made in the world k ferdows

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PRODUCTION AND OPERATIONS MANAGEMENT

Vol. 6 No. 2 Summ er 1997

Printed in U.S. A.

MADE IN THE WORLD: THE GLOBAL

SPREAD OF PRODUCTION *

KASRA FERDOWS

School of Business Administration, Georgetown Universi ty,

Washington DC 20057, USA

We are moving rapidly into an age of transnational manufacturing, where things made in one

country are shipped across national borders for further work, storage, sales, repair, remanufacture,

recycle, or disposal; but our laws, policies, and management practices are slow in adjusting to this

reality. They are often based on inaccurate premises. This article examines these premises and

suggests what they imply for management of manufacturing.

First, a common view is that manufacturing investment in the industrialized nations is declining

and shifting to the developing countries. This is not true. Investment in manufacturing in both

industrialized and developing nations is increasing and, in absolute value, there is a lot more

investment in industrialized countries than in developing countries. Second, a related view argued

by many is that manufacturing does not have a bright future in the rich countries. I argue that

manufacturers can thrive in the industrialized countries if they learn how to add more value for

the end users. They must go beyond productivity improvement to producing more technologically

advanced and customized products, responding faster to changing customer demands, and ap-

pending more services to their products. Doing all this is easier in the industrialized countries

because the needed skills and infrastructure are more readily available there. Third, another po-

tentially misleading notion is related to why companies invest in manufacturing abroad. Access

to low-cost production is not the main motivation in most cases; rather it is access to market.

Superior global manufacturers use their foreign factories for much more: to serve their worldwide

customers better, preempt competitors, work with sophisticated suppliers, collect critical market-

ing, technological, and competitive intelligence, and attract talented individuals into the company.

They build integrated global production networks, not collections of disjointed factories that are

spread internationally. Thus their investment in manufacturing abroad is not a substitute for in-

vestment at home, it is a complement. Building and managing such integrated global factor net-

works is the next challenge in manufacturing.

(GLOBAL PRODUCTION, TRANSNATIONAL MANUFACTURING, GLOBAL FAC-

TORY NETWORK, MANUFACTURING FOREIGN DIRECT INVESTMENT)

It is becoming hard to tell where things are made. Look at the objects around you.

Chances are that many factories in different countries, often not obvious to us, have

worked together to produce them. Take the cars: Ford Fiesta is assembled in South Korea,

Volvo 850 in Belgium, Nissan Quest in the United States, and Dodge Ramcharger in

Mexico. The parts that have gone into these cars come from factories in over two dozen

countries. Other products are equally confusing: although you might have bought an

“American” laser printer, a “Japanese” television, a “Swiss” drug, a “French” video

* Received November 1994; revised July 1995; accepted October 1995; updated March 1997.

102

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Copyright 6 1997 Production and Operations Manag emen t Society


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THE GLOBAL SPREAD OF PRODUCTION

103

recorder or a “Dutch” light bulb, most these products were probably not made in these

countries nor in the countries where you purchased them.

The world is clearly entering an age of transnational manufacturing, where things made

in one country are shipped across national borders for further work, packaging, assembly,

storage, or sales, and products sold in a country are often shipped across national borders

for repair, reuse, remanufacture, recycle, or disposal. Every indicator points to an accel-

erating increase in these flows. According to the statistics collected by the United Nations

(World Investment Report 1993)) from 1970 to 1991, the world output (measured in

constant dollars) doubled, but the value of exports (also measured in constant dollars)

increased faster, by 270%. While more products and services are produced every year, an

increasing share of them cross national boundaries. Trade in manufactures (as opposed

to trade in services and primary commodities) is by far the largest component of the world

trade. As shown in Figure 1, in 1994, the latest year for which the data are available, the

world trade was 4.2 trillion dollars of which 73% (or 3.1 trillion dollars) was trade in

manufactures, up from 55% in 1980 ($1.1 trillion out of $2 trillion) and 71% in 1990

($2.4 trillion out of $3.4 trillion). Reduction of tariffs around the world in general and

the recent economic pacts [EU (European Union), EU with EFTA (European Free Trade

Agreement), ASEAN (Association of South East Asian Nations), and NAFTA (North Amer-

ican Free Trade Agreement)] continue to drive this trend.

Clearly the logistics of moving manufactured goods around the globe will become a

greater challenge and a more critical success factor for manufacturers. This is particularly

important because in a surprising number of these cross-border transfers, the same com-

pany is at both ends of the transaction, that is, transfer is inn-u-firm. Between 25 to 40%

of all world trade is estimated to be intra-firm ( World Investment Report 1993 ) . In a study

of U.S. multinational manufacturers, Kobrin ( 1991) found that in some industries, like

automotive and computer, over 40% of the companies’ international trade was intra-firm.

A more recent study of the U.S. manufacturing multinationals shows that this intra-finn

trade is rising at a striking rate: the share of the intra-firm trade of the total trade by these

companies went from 37% in 1977 to 53% in 1983 and to 60% in 1993. (WorldInvestment

Report 1996) Clearly these companies are organizing or reorganizing their cross-border

production activities in an efficiency-oriented, integrated fashion, capitalizing on their

assets around the globe. They are locating the various parts of the value-added chain

where they contribute most to the company’s overall success.

It is therefore not surprising to see that the world foreign direct investment, in spite of its

year-to-year volatility, has increased faster than both the growth in world output and trade.

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Nations.


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KASRA FERDOWS

Annual growth rate of foreign direct investment from 1986 to 1990 was an astounding 25%

and from 1991 to 1994 it was 13%, still several times the average annual rate of growth of

trade or output. In 1995 global foreign direct investment reached an unprecedented 3 15

billion, 40% more than 1994, and a 1995 survey of largest 100 multinational indicated that

72% of them expected to increase the level of their foreign direct investment in the next five

years ( 1995-2000) and none expected to reduce it. ( World Economic and Social Survey

1996) Companies are setting up operations abroad even faster than most of us imagine.

Manufacturing is the single largest type of foreign direct investment in most countries.

Nearly 60% of the estimated 39,000 companies around the globe that have foreign affiliates

are in manufacturing (World Investment Report 1996). A substantial share of all foreign

direct investment continues to go into the establishment, expansion or acquisition of factories.

About a third of all foreign direct investment by the largest investing countries (United States,

Japan, Germany, France, United Kingdom, Italy and Canada) is in manufacturing. As trade

barriers fall, as transportation becomes easier, and as communication technologies improve,

there are more options for location of production and new challenges for global manufacturers.

Analysis of the options in producing abroad is therefore becoming more complex,

especially as one considers the number of possible arrangements for cross-border pro-

duction: building a green-field site, acquiring an existing factory, forming a joint venture

or an alliance, licensing production rights, or subcontracting. Adding to all this possible

choices in working with foreign suppliers, distribution centers, logistic systems, and repair

services shows the full complexity of cross-border manufacturing decisions. The com-

plexity is not only for business managers but also for public policy makers, tax authorities,

and financial analysts who must regulate and deal with these decisions.

The starting point to deal with this complexity is to answer the basic questions of how

and why production is spreading across national borders. Many start with inaccurate, and

potentially misleading, premises.

Examining the Premises

1. Is Manufacturing Leaving the Rich Countries?

A popular view is that manufacturing is leaving the industrialized countries and going

to the developing nations. This notion is propagated every time one reads that a multi-

national company establishes a factory in a developing nation. These events are usually

well publicized in the media. However, an investment several times larger by the same

multinational company, expanding its manufacturing facilities in a highly industrialized

country, often goes unnoticed by the general public. If Ford invests 200 million dollars

in a Mexican factory, it would stir up a debate in the media, but a 500~million-dollar

expansion in its German or U.S. factories is likely to be only of passing interest to most

people. After a few years of exposure to this type of coverage, it is natural to think that

industrialized countries are being depleted of manufacturing.

The numbers, however, show a different picture. Even if we set aside the domestic

investment in manufacturing (which is orders of magnitude greater in the rich countries

than in the developing countries) and only look at the movement of investment across

borders, it is clear that manufacturing is not leaving the industrialized countries. According

to the data compiled by United Nations Conference on Trade and Development UNCTAD)

in 1994,lO highly industrialized countries, the United States, the United Kingdom, France,

Germany, Spain, Canada, Australia, Holland, Belgium, and Italy, received half of the

world’s foreign direct investments made that year and held two-thirds of the world’s

accumulated stock of foreign direct investments. As shown in Figure 2, this pattern has

not changed significantly over the years.

The largest recipient continues to be the United States. By 1994, foreign multinationals

had more than 500 billion invested in the United States (of which more than 40% was

in manufacturing), up from 80 billion in 1980 and almost as much as accumulated


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Rest of World

Switzerland

Italy

Benelux

Netherlands

Australia

hIada

Spain

France

Germany

United Kingdom

United States

ml994

ml990

Ml985

01980

0 5 10 15 20 25 30 35

Share of World FDI Stock

FIGURE 2. Most FDI is in Industrialized Countries. Source: 1995 World Investment

Report, tJNC TAD.

investments by all multinationals (including the U.S. multinationals) in all of the world’s

154 developing countries Britain, with $214 billion (about a third in manufacturing),

was the second largest recipient, followed by France ($142 billion, one-third in manu-

facturing), Germany ($132 billion, one-half in manufacturing), and other highly indus-

trialized nations. In other words, the rich countries continue to attract more manufacturing

investment from abroad every year in amounts far greater than the developing countries.

This is not to say that manufacturing investment in the developing world is not growing.

Indeed, as Figure 3 shows, foreign direct investment in the developing countries has also

grown dramatically in the last decade and particularly in the 1990s. The recent increase

is concentrated in China and few other rapidly growing countries in South East Asia and

South America, but the growth of foreign investment in these countries does not imply

the decline of manufacturing in the developed countries.

This is not a zero sum game. Both the developed and the developing countries are producing

more. It is true that in the last few years the rate of increase in the flow into the developing

nations is larger than that into the rich countries, but they start from a smaller base and, even

if this pattern persists, it will be many years before the actual amount of investment going

into the developing nations will exceed that which goes into the developed nations. (Remem-

ber that if we include domestic investments, rich countries will maintain their higher rate of

investment in manufacturing for a much longer period.) So the answer to the question “Is

investment in manufacturing in the rich countries declining?” is a clear no.

2. Will the Manufacturing Sector in Rich Economies Employ Fewer People?

Manufacturing productivity has grown faster than any other sector in the rich economies

in the last few decades. Between 1980 and 1992, in constant prices, the output per person

employed in the manufacturing sector in the United States, Japan and European Union coun-

tries increased by almost 50%. Manufacturing output in the same period in most these nations

grew about half as much (except in Japan, which grew by 80%) (Wolf 1994). Thus, fewer

people have been needed to supply tbe output and the number of jobs in the manufacturing

sectors in the rich countries have been declining. But the declining share of employment in

manufacturing should not be interpreted as declining investment or output in manufacturing.

Manufacturing can thrive in the industrialized countries with less people and the re-

maining jobs will be better paid. In 1993 the average hourly wage (excluding fringe


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KASRA FERDOWS

199 1995 199 1993 1994

FIGURE3. Destinations of FDI. Source: 1995 World Investment Report, UNCTAD.

benefits) in the manufacturing sector in the United States was 12, more than any other

sector such as wholesale trade, finance, or retail trade. This is particularly significant

considering the fact that traditionally less than 20% of manufacturing employees have had

higher education (compared to 30% in the finance and business services sector) (The

Economist 1994). As the typical manufacturing job is moving away from the stereotypical

operator on the assembly line to one that is working in teams, helping design new pro-

cesses and products, and dealing directly with customers, suppliers and distribution chan-

nels, more qualified employees will be attracted to production. This change requires a

greater investment in education, technology, and work conditions. Only if a company has

not,been willing to make this investment, then it must either move its factory to where it

can continue to produce in the old way or abandon manufacturing altogether. Otherwise,

as described in the next section, there is no compelling reason why many forms of man-

ufacturing cannot be continued successfully in rich countries. Yes, the number of low

skilled jobs will decline but manufacturing can still thrive.

3. Does Manufacturing Really Matter in Rich Economies?

Some have compared manufacturing with agriculture. They cite that manufacturing in

the industrialized world will follow the fate of agriculture: it will fall from being the

dominant sector (as agriculture was until a few decades ago) to one with marginal eco-

nomic significance (as agriculture currently is in most of these economies). Their argu-

ment is essentially based on the rapid pace of productivity improvement in these sectors:

we need only a few agricultural workers to produce our food and, similarly, we will need

only a few production workers to produce the manufactured goods we need. This argument

is too simplistic; it ignores the enormous potential of adding value in manufacturing.

Perhaps if the farmers had expanded into food processing and biotechnology, agricul-

ture would not have been reduced to a marginal sector in rich economies. However, the

typical farmer stayed with the land and did not add much value beyond producing grains,

fruits, vegetables and simple dairy products; thus, in spite of great improvement in pro-

ductivity, these farmers reached a plateau for generating wealth. Those manufacturers

who, like these farmers, take a narrow view of their contribution in the value chain and

continue to produce the same items, albeit more efficiently, face the same destiny. Demand


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THE GLOB L SPRE D OF PRODUCTION

107

for what they do may reach a plateau or, worse, competition from cheaper or more nimble

producers may grasp their market.

There is no inherent reason why manufacturers should be tied to a comer of the value

chain. They can generate more wealth not only by becoming more efficient as farmers

did) but also by at least three other ways. First, they can deploy new technologies to

produce more advanced and high-performance products. For example, 3M has grown and

extended its product line by finding new applications for the technologies that it masters.

Applying its knowledge of adhesive technology alone, it has introduced thousands of

successful new products. Motorola produces a continuous stream of high-value new prod-

ucts by pushing the technological frontiers in the fast changing telecommunication in-

dustry. Its latest mobile phone is not much bigger than a credit card and sells for a thousand

dollars, much more than a typical mobile phone available in the market.

Second, manufacturers can produce more customized products and respond faster to

changing customer needs. Dell produces its computers only after receipt of the order and

can incorporate the latest generation of components that are changing at a dizzying speed.

Benetton produces most of its garments in Italy in part to be able to respond quickly to

changes in the market. Even in a commodity product like golf balls, Wilson Sporting

Goods, in its factory in Humboldt, Tennessee, has thrived by becoming very agile. It can

customize golf balls by putting desired logos or names on them) for an order as small

as a fe w dozens and can deliver it in 48 h. Its customized golf ball business has grown

lo-fold in seven years. Other examples of such mass customization are Levi’s custom-

made jeans delivered in 10 days) and Andersen Windows individually customized win-

dows and doors. These products are not only sold well but yield good margins.

Third, manufacturers can append more services to their products. The services can start

even before the customer makes the purchase decision for example, help in defining the

needs and desired characteristics of the product) and continue long after s/he is using the

product repair, training, upgrading, and so on). Again, Andersen Windows helps the

customer design the windows they need. Boeing, the aircraft manufacturer, helps its cus-

tomers analyze their aircraft needs, train their pilots and technical staff, answer technical

questions, and set up repair and maintenance facilities; it even guarantees to repair its

“grounded” passenger jets at any airport in the world.

Many successful manufacturers do all three in addition to improving their production

efficiency. If a manufacturer is able to develop the capability to do both improve produc-

tivity and add more value, there is no inherent reason why it cannot thrive in a highly

industrialized country. Moving from the “industrial age” to the so-called “information

age” should not be equated with the demise of manufacturing in the rich countries. In

fact, manufacturers have been among the first to deploy information technology to improve

themselves. Many, including the examples mentioned above, have shown that they can

succeed and contribute significantly to their economies. After all, manufactures comprise

by far the largest share of the exports from the rich countries.

4. Is Znvesting in Manufacturing Abroad a Substitute for Investing in Manufacturing at

Home?

The first reaction, especially by politicians and union leaders, is that it is; but for the

majority of cases it is not true. Many companies may seize an opportunity to set up a

factory where labor is cheap, tariff walls are high, and/or tempting subsidies are offered,

but most continue to expand their production activities also at home. These companies

are not really moving their production abroad; rather, they are entering new markets or

creating a global network of specialized factories or both.

It is useful to examine all the reasons why a company manufactures abroad. Figure 4

provides a summary of the main reasons by grouping them into six categories. Among the

six, only when access to low production costs is the prime motivation, is the company

moving its production abroad, in all other cases, investment in a foreign factory is essentially


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KASFU FERDOWS

enhancing the position and long term viability of the factory at home. Even in those indus-

tries, such as textiles or plastic toys, where access to low production cost is essential, there

are companies that continue to expand their factories at home: Benetton, the Italian garment

manufacturer, continues to invest in its factories in Italy while it has also started factories

in Asia, South America and elsewhere in the world. Similarly Lego, the Danish toy maker,

continues to invest in its factories in Denmark while also building factories elsewhere.

Among the 154 developing countries of the world, the 10 largest recipients of accumu-

lated foreign direct investment in manufacturing in 1995 have been China, Mexico, Sin-

gapore, Indonesia, Brazil, Malaysia, Argentina, Hong Kong, and Thailand

(The Economist

1996). Most of these countries are highly populated nations and most of the factories set

up by foreigners are intended to capture a share of their rapidly growing national or regional

markets. Foreign factories are also established to serve the customers better; preempt com-

petitors; connect to sophisticated suppliers; collect critical marketing, technological, and

competitive information (for the entire company) ; and attract talented individuals to the

company. The investments in these factories are not

substituting

the investment at home;

they are complementing

it. All the factories of the company work together, transnationahy,

to deliver what the customers in different markets want in the most efficient way.

Transnational Production: The Next Challenge in Manufacturing

A clear indicator of the spread of transnational manufacturing is the current controversy

over what constitutes country of origin for many manufactured goods. As production spreads

around the globe, the number of products that can justifiably carry the label of made in one

country is decreasing. For many products, from cars to computers, medical instruments to

pharmaceuticals, telephones to refrigerators, it is aheady difficult to establish what the country

of origin really is: where major components were made, where they were put into subassem-

blies, and where final assembly and packaging were done. Keeping track of all this is not

only for academic interest; tariffs, quotas, safety regulation and a host of other factors depend

on how the country of origin is determined. For example, a recent ruling in the United States

defines the country of origin for a car essentially on the basis of where it was assembled

(different from the most common international practice and different from how it is done for

PRODUCTION

LOGISTICS

COSTS

Labor

Capital

Materials

Transportation

FIGURE 4 Drivers Behind Global Spread of Production


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other products in the United States itself . As one might expect, this ruling is a subject of

dispute and, given all the politics involved, its resolution is not simple.

The difficulty in establishing the country of origin is the harbinger of the new issues

raised by increasing transnational manufacturing. Perhaps the awkward label “Made in

the World” captures what lies ahead in production more accurately than the traditional

label of made in any one country. It forces a new mindset and points out the changes we

need to make in public policies and management practices.

For managers of manufacturing companies, it is especially important to appreciate the

potential strategic benefits and competitive threats of transnational manufacturing. When

considering a factory abroad, settling for simplistic answers, limited benefits, and modest

expectations would result in underutilization of the company’s resources, but in the man-

agerial debates over establishing, acquiring, expanding, shrinking, or closing foreign fac-

tories, often the most measurable and incontestable benefits and losses overwhelm other

arguments. Savings in the direct costs of production, gains in foreign exchange, dazzles

of financial subsidies, savings in transportation costs, and protection from trade barriers

are examples of the tangible factors that can easily dominate the discussion and thinking.

The real mastery of the superior world class manufacturers is that they recognize that

a factory in a foreign land can have long-term benefits also in areas beyond production.

They use foreign factories to enter new markets, support their domestic factories, generate

new knowledge, and bring needed skills and talented people to the company. Rather than

minimal investment, they invest for the long term and encourage development of the

managerial competence to perform all that they expect at these sites. They use these

factories strategically as a part of a robust global network to deal with foreign exchange

and other risks, a network in which the factories reinforce each other. That is different

from a company that spreads its production in a series of opportunistic moves in chase of

cheap labor, tax benefits, capital subsidies, or getting inside trade barriers, and ends up

with a collection of disjointed factories in different countries.

Management of an integrated global factory network is a challenge that manufacturing

managers will be facing with increasing frequency. They need all the valuable lessons

that they have learned about improving the operations inside individual factories and their

supply chains but must also learn new ways of transferring knowledge between factories

and crafting strategic charters for each factory in the network.

Leveraging the global network is a potent source of creating competitive advantage. It

is not only for the big multinationals; smaller manufacturers can also do that too. Even

those companies that do all their production in one country must adjust their strategies to

cope with this trend. Soon, if not already, they will be competing with transnational

manufacturers at their doorsteps. They can lobby for protection but that is clearly myopic;

they can abandon manufacturing by outsourcing their production but that is giving up an

important weapon in the competitive battle, or, as I have explained earlier, move into high

value-adding manufacturing. Perhaps the most effective strategy is do the same them-

selves. They too can spread their production into an integrated global network.

References

The Econo mist ( 1993), “A New Investment for GA‘IT,” September l 75.

- (1996), “Emerging Attractions,” October 26, 128.

KOBRIN, J. K. (1991), “An Em pirical Analys is of the Determinants of Global Integration,” Strategic Manage-

ment Journal, 12, 17-31.

WOLF, M. (1994), “Can Europe Compete? The challenge,” Financ ial Tim es, February 24, 1994, 11

World Investment Report ( 1993)) “Transnational Corporations and Integrated International Production,” United

Nations, New York.

- (1995), “Transnational Corporations and Competitiveness,” United Nations, New York.

- ( 1996), “Investment, Trade and International Policy Arrangements,” United Nations, New York.

World Econom ic and Soc ial Survey ( 1996), “Trends and Poli cies in the World Economy,” United N ations,

New York.

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