicated Vendors
Because Asia has such a large number of manufacturing facilities and people, it is possible to identify highly specialized providers that may no longer be available locally. More vendors ought to offer you a better price. China overtook the US to overtake it as the world's top manufacturer of manufactured goods in 2011. Vietnam has become a major role in manufacturing thanks to its more affordable alternatives to China. Your ideal supplier will be able to produce high-quality goods at lower prices since they will have the necessary tools, expertise, labor force, and quality control systems.
Change in Risk
When scaling up, the most important stage of your company, you can shift capital risk by working with an international supplier. The procurement of sophisticated and pricey equipment, labor expenditures (including workers compensation), and overhead costs are risks you can avoid. But before beginning production, it is crucial to establish a set of standards for vetting and validating each supplier, as well as to grade each one in person. Avoid trading one risk for another if you don't want to have problems with quality.
Buying Raw Materials Nearby
Buying raw materials closer to the point of production offers significant cost benefits. Transfer to your customer any freight savings resulting from the movement of raw materials between locations. It makes sense to obtain and produce rubber components where rubber trees are found in the case of a raw material like rubber (SE Asia). Take a look at how China has used the availability of more raw materials to its advantage in the game of global manufacturing.
Conclusion
Is manufacturing the only industry that displays these favorable growth externalities? Recent research conducted by the Brookings Institution and the World Institute for Development Economics Research (UNU-WIDER) of the United Nations University indicates that a variety of new service industries with many similarities to manufacturing have emerged as a result of technological change over the past 20 years (Newfarmer et al., 2019).
According to the UNU-WIDER analysis, three industries—agro-industrial and horticultural value chains, business and commercial services (including telecoms), and tourism—show considerable promise for structural transformation in Africa.
These are described as "industries without smokestacks" (IWSS) because they have many of the advantages of manufacturing without the negative effects on the environment that come along with the production of physical items. According to preliminary data, between 2002 and 2015, these industries expanded more quickly in a number of African nations than non-mineral exports, taking center stage in Africa's export portfolio.
The study's placement within the ongoing discussion of whether some African nations should skip the manufacturing phase entirely is intriguing. In the past, technological advancements have been a major point of support for these claims. For instance, despite the relatively small and waning significance of ICT in Kenya during the past 15 years, the country's growth in mobile internet and ICT has resulted in the emergence of internationally competitive service marketplaces.
These examples provide motivation for African development, but they shouldn't be used to minimize the potential significance of manufacturing (Juma, 2017). Instead, we ought to acknowledge that some services might present a complementary growth route that also aids in wider industrialization.
For instance, advances in communications, transportation, and energy services make it easier to trade and deliver services digitally through ICT networks. These advancements also reduce transaction costs and foster knowledge spillovers, which support the manufacturing sector. Similar to how accounting and finance may boost manufacturing budgeting and accountability, they can also increase foreign direct investment (FDI).
It is undoubtedly crucial to examine the industry as a whole rather than focusing primarily on one segment. Another illustration is the propensity to overemphasize international tradeables at the detriment of sectors that can boost internal or regional trade.
According to IGC research, the majority of trade transactions really take place locally rather than abroad, hence it would be negligent for policy to ignore internal trade barriers (Donaldson et al., 2017).
Furthermore, if African enterprises embrace the necessary technology and production methods to boost labor efficiency, even low-tech, non-tradable industries like retail, transportation, construction, and food services could have very high development potential. In this regard, we might need to get past the idea that only highly traded services can experience productivity increase.
Finally, it's important to realize that the lines dividing different industries are fuzzier than before. The value chain of many industries, including food processing and distribution, now includes components that are distinctly reminiscent of manufacturing, like production and packaging lines, as well as those that are more frequently connected with service delivery, like food preparation in restaurants.
The ability to distinguish between industries and their distinctive characteristics is frequently lacking, which has an impact on both how sector productivity is measured and how effectively different sectors are supported by policy.
The fact that the majority of the service sectors in African cities are still developing, small-scale, and primarily local in nature, making them neither tradeable worldwide nor regionally, is a worry. many of the same obstacles to manufacturing