Why locate manufacturing in a high‐cost country? A case study of 35 production location decisions

• Published date: 01 March 2017
• Date: 01 March 2017
• DOI: http://doi.org/10.1016/j.jom.2016.12.005

Why locate manufacturing in a high-cost country? A case study of 35

production location decisions

Mikko Ketokivi

a

,

*

, Virpi Turkulainen

b

, Timo Sepp€

al€

a

c

,

d

, Petri Rouvinen

d

,

Jyrki Ali-Yrkk€

o

d

a

IE Business School eIE University, Spain

b

University College Dublin, Ireland

c

Aalto University, Finland

d

ETLA, The Research Institute of the Finnish Economy, Finland

article info

Article history:

Accepted 6 December 2016

Available online 24 January 2017

Accepted by Suzanne de Treville.

Keywords:

Manufacturing location decisions

Case study

International operations

Supply chain management

abstract

In this paper, we examine in detail 35 final assembly location decisions to gain understanding of the

manufacturing location decision from strategy and economic policy pers pectives. We are particularly

interested in the decision to locate final assembly specifically in a high-cost (high GDP per capita)

environment. In contrast with the earlier literature, we focus not just on manufacturing activities

themselves, but also the key linkages between production, market, supply chain, and product develop-

ment. These linkages are examined using three key concepts from theories of organization design:

formalization, specificity, and coupling. Using these concepts, an analysis of the micro-structure of each

case reveals important commonalities that inform our understandi ng of location decisions. We conclude

by discussing the policy implications of our findings.

©2017 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND

license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

1. Introduction

What explains the decision to locate manufacturing in a specific

geographic region or country? The literature on location decisions

is as massive as it is diverse, but two recent phenomena warrant a

re-examination of the topic. One is the notion of reshoring (Ellram

et al., 2013; Gray et al., 2017): some Western manufacturers are

“bringing manufacturing back home,”but our understanding of

why exactly this occurs is limited. Another is the claim by

Brynjolfsson and Saunders (2009), who noted that we knew more

about the drivers of economic value in the1980s than we do today.

Location decisions must be understood not just through the lens of

economic attractiveness of one region or country over another, but

also as a decision where many organizational and technological

interdependencies become relevant: decisions about where to

locate manufacturing link to other decisions, such as location of

research and development activities (Rafii, 1995; Spring et al.,

2017).

In this paper, we examine the interdependencies of production

with other value chain

1

activities and actors, such as product

development, suppliers, and markets. The question “What kind of

production takes place in a high-cost environment?”is of special

interest. In our analysis, high cost is operationally equivalent to high

Gross Domestic Product (GDP) per capita. A high GDP per capita

tends to correlate positively with the price levels of strategically

relevant input factors such as wages. Indeed, the distinction be-

tween high and low cost has always been implicitly a distinction

between high and low wages.

2

The United States, Finland,

*Corresponding author.

E-mail address: Mikko.Ketokivi@ie.edu (M. Ketokivi).

1

In our terminology, value chain consists of all the activities related to the

ideation, development, manufacture and sale of industrial products (Porter, 1985).

Supply chain, in turn, encompasses those activities of the value chain that are

directly related to the manufacture of the product and its components; R&D is thus

not considered to be part of the supply chain. In this paper, supply chain man-

agement means primarily management of the supplier relationships between the

final assembler and the first-tier supplier base.

2

One might rightly questionthe value of the continuing use of this distinction. In

what sense do low-cost countries like China offer cheap labor? According to World

Bank statistics, China's GDP per capita doubled (from $3414 to $6807) in the five-

year period of 2008e2013. This has been associated with roughly commensurate

changes in wages as well: U.S. National Bureau of Statistics reported a 71 percent

increase in wages in China's manufacturing sector in the samefive-year period. In

the same five-year period, both the GDP per capita as well as manufacturing wages

remained stable, even declined, in many Western economies.

Contents lists available at ScienceDirect

Journal of Operations Management

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

http://dx.doi.org/10.1016/j.jom.2016.12.005

0272-6963/©2017The Authors. Published by Elsevier B.V. This is an open access articleunder the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Journal of Operations Management 49-51 (2017)20e30