Emphasis on Manufactures and High Technology Products

Lall et al.[36] identify eight product factors that affect export location: technological capability, marketing capability, logistics and proximity to major markets, fragmentability of production processes, information on and familiarity with different aspects of doing business in the sourcing countries by investors or buyers in major markets, availability of natural resources, and value chain organization. Assuming that a producer, say Motorola, in a major market, say the United States, has marketing expertise in handling the finished product, its choice of outsourcing a product to a developing country depends on whether: the sourcing developing country has the technological capability to produce the good; the logistics are cost reasonable; the product can be fragmented into, say a design phase which can be done in the U.S. and a manufacturing phase which can be done in the developing country; it (Motorola) is familiar with the business-related environment such as labor law, commercial law, bureaucracy, etc., of the country; the country has the needed human and material resources; and it already has established long-term relationships with many subcontractors or suppliers in some other developing countries. Then there are additional economic (Section 23.3.6 above) and policy factors (such as trade restrictions and subsidies, and trading blocs) to consider. To be a successful exporter, an LDC must possess many of these product elements. The easiest and well-trodden path is participation in vertical specialization.

Specialization on a particular component, stage, or block in a production process enables the producing countries to capture economies of scale. In addition, it permits small and medium size firms to operate successfully in the GPN. The implication for LDCs is that they do not have to master entire production processes in order to become viable competitors on the world markets. Each production process may be separated by several stages differentiated by factor intensities. The best locations for different components or activities depend on the relative abundance of resources at the sites. Less developed countries can just specialize in the components that give them the most competitive advantage. Weinhold and Rauch [37] find that productivity growth in the manufacturing sector in LDCs is higher when production is more specialized according to fragmented processes. Take the case of Ireland. Its key costs are between Asia and the industrialized nations. Its electronics industry imports cheaper passive components from Asia and manufactures other electronic components and computers, and assembles printed-circuit-boards (PCBs). The industry is successful in attracting FDI, as it utilizes abundant supplies of medium-skilled, medium-priced labor. In the mid-1990s, while Ireland's share of EU GDP was only around 1%, it received about 25% of all capital expenditures made by U.S. electronics companies in the EU [38].

After the early stage of economic development in which vertical specialization in some low technology components is adopted, LDCs may move on to more sophisticated goods by upgrading TC, an approach that most LDCs take. Consequently, during the past 20 years, exports of manufactures by LDCs were growing faster than those by MDCs in every category of products, especially in high-technology. For instance, exports of manufactures by LDCs grew at about 12% annually, while those by MDCs at about 7%. And while the value of manufactured high-technology exports rose from $20 billion in 1985 to $450 billion in 2000, the growth rate of the LDCs was twice as high as that of the MDCs, at 20% annually compared to10%.

Lall et al. [36] also note that most dynamic exporters are middle income countries, most of which are in East Asia. Technological dynamism is observed if export structure changes from less sophisticated items to more sophisticated ones. Thus while export production is shifting to lower income sites, most low income countries do not benefit that much because they export least sophisticated products such as textile and clothing, footwear, toys, and jute where the growth rate is smallest (2.9% annually during 1990-2000). The success of export among developing countries is concentrated in the top 15 exporters who control 94% of developing countries' total manufactured products, ten of which are in East Asia. These countries are, in descending order of export values in 2001, China, Korea, Mexico, Taiwan, Singapore, Malaysia, Thailand, Indonesia, Brazil, India, Philippines, Turkey, South Africa, and Hong Kong. The reason for their success is that they export highly sophisticated medium- or high- technology products whose growth rate is greatest (13.6% per year during 1990-2000). Among these countries, technological competence varies a great deal. Korea is ranked highest, as it has the greatest capability of designing, manufacturing, and exporting high technology items, followed by Taiwan, Singapore, Malaysia, Thailand, and the Philippines in that order [39]. In the same vein, if the proportion of population enrolled in science and engineering is used as a measure of technological capacity, Korea still leads the LDCs followed by, in descending order, Taiwan, Singapore, Mexico, Hong Kong, Brazil, and India [31].

Negotiating Essentials

Negotiating Essentials

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