Implications for Business

Why does all this matter for business? Three main implications of the material discussed in this chapter for international businesses are (1) location implications, (2) first-mover implications, and (3) policy implications.

Location Implications

Underlying most of the theories we have discussed is the notion that different countries have particular advantages in different productive activities. Thus, from a profit perspective, it makes sense for a firm to disperse its productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently. If design can be performed most efficiently in France, that is where design facilities should be located; if the manufacture of basic components can be performed most efficiently in Singapore, that is where they should be manufactured; and if final assembly can be performed most efficiently in China, that is where final assembly should be performed. The result is a global web of productive activities, with different activities being performed in different locations around the globe depending on considerations of comparative advantage, factor endowments, and the like. If the firm does not do this, it may find itself at a competitive disadvantage relative to firms that do.

Consider the production of a laptop computer, a process with four major stages: (1) basic research and development of the product design, (2) manufacture of standard electronic components (e.g., memory chips), (3) manufacture of advanced components (e.g., flat-top color display screens and microprocessors), and (4) final assembly. Basic R&D and design require a pool of highly skilled and educated workers with backgrounds in microelectronics. The two countries with a comparative advantage in basic microelectronics R&D and design are Japan and the United States, so most producers of laptop computers locate their R&D facilities in one, or both, of these countries. (Apple, IBM, Motorola, Texas Instruments, Toshiba, and Sony all have major R&D facilities in both Japan and the United States.)

The manufacture of standard electronic components is a capital-intensive process requiring semiskilled labor, and cost pressures are intense. The best locations for such activities today are places such as Singapore, Taiwan, Malaysia, and South Korea. These countries have pools of relatively skilled, low-cost labor. Thus, many producers of laptop computers have standard components, such as memory chips, produced at these locations.

The manufacture of advanced components such as microprocessors and display screens is a capital-intensive process requiring skilled labor, and cost pressures are less intense. Since cost pressures are not so intense at this stage, these components are manufactured in countries with high labor costs that also have pools of highly skilled labor (primarily Japan and the United States).

Finally, assembly is a relatively labor-intensive process requiring only low-skilled labor, and cost pressures are intense. As a result, final assembly may be carried out in a country such as Mexico, which has an abundance of low-cost, low-skilled labor.

When we look at a laptop computer produced by a US manufacturer, we may find that it was designed in California, its standard components were produced in Taiwan and Singapore, its advanced components were produced in Japan and the United States, its final assembly occurred in Mexico, and the finished product was sold in the United States or elsewhere in the world. By dispersing production activities to different locations around the globe, the US manufacturer is taking advantage of the differences between countries identified by the various theories of international trade.