Berkeley Roundtable on the International Economy
In a digital era, companies and countries must determine whether manufacturing capacity is a strategic asset or a vulnerable commodity. For companies, the relevant issues are, When does production serve to generate and maintain advantage? Under what circumstances is a lack of in-house world-class manufacturing skills a strategic vulnerability? When is it simpler and easier to buy production as a commodity service? For a country or a region, the relevant issue is, What can be done to make this country/region an attractive location for world-class manufacturing, that is, an attractive place for companies to use production in order to create strategic advantage?
This paper develops three arguments. First, the argument about production in a digital age is set in the context of the argument that a service economy will follow on a manufacturing economy. As will be shown, there is in fact an evolution and reorganization of production hidden within the statistics. Second, the emergence of the digital era is put into an historical context. Third, the place of production in value creation and market position is considered for three different types of sectors.
The sense that we are living through a digital revolution suggests that as a national economy, we can safely exit manufacturing. The implication is that there will be a secure economic life doing software, developing digital applications, and providing services, a whole array of activities that do not involve making things.
This logic is an extension of the argument of 20 years ago about services and manufacturing. Because we were supposedly moving from an industrial society to a post-industrial or service economy, it would be all right for the American economy to lose manufacturing production and jobs. We had moved from agriculture to industry and now would undergo the next transition. But the agriculture into industry metaphor is itself misleading. The agricultural sector didn’t disappear. When you fly across the country from California to Washington you fly across the agricultural heartland of America. There is a lot of agriculture between California and the East Coast. Farm production was reorganized, and the process of how you grow things in Nebraska and California evolved. Labor went away from the land into the inputs in the form of fertilizer and machinery. If Nebraska farmers stopped growing grain, the spraying companies in Nebraska would be out of business. They would be unlikely to fly down to Argentina each day to sell their services abroad. Pesticide-free agricultural production in Denmark with limited workforces is possible with the use of GPS systems that allow marking of weed infestations for systematic monitoring.