Costs Prices Product Qualities and Technological Innovations

In the global context, LDCs can be seen as peripheral countries clustering around MDCs that provide central markets to the former. Product prices are set in the central markets and those of LDCs must be lower, other things being equal, in order to compete successfully with the incumbent suppliers, who are originally located in the central markets themselves. Market price is equal to producer price plus transport and communications costs. The incumbent sellers have the advantage of zero transport costs. Therefore, the producer price of LDCs must be lower than the market price by an amount at least equal to the transport and communications costs. Obviously the closer the LDCs are to the markets, the lower the transport cost. For instance, in terms of transport cost, Mexico has an advantage over South Korea in selling products in the U.S., which means that the producer price in Mexico can afford to be higher than that in Korea in the competition with American sellers.

The producer price is the cost per unit of output (unit cost). This unit cost is comprised of unit factor costs, unit transport, communication, information, and transaction costs, and unit tax cost. Unit factor cost for each factor, in turn, is the factor payment divided by its productivity. For instance, unit labor cost consists of wage per hour divided by labor productivity, measured in output per hour of work. Tax can be considered as payment to the factor government service, which should also be an argument in the aggregate production function. From this basic relation we can derive policies and institutions that can lower unit cost, i.e., lower factor payment and/or raise factor productivity.

Factors are divided into mobile and immobile ones. Mobile factors are capital and technology while immobile ones are land, governments, and, for all practical purposes, labor. Mobile factors tend to follow the "law of one price," i.e., their returns or payments tend to be equalized across borders due to owners' arbitrage by moving them from countries where they receive low returns to those where they can reap higher returns. The gap between the returns of immobile factors located in the central market countries and in the peripheral countries can be significant. For instance, even when labor is not abundant, LDCs will generally be required to have lower wages, simply to compensate for the distance between the sellers in LDCs and the central markets. Naturally, to minimize the production costs the firms in the central market locations will employ more capital relative to labor, the reverse of what occurs in the peripheral locations.

In order to lower the producer price, LDCs must raise factor productivities which, among other things, come from inflows of capital and technology. But to attract foreign capital and technology, LDCs must raise their returns higher than those they can obtain in central markets, by an amount sufficient to cover the information and transaction costs. Information costs are fixed costs and, in some cases, quite high, as information must be acquired before a firm makes a decision whether to enter production in a new location. After the firm builds production facilities in the new location, transaction costs may be incurred in using and defending property rights such as the buying, selling, and renting of the firm's property and products.

For homogeneous products like cotton and sugar, difference in price, which covers the transport cost, is all it takes for a successful export. For differentiated products such as apparel and footwear, style and quality as fitness for use, which implies customer satisfaction, is also needed. The new trade theory has recently emphasized that aggregate trade shares may depend on the variety and quality of goods produced in the economy [18]. Godfrey and Kolesar [19] consider product quality to be the most important factor in global competitiveness. They demonstrate why Japanese (such as Toyota and Sony) and American companies (such as Xerox and Kodak) which devote their attention to quality management retain their dominance in the marketplace. Greater productivity and lower costs also go hand in hand with improved quality. Less developed countries can compete successfully with American products that have passed through the maturity phase in their product life cycles. LDCs can capitalize on manufacturing strength due to the quality of their disciplined labor but MDCs still lead in exporting sophisticated products with more technology, although the lead has been narrowed over time. Technological innovations may involve process or product design that enhances productivity to compensate for higher wages.

One of the most important innovations in recent years is the new management technology. Computer integrated manufacturing and flexible manufacturing demand a new management method called IPM, as mentioned above [20]. The old management method, which involves a hierarchical command structure, was an answer to a rigid manufacturing system with dedicated assembly lines. With the advent of CIM and FMS, the command hierarchy becomes an obstacle rather than a facilitator because it is embedded in vertical (position oriented) organizational structure. It has to be replaced by the integrated management technique with its horizontal (process oriented) structure. Efficiency and quality problems can be solved by more self-coordination among workers and machines, as the ultimate knowledge of the process rests with the workers. Moreover, as the ultimate knowledge of the product rests with the customer, the latter must be allowed to participate in the production process. Toyota has experimented with this customer-worker participation for some time and has found it quite helpful in its product decisions.

Negotiating Essentials

Negotiating Essentials

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