Competitive manufacturing in a high‐cost environment: Introduction to the special issue

• Author: Suzanne Treville,Vinod Singhal,Mikko Ketokivi
• Date: 01 March 2017
• Published date: 01 March 2017
• DOI: http://doi.org/10.1016/j.jom.2017.02.001

Competitive manufacturing in a high-cost environment: Introduction to

the special issue

1. Manufacturing in a high-cost environment: the debate

The special issue emerges at a time of intense debate concerning

the role of manufacturing in the developed world. There is general

consensus that manufacturing strengthens the economy in which it

is carried out. It creates follow-on production: The domestic

manufacturing multiplier was estimated to be 1.90 for U.S.

manufacturing, for example

1

(Bureau of Economic Analysis n.d.).

It is also generally agreed that innovation follows manufacturing,

and that compressing the supply chain improves sustainability.

But, there is a recognition that manufacturing carried out in a

high-cost environment must pay its own way, as governments

and shareholders are not willing to make up for unprofitable activ-

ities. There is also considerable skepticism as to whether

manufacturing has a role to play in a developed economy,with ef-

forts to restore manufacturing considered as protectionismdor

even referred to as “manufacturing fetishism”(Kay, 2010).

Autor et al. (2016a, pp. 4, 28-29) provide a comprehensive pic-

ture of the impact on labor from a loss of low-skilled manufacturing

jobs. As jobs were lost from the developed world overthe past two

decades, economists expected that new jobs would be created

based on the wealth generated by the savings arising from low-

cost sourcing. Data is now available concerning how the rise of

manufacturing in China and the resulting trade shocks have nega-

tively impacted workers in the affected industries, exemplifying

what has occurred across the developed world:

Whilethese results do not at all suggest thatinternational tradeis

in the aggregate harmful to nationsdindeed, China's unprece-

dented rise fromwidespread poverty bears testimony to trade's

transformative economic powerdit makes clear that trade not

only has benefits but also significant costs. […]Developing

effective tools for managing and mitigating the costs of trade

adjustment should behigh on the agenda for policymakers and

applied economists. […] Inter-industry linkagesthus magnify the

employment effects of trade shocks, almost doubling the sizeof

the impact withinmanufacturing and producing an equallylarge

employmenteffect outside of manufacturing.

Autor et al. (2016b), recognizing that innovation might suffer

when separated from production and estimating that 71% of U.S.

corporate patents stem from manufacturing, demonstrate that a

reduction in manufacturing employment was accompanied by

reduced innovation as measured by patents produced.

The general relationship between innovation and

manufacturing is described in the report published by the World

Trade Organization to recognize the 15th anniversary of its Infor-

mation Technology Agreement:

The increased involvement of certain developing countries in

[Global ProductionNetworks] of [Information Technology] prod-

ucts correlates with a disproportionate increase in innovative

activity in these technology fields, compared to the average in-

dustry innovation in these countries. This seemsto confirm that

trade and intermediate manufacturingsteps can indeed have the

technology spillover effects and induce further innovation that

economic theorysuggests. The pictureis also consistent with the

view that theremay be limits to the separation of manufacturing

and innovationin globalized manufacturingnetworks, which in-

dicatesthat at least some types of innovationsand improvements

may requiredirect involvement in the productionprocess (Worl d

Trade Organization, 2012,p. 76).

The special issue begins by identifying the factors that determine

which value chains are best positioned to profit from the cost differ-

ential offered by a distant supplier, and which value chains are likely

to have the lowest totalcost when production is located in the high-

cost environment even after paying developed-country wages and

social costs. The ability to clearly identify which supply chains best

stand to gain competitive advantage from being located in a high-

cost environment facilitates moving the debate from polemic to sci-

ence to policy.Other articles in theissue provideinsights concerning

how best to organize and support these production activities and

their industrial ecosystems. The question is not whether

manufacturing has a future in the high-cost environment, but

rather, what kind of manufacturing has a future, as elaborated in

the following section. Whether production in a high-cost environ-

ment is a source of competitive advantage determines whether

locating manufacturing there is protectionism or sound business.

2. Guide to the special-issue papers

2.1. Exploring the decision to (re)locate manufacturing in a high-

cost economy

Ketokivi et al. (2017)analyzed 35 production-location decisions

made by firms headquartered in Finlandda quintessential high-

1

Final demand for $1.00 of U.S. manufacturing output required total domestic

production of $1.90 across the entire economy.

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

Journal of Operations Management 49-51 (2017)1e5

http://dx.doi.org/10.1016/j.jom.2017.02.001

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