Supply Chains, Trade & Investment (Week 2) > 1. Weekly Guide > Introduction: Supply Chains, Trade & Investment
- This week we’re going to follow up with some equally controversial topics related to supply chains.
- Now, what are supply chains? The World Trade Organization estimates that 80% of all trade takes place within multinational corporate networks or in supply chains that are organized by the multinational corporations.
- We already saw supply chains, to a certain extent, when we looked at sweatshops.
- Kenya, for example, is supplying cut flowers throughout the Middle East.
- We will find that, when we look at autos and auto parts, electronics, medical equipment, medical supplies, that these offer vast opportunities for countries in Latin America, in Asia, and in Africa to expand their contact with the supplier networks and the supply chains of multinational corporations.
- Within our discussion of supply chains this week we will once again have some very interesting guest speakers and experts covering Latin America and India, for example, and introducing issues related to entrepreneurship in India, for example, gender issues, youth unemployment, and the role of education in trying to eliminate or help cushion youth unemployment.
- That is, does the creation of supply chains in manufacturing in the developing countries come at the expense of jobs in the developed world, in Europe and the United States and the developed part of Asia? Or is this supply chain development complementary and strengthen the position of workers and firms and communities in the developed countries? But that is our topic for next week.
Supply Chains, Trade & Investment (Week 2) > 2. Classical Trade Theory > Comparative & Absolute Advantage Lecture
- The insight of both of them is to stress that economies are best off if they do more of what their comparative advantage is.
- The peculiar thing you are going to see when you look at that chart is that Portugal takes fewer hours of labor to do both.
- How would you explain the difference between comparative advantage and absolute advantage? Well, absolute advantage would be the country that can produce the most of a good.
- So if you and I both catch fish, then the one who would have the absolute advantage would be the one who can catch the most fish.
- Comparative advantage is comparing what is given up when two people produce specific goods.
- Other words, if I were to spend an hour of catching fish and hour of hunting, for example, deer, then I would have a comparative advantage in the one that I catch more efficiently.
- So that’s going to be their relative advantage.
- In the labor factor of production, important for our work is going to be the distinction between high skilled labor and low skilled labor.
- Some economies are going to have a comparative advantage in higher skilled labor.
- Some economies are going to have a comparative advantage in lower skilled labor.
Supply Chains, Trade & Investment (Week 2) > 2. Classical Trade Theory > Guest Lecture: Professor Anna Maria Mayda on Classical Trade Theory
- So I have been teaching trade at Georgetown University for 10 years, and my research is on trade and international migration.
- I’ve been working on political economy issues of trade policy and migration policy.
- I’ve looked at the determinants of public opinion on trade and migration.
- It is this difference in relative labor requirements that makes it so that countries gain from trade.
- Since 1/100 is greater than 1/120, it means that England is better off producing cloth and exchanging it for wine, rather than producing wine directly itself.
- This means that England gains from trade, and you can show exactly the same for Portugal.
- Since 1/80 is greater than 1/90, the Portuguese worker is better off producing wine and exchanging it for cloth, rather than producing cloth directly itself.
- As we saw with the one Portuguese worker and the one English worker, international trade is an indirect method of production that allows countries to produce more than if they produced the good by themselves.
- International trade is not based on absolute advantage.
- The opportunity cost to produce cloth in terms of wine is equal to the relative labor requirement needed to produce one good in terms of the other.
- Since 100 divided by 120, which is the opportunity cost to produce cloth in terms of wine in England is smaller than 90 divided by 80, which is the opportunity cost to produce cloth in terms of wine in Portugal, we say that England has a comparative advantage in the production of cloth, and Portugal has a comparative advantage in the production of wine.
- If both countries do so, they will gain from international trade.
- The David Ricardo example has two different kinds of countries trading, but what about similar countries trading? You’re right, Ted.
- Countries trade because they’re different, and each specializes in the good which it produces best.
- How does product differentiation come in? What does product differentiation mean, anyway? It means that each country will produce only a subset of the different varieties of a good, and will import the other varieties of the good, the other differentiated varieties of the good from the other country.
- If they’re economies of scale, what will happen is that countries will only produce a few varieties, so that they will be able to take advantage of these economies of scale, but at the same time, thanks to trade, consumers will be able to access the entire range of products.
- Could you explain the difference between trade between developed and developing countries versus trade among developed countries? Sure.
- The theory of international trade based on differences across countries, which is the theory of comparative advantage, explains North- South trade.
- In other words, trade between developed and developing countries, while the theory based on economies of scale explains North- North trade, which is trade between developed countries.
- So if we want to think of trade between the United States and Europe, or the United States and Japan and Korea, which would we use? We would use North – North trade, we would call it North- North trade, and it would be based on economies of scale.
- If we went and looked at the data, what we would find is that there is a lot of two way trade taking place between the United States and Europe.
- Intra-industry trade is defined as two way trade, while inter-industry trade is defined as the exchange of one good for another good.
- So the theory of comparative advantage explains North- South trade.
- That is trade between a developed and a developing country.
- What about trade between two advanced countries, which we call North- North trade? North- North trade is explained by economies of scale.
- This is the type of trade that we observe between developed countries.
- If we go and look at the data, North- North trade is intra-industry trade.
- In other words, you will see two way trade flows, which is trade flows within a product category, while if you go and look at the data for North- South trade, what you will see is inter-industry trade, which is the exchange of one good for another good.
Supply Chains, Trade & Investment (Week 2) > 2. Classical Trade Theory > Opportunity Cost Lecture
- So let’s look at the idea of comparative advantage in a little bit more detail, and introduce the concept of opportunity cost.
- So how should we explain comparative advantage and opportunity cost? Well, I like to play golf.
- Take two hours, save $300. But here’s the opportunity cost.
- If they took two hours away from the practice green and they came in second or 10th in the next tournament, that could cost them hundreds of thousands of dollars or more.
- That’s the opportunity cost from devoting time to something that is not their comparative advantage.
- That’s what they should devote their time too and then let the gardener cut their lawns and pay them the $300 that it costs.
- Now, that’s a way of explaining comparative advantage and opportunity cost.
- Balcerowicz said, you don’t understand comparative advantage.
- Comparative advantage means that our Polish economy will settle in to doing activities that we are comparatively better off- and this will be mediated through the exchange rate.
- Much more current is in the free trade agreement with the Dominican Republic and the CAFTA Central American economies with the United States.
- The leaders of El Salvador said, “Oh look at these very high productive Dominicans in the Dominican Republic.
- If we open up to trade, they’re going to get all the jobs.
- The principle of comparative advantage prevailed and El Salvador does some of what it does comparatively better, the Dominican economy does some of what it does comparatively better, and the Costa Rican economy does what it does comparatively better.
- Did any of them fall off the cliff? Did any of them disappear from existence? No, that is the insight of comparative advantage of how this fits together for all to benefit.
Supply Chains, Trade & Investment (Week 2) > 2. Classical Trade Theory > Contemporary Trade Theory Lecture
- Comparative advantage is not the most important ingredient in the globalization of trade, technology, and investment.
- More important is going to be intra-industry trade with product differentiation.
- This originates with Paul Krugman and other contemporary economists.
- What does Motorola think of every day when the executives go to work? Well, they may think wages are rising in China.
- What they really are thinking about is, what is Apple doing? What is Ericsson doing? What is Huawei doing? What are their competitors in the same industry doing? More powerful batteries, different applications, smaller devices- all of this is a pulse.
Supply Chains, Trade & Investment (Week 2) > 3. Ratio of Benefits to Costs of Globalization > Ratio of Benefits to Costs of Globalization Lecture
- So these are the pressures that produce benefits, but they also require adjustments.
- What is the ratio of benefits to costs? Costs meaning job dislocation, shifting of jobs, mixing and matching as all of this competitive pressure gets under way.
- What do you think the ratio is? Is it two to one benefits to cost? Three to one benefits to cost? Ten to one benefits to cost? Well, you will see from reading Hufbauer et al.
- So there are real costs- worker dislocation, shifting of firms, some firms gaining, some firms being driven out of business.
- Because we don’t want globalization just to leave many parts of the population marginalized or left out of the process of globalization.
- I’ve asked you to take a look at some of the studies that have tried to calculate the ratio of cost to benefits from globalization in the United States.
- What did you find, what do you think are the best estimates? Well, it appears that at least in the United States, the benefits far outweigh the cost.
Supply Chains, Trade & Investment (Week 2) > 3. Ratio of Benefits to Costs of Globalization > Guest Lecture: Professor Matthew Carnes on Globalization in Latin America
- Matt, could you tell us a little bit about your background? And we’re going to talk about globalization in Latin America.
- My work began in Latin America over two decades ago.
- So I worked some in Ecuador and Paraguay over a couple different summers and became fascinated with questions of inequality, and distribution, and redistribution.
- I’ve studied at Stanford University in California, doing my Ph.D. in political science, and I’ve worked pretty extensively in the region.
- So I spent a year doing hurricane relief work in Central America- in Honduras, following Hurricane Mitch, which hit the region in 1998, I was there in ’99 and 2000.
- Then more recently, I’ve been doing work on labor policy and social welfare policy, mainly in the Southern Cone, so Argentina, Peru, and Chile are the countries I’ve worked on most.
- We are defining globalization as the spread of trade, technology, and investment.
- I wonder if you could start out- whatever country or whatever places that you want to- and talk a little bit about winners and losers from globalization.
- Well as you know, Latin America is one of the regions that’s been most impacted by globalization.
- In part because it had an early phase of globalization, in the late 1800s, and which was very connected, supplying commodities to the world.
- Mexico, Chile, in particular have had very dynamic- especially manufacturing sectors, we think of Mexico.
- Brazil has been another country that’s thrived under globalization with the opportunity to sell, especially, its oil and petroleum on the world market.
- One thing that’s very interesting in this round of globalization is the entry of Asian markets into the mix.
- So while Latin America was focused in on inward development, that created a certain sort of middle class of privileged, more unionized manufacturing workers that actually did pretty well and had fairly stable job tenures and careers.
- Those workers have often seen their industry shaken up by globalization.
- So that’s a group that’s been, in some ways, prejudiced by globalization.
- Traditionally, had a fairly large informal sector, but that’s grown tremendously during this era of globalization, I wouldn’t say it’s a direct effect.
- Spend a word or two describing what we mean by the informal sector and the formal sector.
- So the informal sector is the sector in which jobs and employment are not registered with the government.
- They can be anything from self employment, where I work a job myself, and I just don’t ever register with the government and then pay benefits in for pensions, or health care, or otherwise getting incorporated into the social welfare system of the state.
- So informal sector workers are not governed by labor laws, because simply, they’re not respecting any of the laws.
- So it’s very hard for governments to monitor this kind of work.
- So in Sao Paolo, or in Santiago, or in Mexico City, or Monterey, are there workers who have benefited from the process of trade technology and research and development? Oh certainly.
- So within each of those cities that you mentioned, there’s a very dynamic sector.
- That happened some through the kinds offshoring of work that we can do from the United States, or from Europe, to these economies where a more dynamic, educated class can then contribute, often in technology, often in financial services.
- By and large we also see an influx of a large number of workers that come to the cities looking for work and end up without the kinds of productive work or upwardly mobile work that we might hope would be there.
Supply Chains, Trade & Investment (Week 2) > 3. Ratio of Benefits to Costs of Globalization > Guest Lecture: Professor Robin King on Historical Context of India’s Development
- Robin, you teach here at Georgetown, but you’ve just come back from several years in India.
- I did go to India and help set up a new think tank on science and technology policy.
- Who are the winners, who are the losers in India? And how has globalization affected India? That’s a big, wide question.
- The recent rounds of globalization that we see are returning us to a world where countries that previously were huge and played large roles, like India and China, are returning to the global scheme of things.
- So countries like China and India are returning to the world economy in different ways.
- It’s really this move from not just thinking about goods, but thinking about goods and services, where India has really fit in and played such a dynamic role.
- Globalization has allowed India to access new markets, as well as to be open to new markets, so that economic growth has really picked up tremendously.
- I think when we think about India, and specifically with services, we need to really think about liberalization that started in 1991.
- It wasn’t something India really particularly wanted to do.
- India, historically, has been this very- let’s say for the last 50 years since independence- has been this very interesting combination of, on paper, this socialist paradise with its very state run, five year plans, but that being very disconnected from the vast majority of economic production that took place, and certainly from the most dynamic sectors of the economy.
- India was able to take advantage of some of the previous investment and successful implementation of pieces of the previous plans, such as a continued focus on English as a medium of education, and emphasis on technology, and technology development.
- Where India was really able to blossom was on not the stuff, but the things that that stuff could do in terms of services.
- Software took advantage of the overseas Indian community, that are called non-resident Indians, who in some cases came back to India.
Supply Chains, Trade & Investment (Week 2) > 3. Ratio of Benefits to Costs of Globalization > Guest Lecture: Professor Robin King Benefits on the Pro’s and Con’s of Globalization in India
- Where India was able to blossom was on the services side, and using those goods, as well as combining with education and the connections that they had to the world economy in new ways.
- What particular sectors and service were the first? And how did they grow in India? Well in the ’80s and ’90s, there was Indian investment and discussion in this area.
- Taking advantage of those highly educated technical engineers especially, in the IT sector, that spoke English, but that knew how to deal with the rest of the world.
- Much of the impetus came from the year 2000, the Y2K problem, and the need to transfer huge amounts of code across all sectors in the US economy and the European economies, to deal with an extra digit, in terms of many of the databases and computer processing equipment systems that we have, that are sort of back office- not in the front, but that help all the systems that we depend upon work on a daily basis.
- I think the financial services sector was actually one of the first to take full advantage of the offshoring possibilities, because of the large amount of data, and it’s very simple data entry, but we also see it in terms of medical transcription.
- So folks like General Electric, folks like Alstom folks like Nokia, from around the world, going and doing some of their product development in India, both for an Indian market and developing emerging markets, but also for the whole world.
- What sectors had losers, or those who might have been damaged by globalization? Well globalization certainly has winners and losers.
- Only 11% of the economic structure of India is formal.
- The informal sector ranges from- in general, it’s anything that’s not formal.
- It can be quite wide a range, from folks making rotis in bread in their house, and selling it out of their house, to a small sector, a small factory that produces garments on a contract basis for a larger factory, to a large group that just doesn’t do things by the law and tries to stay underneath the radar.
- This is especially prevalent in India, because as a legacy of the License Raj and the very heavy regulation.
- The IT sector, clearly, and folks- the engineers, the professors, the family, the extended staff around the folks that worked in the IT sector, clearly benefited.
- We need to remember that this is actually a very small group in India.
- So that’s one of the other things, is the scale of everything in India is quite overwhelming.
- The losers of globalization have been folks in sectors that traditionally had been protected, both small scale and large scale people and companies that suddenly are facing global competition.
- Even in Bangalore, which is thought of as sort of the IT capital, there’s still more people working in textiles and apparel than there are in the IT sector.
- I would say at the advanced sort of super high-tech products, folks are competing successfully.
- On the lower scale, they’re being outbid by folks from Bangladesh, from Vietnam.
- There is a large concern in India about small scale retail, and what that means in terms of opening on the FDI side, so that has moved much more slowly than the opening has on the good side.
- India continues to be a fairly protected, less connected economy in a lot of ways, compared to many other countries of the world.
Supply Chains, Trade & Investment (Week 2) > 3. Ratio of Benefits to Costs of Globalization > Guest Lecture: Professor Robin King on Comparative Perspectives, Opportunities, & Challenges of Globalization
- So I went to India as a Latin Americanist and so that was something that was quite interesting, partly because Latin America was still very foreign and alien to folks in India.
- I guess I’ll talk about a couple of similarities and a couple differences that I see.
- So a lot of the dynamics that we see of people moving around is about the next generation and people trying to find better educational opportunities for their children.
- So we’re seeing protests in places like India and places- if you know anything about the Middle East, if you think about Brazil- where folks are saying, we have this great economic growth, but we’re not seeing those benefits.
- We’re seeing the benefits not shared as widely.
- We don’t see the state administering the money and the windfall that they’ve gotten in a way that really helps us very much.
- In terms of some of the differences, I think that there are different risk profiles in different countries.
- I think there’s also an issue there in terms of differences, in terms of the levels of urbanization.
- We see Latin America is very, very urbanized.
- We see China recently moving into more urban than rural.
- We see India probably going to be about half and half, they may be 20/50.
- Then we see Africa just starting that urbanization process.
- Then I think another big difference is the cultural aspects and how open and fluid a society is.
- We see it in Latin America and we’ll see it in Africa and we see it in China too, where as people move, especially from rural areas into the cities, if you don’t have a very, very fluid social structure, it’s not clear where they fit in.
- There could be a lot of social problems: there could be gender related problems, as we’ve had in India, there can be caste related problems like you’ve got in India.
- If you could find a way to, if the state and the society and the economy can find ways to incorporate these folks to actually create a new urban cohort and citizenry, you’ve got really tremendous potential going forward, I think.
- Another difference, I think, between the different regions and even within the same country often in different places is what sectors dominate the economy and what sectors offer opportunities.
- Here I think we can see differences between the traditional export enclave economies exporting commodities versus services, versus manufacturing.
- I think for in Indian context but also in Latin America and I would say even in developed countries, this is one of the key issues in terms of employment and the incorporation of technology is how are we going to actually find useful employment for everybody, especially the new folks that are entering the labor force.
- If you think about places like India or China, where you have hundreds of millions of people who are to be joining the labor force over the next 20 years, as manufacturing has become more capital intensive, it’s not a first entry level job that way that it used to be for the less educated people.
- We are shifting from this period of US dominance now to a more sort of multi-polar kind of environment, and we see China playing an increasing role.
- I think it plays a very important role and I’d say probably a larger role for certain countries than the US does.
- Whereas I think before I worked as a woman in the banking sector, I thought maybe that we didn’t need to worry about it, but now after 30 years of experience, I think that it’s even more important that we actually explicitly address some of these issues.
- Could you look at some of the challenges that India faces going forward? And what do you think of the biggest problems, the biggest opportunities? Give us a little bit of a perspective on the future.
- India has great opportunities going forward but really faces many, many challenges.
- I think the education system has really been key to the success, but it’s been a very limited slice of the education system that is really propelled this, again, very limited slice of the economy forward.
- In a world that’s changing with new players and markets, new opportunities and changing technology, I think that’s sort of the kiss of death.
Supply Chains, Trade & Investment (Week 2) > 3. Ratio of Benefits to Costs of Globalization > Guest Lecture: Professor Robin King on Gender Issues
- It’s important, because there’s a large portion of the population that are female, as well as potential workers and a tremendous amount of economic and social and political and brain power is often wasted because of either informal or formal limitations on what women can do and the roles that they can play in the economy.
- I would say most of the limitations are cultural and traditional, but there are some legal issues in terms of what women can and can’t do in different places.
- What we’re seeing though, increasingly, is those barriers are breaking down.
- Interestingly, in India when you go into a computer lab, you see as many women as you see men.
- When you go into a board room, you still see mainly men other than the relatives of the owners, who are the women that are there.
- In higher leadership positions, you’re starting to see women sort of break through.
- Finding creative ways to handle that I think is something that would be very, very important for us to really utilize the skills that are out there and have women be full participants across the board.
Supply Chains, Trade & Investment (Week 2) > 3. Ratio of Benefits to Costs of Globalization > Guest Lecture: Professor Robin King on Entrepreneurship in India
- You spoke a little bit about your experiences in setting up a think tank.
- Could you explain what you were trying to do? What kind of a think tank? And then tell us a little bit more about how that was a challenge.
- So I was invited to help- I was, I think, employee number 5 of a think tank that was set up in Bangalore called the Center for the Study of Science, Technology, and Policy that was set up with somebody who had been the scientific adviser to the prime minister.
- We got some funding from some Indian sources, one of the Tatas in addition to having TCS as one of the major computer companies, have an entire empire of products, as well as services and investors, investments, and they also fund through their various trusts and foundations many of the philanthropic projects in India, whether they are hospitals or think tanks, trying to generate more evidence based policy inputs.
- One of the things that India- and this is part of globalization, I’d say, on the cultural side- is saying, OK, we’re going to go away from thinking that the government is always going to have a monopoly on all the information, and on the data, and decide for everybody to providing information, providing data, providing analysis to all kinds of actors in the political economy to allow more discussion, and hopefully more informed policy making down the line.
- I think some of the issues that we faced in the US were similar to some of the issues that we faced in India, where technical experts think that it’s all about technology and sort of not thinking about marketing, not thinking about the finance, not thinking about the legal issues.
- So finding the right attitudes and the right kinds of skills was something that the education system in India prepared people for less well, I would say, than the education system in the US. In the US, engineers have taken some kind of writing course, somewhere, since they were 10.
Supply Chains, Trade & Investment (Week 2) > 4. Supply Chains > Foreign Direct Investment in Emerging Markets Lecture
- So we have spent time asking what is the ratio of cost to benefits from the globalization of trade, investment, and technology.
- So the whole question is under what circumstances do the benefits in developing countries also equal 20 to 1 or even higher? Why should we say even higher? Well, if you look at the impact of globalization on Malaysia, one generation ago, 50 years ago, Malaysia was primarily an exporter of rubber, tin, rice.
- Later in this same segment, we are going to look at the transformation of Costa Rica, which was primarily low wage, low skilled exports, plus coffee, plus some other agricultural exports.
- We’re going to look at Costa Rica in some detail.
- Now, 80% of all trade takes place within multinational corporate networks, either among affiliates that are mutually owned, or within supplier networks that are created by the multinational.
- If or when, as I hope, you come to the Georgetown campus, you will look at our graduate classes and find that we discourage our graduate students from talking about trade.
- The first area that we’re going to look at is in agribusiness and agroprocessing.
- Now, I am going to ask you to look at what has happened in Kenya and in Ethiopia.
- What you will find is in the past decade and a half, there has been a vast export boom in cut flowers and packaged and cut vegetables.
- Now, what are we talking about? Roses, carnations being sent from Ethiopia or from Kenya to the Middle East, to Saudi Arabia, to Dubai, to Abu Dhabi, or increasingly to Europe.
- Where do they originate? They originate in countries like Ethiopia and Kenya.
- Within the category of Asian vegetables are shiitake mushrooms that are grown in Kenya, taken to a processing plant owned by VegPro next to the airport.
- Then they’re sent overnight directly for retail supermarkets in the UK. The big benefit comes to entrepreneurs in Kenya and Ethiopia.
- VegPro Kenya is now one of the biggest cut vegetables and cut flower producers established in Kenya, now spreading throughout Africa, and with sales of over $100 million per year.
- In Kenya now, there are two or three air transport companies that are dedicated simply to flying roses, and carnations, and other flowers to Dubai, Saudi Arabia, Kuwait, and Abu Dhabi.
- There is contract farming that VegPro goes and provides the specifications.
- A.P. is an NGO that helps vegetable producers around the world meet the cleanliness, the pesticide, the other standards that are required to export vegetables into the UK, into France, into Germany.
- This is a kind of technical training for the farmers and for the workers in Kenya or Ethiopia.
- Now, the wages of the farmers and the workers are still low.
- If you’re looking for a way to get many of the farmers, small farmers, in Africa into the formal economy and earning some real wages, this is a way to do it.
- In El Salvador, for example, you have packaged and sometimes processed or chopped vegetables and fruits that come to the United States, or that come into Mexico.
- Next time you go to an organic food store, why don’t you treat yourself to some mango juice and take a look at where it’s produced? High probability that it’s produced in Haiti.
Supply Chains, Trade & Investment (Week 2) > 4. Supply Chains > FDI: Agribusiness Challenges Lecture
- The next segment about land grabs in Africa, South Asia, and Latin America, actually comes from your predecessors.
- That is to say, the students in the MOOC, who asked us, well, are there not some worrisome aspects to foreign takeovers of large amounts of land? And the answer is, yes.
- There is a phenomenon, in particular, Africa and parts of Latin America, in which investors from China, investors from South Korea, investors from Saudi Arabia and Kuwait have taken over the large, I mean, I am talking about hundreds of square miles of cropland, out of fear that they need it for their own food security in China, in Saudi Arabia, in Kuwait.
- One problem is that in some parts of both continents, some parts of Africa and some parts of Latin America, traditional farmers, tribes, and tribesman in Africa, peasants in Latin America have customary property rights.
- They don’t actually own the land, so that when it is sold to the Saudis or sold to the Chinese, they don’t receive any benefit.
- Yet they may be pushed off and not allowed to use the land.
- Then there is the question of what if the foreign investors hold the land in speculation and actually don’t produce crops.
- If you go online and just Google land grabs in Africa, you will find stories and exposes that reflect considerable tension and considerable apprehension.
- As in natural resources, it is important to have accountability and transparency so that when large Saudi investors or large Chinese investors take over land, they don’t get the land rights by bribery.
- So that you have a transparent buying and selling of land, you have transparent paying of taxes, you have transparent processing of exports, so that the host economy and the people more broadly can benefit from this kind of foreign investment in agricultural land.
Supply Chains, Trade & Investment (Week 2) > 4. Supply Chains > FDI: Insights on Diversification of the Export Base Lecture
- This week, we are continuing with the idea of using foreign direct investment to create supply chains between sources in emerging markets and developed economies- so foreign investors coming in, creating supply chains so that developing economies can export back into the United States, Europe, the developed countries of Asia.
- Simply exporting more and more of the same products that a country has always exported has limited growth potential, limited spillover benefits to the host economy.
- We have looked at foreign direct investment in low-wage, low-skill activities.
- If you talk to people around the world, many of them think that almost all foreign direct investment in manufacturing and assembly is involved in lowest-wage, lowest-skill activities.
- Foreign direct investment in manufacturing and assembly is driven by the search for cheapest labor.
- It turns out that the data show that foreign direct investment in middle-skilled and higher-skilled activities.
- Foreign direct investment in these middle-skilled activities is 10 to 14 times greater than foreign direct investment in garments, and footwear, and toys, and other low-skilled activities.
- What’s even better news is that foreign direct investment in these middle-skilled activities, in autos and auto parts or electronic devices, pays 4 to 10 times higher wages than the lower wages in garments and footwear.
- For supervisors, managers, and engineers in auto plants or electronics plants or medical device activities, it may be even higher than that.
- The wages in Malaysia- we’ve talked about Malaysia- the wages in Chile, in software development and services, the wages in Costa Rica, which we’re going to deal with next, are still cheaper than wages in Germany, or wages in Connecticut, or wages in Tokyo.
- So that this kind of foreign direct investment in middle-skilled activities is very much of a prize to attract to developing countries.
- There are market failures- what we economists call market failures- or tricky obstacles to attracting middle-skilled investment to emerging markets.
- Would it be beneficial to go to Sri Lanka? Well, we know there’s lots of foreign investment in India.
- We know there’s lots of foreign investment in Malaysia.
- What about Sri Lanka? Well, it’s difficult for countries to put themselves on the radar, to put themselves on the horizon of multinational corporations.
- So when we get to Costa Rica, look closely at the need for an investment promotion agency.
- One of the reasons why we choose this example is because we will see that they had a very effective investment promotion agency.
- So the first of the three ingredients is effective investment promotion to attract middle-skilled investors to new sites in new countries, countries that are new to that multinational.
- Now we’re going to find that this is very important, because everybody can say, well, the countries in Latin America should improve their educational system.
Supply Chains, Trade & Investment (Week 2) > 4. Supply Chains > FDI: Insights on Backward Linkages & Industrial Policy Lecture
- What do we mean by backward linkages? What we mean is to have indigenous firms, local firms, Latin American firms, African firms, Asian firms, become suppliers to the multinational corporation.
- That is to say, multinational corporations have a self-interest in providing technology, in providing training, in providing instruction, to local firms to enable them to qualify as low-cost, reliable, quality-controlled suppliers.
- This should not be a surprise, but it often is a surprise- if you want local firms, if you want indigenous suppliers to be able to qualify to sell to multinational supply chains, you have to have a good business climate for local firms.
- Many emerging markets can be persuaded to treat multinationals nicely, but then they’re pretty beastly to their own indigenous firms.
- What you need is lack of red tape, lack of corruption, good judiciary enforcement of contracts, intellectual property rights for local firms as well as for foreign firms.
- Then host countries in the developing world can set up certification programs, training programs, again, usually managed by the multinationals themselves, to teach local suppliers how to meet quality standards, how to deliver on time, how to cut costs, how to become reliable vendors.
- That is to say, representatives from the multinational community or representatives from the host government that try to link up local firms with foreign multinationals.
- It may need light-handed policies to try to link up local firms with foreign suppliers.
- The host insists that the foreign multinational buy a certain amount of domestic content.
- No to the heavy-handed dictates and mandates that insist on joint ventures, technology sharing, and domestic content on the part of foreign multinationals.
Supply Chains, Trade & Investment (Week 2) > 4. Supply Chains > Foreign Direct Investment Lecture
- How can an economy in the developing world attract foreign direct investment that is more sophisticated? Well, it’s harder than you might think.
- The ease of starting a business, of shutting down a business, of hiring workers, of laying off workers, macro-economic reform refers to low inflation rates, realistic exchange rates, and institutional reform is probably the easiest to grasp, enforcing contracts, having a corruption free judiciary.
- Multinational investors, especially sophisticated multinational investors, are risk averse.
- So it’s important to signal to demonstrate that Malaysia, that Costa Rica, that the Dominican Republic, has changed its economy, reformed its economy, and is ready to receive more sophisticated activities.
- Most people think that foreign direct investment in the developing world takes place almost entirely in low skilled jobs.
- The flow of foreign direct investment to middle skilled and higher skilled operations, like what? Like autos and auto parts, like electronics, pharmaceuticals, medical devices, chemicals, petrochemicals.
- The flow of foreign direct investment to these higher skilled and middle skilled occupations is 14 times higher.
Supply Chains, Trade & Investment (Week 2) > 4. Supply Chains > Attracting Investment Lecture
- Many developing countries have created Investment Promotion Agencies, which ideally are one stop shops.
- That’s to say, they coordinate all of the information, all of the permits that are needed to attract a more sophisticated auto investor or electronics investor.
- Now in reality they often become one more stop shops because it’s very hard to create an efficient Investment Promotion Agency that has the authority to give all of these permits.
- A good example that I gave you in the readings, so please take a look at the example of Costa Rica trying to attract Intel, the famous microprocessor in Santa Clara, California.
- So they upgraded their IPA, they sent representatives to Santa Clara, they pounded on Intel’s door.
- It actually took two years before they even got the first interview because they weren’t on the radar screen of Intel.
- They built a special subsection of the power grid so that Intel would never lose power.
- Most importantly, they created public private partnerships between Intel’s human relations department and vocational and skill building institutions within Costa Rica.
- Have you heard me mention the term wages? No. Intel is not searching for lower wages.
- If you become a supervisor, or a skilled worker, or an engineer this is a path into middle class society in Costa Rica.
- Intel doesn’t go around trying to find just the cheapest labor.
- They’re more concerned about skilled labor and about reliable labor.
- Proactive marketing agency, that’s to say the Investment Promotion Agency.
- Because imports mean cheaper, more variety for consumers.
- Usually people think, oh, exports are good for workers, but imports are bad for workers.
- 30%, 40%, 50% of the imports in developing countries or in developed countries are intermediates.
Supply Chains, Trade & Investment (Week 2) > 4. Supply Chains > Guest Lecture: Professor Matthew Carnes on Education & Youth Unemployment
- What about the educational possibilities? In this MOOC we’ve talked about everybody would like to reform education all over the country, but we’ve also looked at public/private partnerships in which companies and investors actually partner with vocational institutions or skill building centers to try and design workers, supervisors, and managers that they can actually take into their factories.
- Each of these programs says, we recognize there are costs to sending your child to school, there’s a certain opportunity cost.
- You have to forgo the work they might contribute to the family.
- In some cases, you have to take a day off work to go and register them for classes.
- So let’s find a way of facilitating that by making a cash transfer to the family for doing that good thing, for getting their child to school, and trained, and then becoming more productive in the future.
- They then are monitored for making sure the children get to school a set number of days each month.
- If they comply with that, then they receive this cash transfer each month to the family to offset, in a sense, those opportunity costs of sending the child to school.
- It’s been very successful in terms of increasing attendance in schools.
- I know Mexico has shown at least a one year increase in the total number of years of school on average throughout the region, which is significant.
- How much more has the student learned by being there an additional year? We know they’re getting into the classroom, that’s the first right step.
- The next right step would be to make sure that they’re actually getting better schooling, better education, better skills that will make them more useful in the market.
- I have heard of these programs, but I have heard of them in the context of trying to lessen child labor, an incentive, as you say, to keep children in school.
- One is working with the traditional middle class, those that had been in traditional either regular productive jobs, manufacturing in some countries, but more often than not just regularized employment, meaning you have a single contract, you’re in the formal sector.
- Then the other piece, which I think we’re slowly starting to understand more and more, is the importance of reaching that group that was never incorporated before, especially that often coincides with ethnic groups that have been systematically marginalized.
- It’s interesting with the conditional cash transfer programs, they target actually a higher amount to keeping girls in school because they know parents are more likely, when they’re judging, do we keep the boy in school or the girl in school, they take the girl out earlier.
- So they actually make a higher payment to keep the young women in school.
- So I think thinking about both who’s seeing new risks because of the competition of globalization and who was never incorporated but who now could be brought in? We often think of growth with equity, and I think those are the two edges to keep in mind.
Supply Chains, Trade & Investment (Week 2) > 6. Conclusion & Looking Ahead > Conclusion: Summary
- We showed the benefits are 20 to 1, really lopsided benefits in developed countries.
- Then we spend most of our time looking at the transformative character that manufacturing investment can have on developing countries.
- Now, what is the impact of this on developed countries? Does this globalization of industry in emerging markets- including China, including India, including Latin America- come at the expense of jobs and welfare in the developed world? What is the impact on workers in the United States? Why is the United States having a trade deficit? Why are wages and benefits stagnating in the United States and inequality increasing? Is this due to what we see in the emerging markets? Or is this a process in which both sides are still winning? We started out today by saying it’s win-win when economies do more of what they do best.
Section 2: Supply Chains, Trade & Investment