The Internationalization of U.S. Manufacturing Causes and Consequences (1990) / Chapter Skim
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2. Causes of Internationalization
2. Causes of Internationalization
Pages 9-33
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Rapid increases in foreign demand for manufactured products have created highly attractive markets abroad. · The pace of technological development has accelerated as sources of new technology have diffused worldwide.
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Other measures, such as improving productivity by enhancing workers' skills and encouraging their participation in decision making, strengthening customer-supplier relations to instill a sense of partnership, and effectively implementing advanced manufacturing technologies to enhance flexibility and spur innovation, are becoming essential to competitive manufacturing ~ Rudiger Dornbusch, James Poterba, and Lawrence Summers, The Case for Manufacturing in America's Future, Rochester, N.Y., Eastman Kodak, 198S, and Federal Reserve Board, unpublished data, 1989. 2 Graham and Krugman, Foreign Direct Investment in the United States, p.
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11 Percent of Domestic Absorption 40 38 36 34 32 30 28 26 24 22 20 18 16 12 - , 1 980 '81 ~ / / / ~~' r '82 '83 '84 FIGURE 2 Import penetration~onsumer goods. 1 1 10 9 8 6 1980 '8 1 '82 '83 '84 '85 '86 '87 '88 FIGURE 3 Import penetration~apital goods.
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in the domestic market. The need to stay abreast of product and process innovations worldwide and to build genuinely world-class operations is being forced on companies of all sizes, even those with no historical international presence.3 Growth in Foreign Demand The second major development in the global market is the shift in the relative size of markets in the United States and abroad.
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In its discussions with manufacturing executives, the committee found a growing realization that simply exporting to foreign markets may not provide the broad access, interaction with customers, and learning opportunities needed for long-term growth in global market share. Manufacturing managers often cite this realization as the primary motivation for siting production facilities abroad.
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Only a few industries remain in which the traditional product cycle approach to international production still applies.6 Strong intellectual property rights have become more important as companies are forced to recoup investments on new products and production facilities over shorter periods. Manufacturers cannot afford the revenue losses associated with misappropriation of intellectual property.
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In these state-of-the-art markets, constant improvement in product and process technologies is driven by customer demand; therefore, successful innovation becomes a key determinant of competitive success. Participating in these markets is essential both to keep pace with technological advances in a given product class and to provide ready access to a customer base for innovations that can ease the risks and build a basis for global sales.
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Production capabilities in the market, along with significant engineering resources, are essential to identifying and responding to rapidly changing consumer demand or competitors' challenges. The lessons learned can then be transferred to the firm's other production facilities worldwide and used to gain a competitive edge in world markets.
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Techniques used to gain access include creating wholly owned R&D facilities in key foreign markets, contracting with independent research institutions, strengthening ties to local universities, establishing local production facilities in areas with relevant technological concentrations, entering joint ventures with foreign firms in the United States or abroad, buying key technologies (embodied in products or processes) from foreign suppliers, licensing foreign patents, reviewing local technical publications, and informal cooperative research with foreign companies.
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18 ~ an .
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The optimum balance between make and buy depends on a variety of factors, not just access to technology; they include cost, supply flexibility, necessary process capabilities, and the role of specific components or products In overall corporate strategy. In some product segments, however, buying components from foreign manufacturers has become the only way to participate in final product markets.~° For instance, Canon dominates global production of engines for facsimile machines and laser printers, with 84 percent of the world market.
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producers advanced technology, as well as the financial backing for required investments, while giving Japanese producers broader access to the U.S. market and a production base to supply the American plants of Japanese auto producers.~3 In contrast to decisions made to gain access to foreign technology, U.S.
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with large foreign firms that, in their basic form, trade U.S. design tools and circuit libraries for manufacturing capacity and distribution support abroad.
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CHANGES IN COST PRIORITIES Another factor central to the internationalization process is the major changes that have emerged in the understanding of and priority given to different components of manufacturing costs. Though cost structures in different industries valy widely, an important shift is occurring In manufacturers' understanding of the role of direct and indirect labor, sources and allocation of overhead costs, the importance of capital costs, the hidden costs of poor product design, poor workmanship, and scrap and rework 15U.S.
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Over time, however, the importance of labor costs in international investment and production decisions has been diminished by a number of factors: · Advances in technology and a long history of squeezing labor out of production have reduced direct labor content in most manufacturing industries to 15 percent or less of production costs; in high-technology industries it seldom exceeds 10 percent and increasingly is under 5 percent.~7 Even wide variations in direct labor costs have relatively insignificant effects on total costs. Many companies have discovered that a strategy based on low labor costs is difficult to implement in the long term.
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The lessons learned about a labor cost strategy and a total system approach to cost control have created different considerations in production location decisions, but direct labor remains important to production costs in some product lines. Managers from several industries told the committee that, as a general rule, if direct labor costs exceed 10 percent of total costs, production can be cheaper in low-wage locations.
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In some capital-intensive industries, such as semiconductors and chemicals, the cost of capital is the major cost consideration in investment decisions.~8 Because labor needs are minimal, supplies are shipped globally, and transportation costs are low, the key factors in site selection are availabili~ of low-cost capital and the presence of the appropriate technical and logistical infrastructure. In such capital-intensive industries, government incentives to reduce capital costs using mechanisms such as interest rate subsidies, tax holidays, and cost sharing on plant and equipment can be particularly effective in swaying corporate location decisions.
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Manufacturers have responded to long-term currency shifts by diversifying production geographically, making exchange rate variations an integral factor in the internationalization process.20 For instance, the dramatic cost reductions achieved by major Japanese exporters in recent years were necessitated by the tremendous rise in the value of the yen after 1985-1986. Such cost reductions have not 19The question of the costs and benefits of government investment incentives typically is addressed in the context of local public finance debates.
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companies pursued similar responses to the strong dollar of the early 1980s. Another response is for companies to establish production facilities in local markets to minimize their dependency on exports to that market and, therefore, to reduce the effects of currency swings on product prices and market share.
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President Reagan initiated S-year VER agreements on machine tools with Japan and Taiwan in May 1986. In this case the foreign response has been to purchase existing domestic capacity, to build new manufacturing facilities in this country, to license domestic builders, and to create joint ventures with American machine tool builders.24 The government has used trigger price mechanisms—establishing a minimum price for sales in the U.S.
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In other cases, market presence may be essential to tap sales potential or to gain access to specific resources, but the local content rules force decisions on the amount and form of manufacturing investment that are suboptimal from the firm's perspective. The rules introduce constraints on management flexibility, dictate the type and scale of technology used in certain locations, and preclude desired plant and product rationalizations.
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penetration of global markets. Few companies have progressed far in coordinating this extensive infrastructure on a global basis, but the emergence of advanced communication and manufacturing technologies has made global integration possible.
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The growth of international competition in the markets served by small firms has set new standards for their production operations and put a premium on staying abreast of technological developments worldwide and attacking foreign markets. Most small firms lack the resources to spread their production base to foreign markets, but options are available.
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Though their marketing and distribution infrastructure is well established, they now face the need to create a global manufacturing infrastructure. Changes in the value of the yen, improving capabilities of other Asian nations, and fear of increased protectionism in world markets are spurring a dramatic increase in Japanese offshore production.
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28According to the Federal Reserve Board, all U.S. assets abroad currently continue to exceed foreign assets in the United States by a wide margin if assessed at market value, $785 billion versus $466 billion.
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