CHAPTER THIRTY-TWO
The Rise of Production Sharing
THE NEWEST WORLD ECONOMIC TREND is production sharing. Although neither export nor import in the traditional sense, this is how it is still shown in our trade figures and treated in economic and political discussions. Yet it is actually economic integration by stages of the productive process.
Few people have heard of production sharing, but everyone who has a hand-held calculator is familiar with it. The semiconductors that do the calculating are “Made in America” and then shipped for assembly to a developing country such as South Korea or Singapore. The finished product is then marketed primarily in developed countries.
Traditional statistics show the calculators as “imports,” but actually they are the way in which American-made electronics go to market, earn foreign exchange, and create American jobs. Indeed, the old eighteenth-century German term Veredelungsverkehr (upgrading trade) describes the transaction better than any of the familiar terms of international economics and international trade theory.
A similar example of integration by stages of production is the large European textile group that does spinning, weaving, and dyeing in the European Common Market—all automated, capital-intensive, and high-technology processes. Then it airlifts the cloth to Morocco, Malaya, or Indonesia where it is converted into garments, bedding, rugs, towels, upholstery fabrics, or curtains. Finally, it is airfreighted back and sold in European markets.
There is also the production sharing actively promoted by the government of Japan, under which a Japanese company exports an entire industrial plant and receives much of its payment in that plant’s products, which are sold in Japan.
The developed countries are strong in management, capital and technology, and consumer purchasing power. The developing countries offer enormous and rapidly growing labor surpluses.
We lack figures on the size of this process. But major multinational banks estimate that the volume at least doubled between 1974 and 1977. [1981 note: And it has doubled again since, that is, between 1977 and 1981.] Some banks consider it so significant already as to justify setting up special units within their traditional international or corporate banking divisions to finance production sharing.
Production sharing is bound to grow, for behind it is an inexorable economic force: population dynamics. One can argue about employment and unemployment figures in the developed countries, which are indeed very confusing. Nevertheless, more than half of all the young people entering the labor force in developed countries have attended some school beyond high school, thus they are not available for traditional low- or semiskilled work.
In the developing countries, however, population dynamics are vastly different. There the babies who did not die in the late fi fties and sixties when infant mortality dropped precipitously—by 60 percent or 70 percent in some areas—are now entering the labor force and need jobs. Mexico, for instance, will have to fi nd almost three times the number of jobs for young new workers in each year between now and 2000 than the country ever created in any previous year.
Few of these young people are highly trained or highly skilled, but they are far better prepared than their parents were—and increasingly they are in the cities. Farming cannot possibly provide the necessary jobs. Land reform, whatever its emotional appeal, would in most places exacerbate the problem.
Only in very few countries, countries like Brazil that are well past the “development takeoff,” is there much potential for rapid growth of the domestic market. Moreover, developing countries usually lack the population base, purchasing power, and capital necessary for rapid domestic growth. The only employment conceivable for the masses of new workers is producing for the consumer markets of the developed countries, which no longer have adequate unskilled labor.
Production costs in developing countries tend to be high, often a good deal higher than in the developed countries, despite relatively low cash wages. Productivity tends to be low, and managerial and governmental overhead costs are often astronomical. Moreover, production sharing has fairly high costs of its own—heavy management requirements, high cost of capital, and added transportation expenses.
What propels the move toward production sharing is thus not primarily lower costs but the shortage of people available for the traditional production work in the developed world. Almost all developed countries have structured unemployment compensation, seniority rules, and retirement plans so as to discourage manual workers from looking for jobs outside the industry that originally employed them.
Production sharing may, in the last quarter of this century, become as dominant in the world economy as the traditional multinational corporation became in the world economy of the last twenty years. Yet, paradoxically, the multinational that organizes production sharing will be more controversial than ever.
This is because production sharing offers developing countries their only real opportunity to provide the jobs and skills their people need. But this won’t necessarily make them grateful, so that they are more likely to continue the old rhetoric the more dependent they become on the “wicked imperialists.”
Still, many developing countries are rapidly adjusting their policies and their behavior. “Multinational” is still a dirty word in the developing countries, but their governments increasingly court the multinationals to build and run export industries—the products of which the multinational is then expected to market in the developed world.
Only fifteen years ago, in the early sixties, the countries on the west coast of South America, from Venezuela to Chile, solemnly joined the Andean Pact, designed to drive out the multinationals. Within the last few years, each of those countries has either repealed most of the Andean Pact laws or quietly discarded them.
In developed countries, production sharing threatens the very base of traditional unionism, which lies in the old manual manufacturing industries. It is indeed likely to create more jobs than it displaces, above all, jobs for better-educated workers who make up the new labor force. But displaced workers will be far more visible and will be concentrated in areas that are already declining. They will also tend to be older people with limited skills. The same will largely be true of the businesses that employ these workers: yesterday’s businesses in already declining industries.
Multinationalism will thus once more become a major issue in the developed countries. Indeed, the main attack against the multinational has already shifted from host countries to home countries, especially to the United States. Congress, the Internal Revenue Service, the Securities & Exchange Commission, and a host of other government agencies now pose even greater threats to multinationals than did either de Gaulle or Third World nationalism.
Therefore, we badly need policies enabling the economy to adopt production sharing at minimum cost to displaced workers.
We need the kind of policy the Swedes pioneered to make possible a similar transition from an almost preindustrial, raw-material-producing nation of the 1940s into the highly industrialized and highly competitive nation of today. Twenty years ago they organized employers, unions, and governments to work together to retrain redundant workers and place them in new jobs (an approach that accomplishes much more than any unemployment compensation system at a fraction of the cost).
We also need to revise the trade figures so that they enable us to know where production sharing creates and where it displaces jobs. Free trade or protectionist arguments only add to the confusion, for both assume an exchange of goods rather than economic integration by stages of production in which exports and imports are mutually dependent.
But the new, emerging multinational integration poses equally great challenges to management.
It does not fit the traditional organization structure of the multinational corporation, with a central top management to which management of subsidiaries reports. It requires, rather, a systems approach, in which one body coordinates autonomous managements that do not report to one another.
The new multinational does not rest on capital investment or ownership. In fact, the parent company in the developed country typically invests little or nothing, although it often provides its partners in the developing country access to financial resources by purchasing their output. For this reason, those that are likely to do best as new multinationals may well be marketing businesses rather than, as in the past, manufacturing businesses.
Smaller businesses are also likely to do better than giant companies, since they have the necessary flexibility. This explains why some medium-sized businesses are doing well in electronics.
A major requirement is the ability and willingness to adapt to different cultures and to work with people of different habits and traditions. For production sharing is not only transnational, rather than multinational; it is, above all, transcultural. And it is an idea whose time has come.
(1977)