This paper analyzes the factors that have led developed and developing countries, especially the United States and Mexico, to adopt this system, termed “production sharing.” It examines the results of production sharing to date and discusses possible policy options to achieve the best results of this global trend.

EVOLUTION OF PRODUCTION SHARING FROM THE POINT OF VIEW OF THE DEVELOPED COUNTRY: THE U.S. CASE

Production Sharing and Industry Life Cycles

In discussions of the changing international division of labor, manufacturing industries are often classified as either traditional industries that use stable, widely understood technology to make relatively simple products or high-technology industries that use rapidly developing technology to make a continuous stream of quickly obsolete new products.

The traditional industries have generally been associated with fairly labor-intensive technologies. Because of persistently low wages in the Third World and the relatively low investment needed to begin to produce these products, these industries have led the burgeoning exports of manufactures produced in developing countries.

The high-tech industries, in contrast, depend for their success on access to the specialized resources required for research and development and highly complex production processes. These industries have therefore been located in the industrialized countries. As products mature and technology diffuses, high-tech products eventually become traditional products, and production moves to more competitive locations abroad.

The phenomenon of production abroad may be viewed as a system geared to retaining competitiveness for firms in developed countries after a product has entered the downside of the product cycle. That is, the firms that developed the product continue to produce profitably by eventually relocating or subcontracting assembly production facilities in low-wage developing countries.

When this strategy works, these firms generally have some other competitive cost advantages, such as access to capital, marketing administration, or technology, since an indigenous firm producing standard products in its native business environment presumably could do so at no greater and possibly at lower cost. Also, production processes must permit such a division of labor, and transportation costs should not be an excessive component of total costs.

Growth in Production Sharing

Assembly abroad has grown dramatically during the last few decades. Before wage differentials became an important factor in world trade, co-



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