PRODUCTION

AND OPERATIONS
MANAGEMENT
Vol. 6, No. 2, Summer 1997
Printed in U.S.A.

MADE

IN THE WORLD: THE GLOBAL

SPREAD OF PRODUCTION *

KASRA FERDOWS
School of Business Administration,
Georgetown
Washington DC 20057, USA

University,

We are moving rapidly into an age of transnational manufacturing, where things made in one
country are shipped across national borders for further work, storage, sales, repair, remanufacture,
recycle, or disposal; but our laws, policies, and management practices are slow in adjusting to this
reality. They are often based on inaccurate premises. This article examines these premises and
suggests what they imply for management of manufacturing.
First, a common view is that manufacturing investment in the industrialized nations is declining
and shifting to the developing countries. This is not true. Investment in manufacturing in both
industrialized and developing nations is increasing and, in absolute value, there is a lot more
investment in industrialized countries than in developing countries. Second, a related view argued
by many is that manufacturing does not have a bright future in the rich countries. I argue that
manufacturers can thrive in the industrialized countries if they learn how to add more value for
the end users. They must go beyond productivity improvement to producing more technologically
advanced and customized products, responding faster to changing customer demands, and appending more services to their products. Doing all this is easier in the industrialized countries
because the needed skills and infrastructure are more readily available there. Third, another potentially misleading notion is related to why companies invest in manufacturing abroad. Access
to low-cost production is not the main motivation in most cases; rather it is access to market.
Superior global manufacturers use their foreign factories for much more: to serve their worldwide
customers better, preempt competitors, work with sophisticated suppliers, collect critical marketing, technological, and competitive intelligence, and attract talented individuals into the company.
They build integrated global production networks, not collections of disjointed factories that are
spread internationally. Thus their investment in manufacturing abroad is not a substitute for investment at home, it is a complement. Building and managing such integrated global factor networks is the next challenge in manufacturing.
(GLOBAL
PRODUCTION, TRANSNATIONAL
MANUFACTURING,
GLOBAL FACTORY NETWORK, MANUFACTURING
FOREIGN DIRECT INVESTMENT)

It is becoming hard to tell where things are made. Look at the objects around you.
Chances are that many factories in different countries, often not obvious to us, have
worked together to produce them. Take the cars: Ford Fiesta is assembled in South Korea,
Volvo 850 in Belgium, Nissan Quest in the United States, and Dodge Ramcharger in
Mexico. The parts that have gone into these cars come from factories in over two dozen
countries. Other products are equally confusing: although you might have bought an
American laser printer, a Japanese television, a Swiss drug, a French video
* Received November 1994; revised July 1995; accepted October 1995; updated March 1997.
102
1059-1478/97/0602/0102$1.25
Copyright

6 1997, Production

and Operations

Management

Society

THE GLOBAL

SPREAD OF PRODUCTION

103

recorder or a Dutch light bulb, most these products were probably not made in these
countries nor in the countries where you purchased them.
The world is clearly entering an age of transnational manufacturing, where things made
in one country are shipped across national borders for further work, packaging, assembly,
storage, or sales, and products sold in a country are often shipped across national borders
for repair, reuse, remanufacture, recycle, or disposal. Every indicator points to an accelerating increase in these flows. According to the statistics collected by the United Nations
(World Investment Report 1993)) from 1970 to 1991, the world output (measured in
constant dollars) doubled, but the value of exports (also measured in constant dollars)
increased faster, by 270%. While more products and services are produced every year, an
increasing share of them cross national boundaries. Trade in manufactures (as opposed
to trade in services and primary commodities) is by far the largest component of the world
trade. As shown in Figure 1, in 1994, the latest year for which the data are available, the
world trade was 4.2 trillion dollars of which 73% (or 3.1 trillion dollars) was trade in
manufactures, up from 55% in 1980 ($1.1 trillion out of $2 trillion) and 71% in 1990
($2.4 trillion out of $3.4 trillion). Reduction of tariffs around the world in general and
the recent economic pacts [EU (European Union), EU with EFTA (European Free Trade
Agreement), ASEAN (Association of South East Asian Nations), and NAFTA (North American Free Trade Agreement)] continue to drive this trend.
Clearly the logistics of moving manufactured goods around the globe will become a
greater challenge and a more critical success factor for manufacturers. This is particularly
important because in a surprising number of these cross-border transfers, the same company is at both ends of the transaction, that is, transfer is inn-u-firm. Between 25 to 40%
of all world trade is estimated to be intra-firm ( World Investment Report 1993 ) . In a study
of U.S. multinational manufacturers, Kobrin ( 1991) found that in some industries, like
automotive and computer, over 40% of the companies international trade was intra-firm.
A more recent study of the U.S. manufacturing multinationals shows that this intra-finn
trade is rising at a striking rate: the share of the intra-firm trade of the total trade by these
companies went from 37% in 1977 to 53% in 1983 and to 60% in 1993. (WorldInvestment
Report 1996) Clearly these companies are organizing or reorganizing their cross-border
production activities in an efficiency-oriented, integrated fashion, capitalizing on their
assets around the globe. They are locating the various parts of the value-added chain
where they contribute most to the companys overall success.
It is therefore not surprising to see that the world foreign direct investment, in spite of its
year-to-year volatility, has increased faster than both the growth in world output and trade.
4.5

-80

-- 70

3.5 i
3

-- 60
--50

@
P
--40 PQ)
TradeinManufacMes
::
-- 30 p' TotalTrade
+percentageofManufactnre3
-- 20

a
i 2.5
;:

2!
1.5

t
-- 10

0.5

-- 0

0 L

1980
FIGURE

Nations.

1990

1994

1. Share of Manufactures in World Trade. Source: World Economic and Social Survey 1996, United

104

KASRA

FERDOWS

Annual growth rate of foreign direct investment from 1986 to 1990 was an astounding 25%
and from 1991 to 1994 it was 13%, still several times the average annual rate of growth of
trade or output. In 1995 global foreign direct investment reached an unprecedented $3 15
billion, 40% more than 1994, and a 1995 survey of largest 100 multinational indicated that
72% of them expected to increase the level of their foreign direct investment in the next five
years ( 1995-2000) and none expected to reduce it. ( World Economic and Social Survey
1996) Companies are setting up operations abroad even faster than most of us imagine.
Manufacturing is the single largest type of foreign direct investment in most countries.
Nearly 60% of the estimated 39,000 companies around the globe that have foreign affiliates
are in manufacturing (World Investment Report 1996). A substantial share of all foreign
direct investment continues to go into the establishment, expansion or acquisition of factories.
About a third of all foreign direct investment by the largest investing countries (United States,
Japan, Germany, France, United Kingdom, Italy and Canada) is in manufacturing. As trade
barriers fall, as transportation becomes easier, and as communication technologies improve,
there are more options for location of production and new challenges for global manufacturers.
Analysis of the options in producing abroad is therefore becoming more complex,
especially as one considers the number of possible arrangements for cross-border production: building a green-field site, acquiring an existing factory, forming a joint venture
or an alliance, licensing production rights, or subcontracting. Adding to all this possible
choices in working with foreign suppliers, distribution centers, logistic systems, and repair
services shows the full complexity of cross-border manufacturing decisions. The complexity is not only for business managers but also for public policy makers, tax authorities,
and financial analysts who must regulate and deal with these decisions.
The starting point to deal with this complexity is to answer the basic questions of how
and why production is spreading across national borders. Many start with inaccurate, and
potentially misleading, premises.
Examining
1. Is Manufacturing

the Premises

Leaving the Rich Countries?

A popular view is that manufacturing is leaving the industrialized countries and going
to the developing nations. This notion is propagated every time one reads that a multinational company establishes a factory in a developing nation. These events are usually
well publicized in the media. However, an investment several times larger by the same
multinational company, expanding its manufacturing facilities in a highly industrialized
country, often goes unnoticed by the general public. If Ford invests 200 million dollars
in a Mexican factory, it would stir up a debate in the media, but a 500~million-dollar
expansion in its German or U.S. factories is likely to be only of passing interest to most
people. After a few years of exposure to this type of coverage, it is natural to think that
industrialized countries are being depleted of manufacturing.
The numbers, however, show a different picture. Even if we set aside the domestic
investment in manufacturing (which is orders of magnitude greater in the rich countries
than in the developing countries) and only look at the movement of investment across
borders, it is clear that manufacturing is not leaving the industrialized countries. According
to the data compiled by United Nations Conference on Trade and Development (UNCTAD)
in 1994,lO highly industrialized countries, the United States, the United Kingdom, France,
Germany, Spain, Canada, Australia, Holland, Belgium, and Italy, received half of the
worlds foreign direct investments made that year and held two-thirds of the worlds
accumulated stock of foreign direct investments. As shown in Figure 2, this pattern has
not changed significantly over the years.
The largest recipient continues to be the United States. By 1994, foreign multinationals
had more than $500 billion invested in the United States (of which more than 40% was
in manufacturing), up from $80 billion in 1980 and almost as much as accumulated

THE

GLOBAL

SPREAD

105

OF PRODUCTION

Rest of World
Switzerland
Italy
Benelux
Netherlands
ml994
ml990
Ml985
01980

Australia
hIada
Spain
France
Germany
United Kingdom
United States
0%

5%

10%

15%

20%

25%

30%

35%

Share of World FDI Stock

FIGURE 2. Most

FDI is in Industrialized

Countries.

Source:

1995 World

Investment

Report, tJNC!TAD.

investments by all multinationals (including the U.S. multinationals) in all of the worlds
154 developing countries! Britain, with $214 billion (about a third in manufacturing),
was the second largest recipient, followed by France ($142 billion, one-third in manufacturing), Germany ($132 billion, one-half in manufacturing), and other highly industrialized nations. In other words, the rich countries continue to attract more manufacturing
investment from abroad every year in amounts far greater than the developing countries.
This is not to say that manufacturing investment in the developing world is not growing.
Indeed, as Figure 3 shows, foreign direct investment in the developing countries has also
grown dramatically in the last decade and particularly in the 1990s. The recent increase
is concentrated in China and few other rapidly growing countries in South East Asia and
South America, but the growth of foreign investment in these countries does not imply
the decline of manufacturing in the developed countries.
This is not a zero sum game. Both the developed and the developing countries are producing
more. It is true that in the last few years the rate of increase in the flow into the developing
nations is larger than that into the rich countries, but they start from a smaller base and, even
if this pattern persists, it will be many years before the actual amount of investment going
into the developing nations will exceed that which goes into the developed nations. (Remember that if we include domestic investments, rich countries will maintain their higher rate of
investment in manufacturing for a much longer period.) So the answer to the question Is
investment in manufacturing in the rich countries declining? is a clear no.
2. Will the Manufacturing Sector in Rich Economies Employ Fewer People?
Manufacturing productivity has grown faster than any other sector in the rich economies
in the last few decades. Between 1980 and 1992, in constant prices, the output per person
employed in the manufacturing sector in the United States, Japan and European Union countries increased by almost 50%. Manufacturing output in the same period in most these nations
grew about half as much (except in Japan, which grew by 80%) (Wolf 1994). Thus, fewer
people have been needed to supply tbe output and the number of jobs in the manufacturing
sectors in the rich countries have been declining. But the declining share of employment in
manufacturing should not be interpreted as declining investment or output in manufacturing.
Manufacturing can thrive in the industrialized countries with less people and the remaining jobs will be better paid. In 1993 the average hourly wage (excluding fringe

KASRA

1990

1995

1990

FERDOWS

1993

1994

FIGURE3. Destinations of FDI. Source: 1995 World Investment Report, UNCTAD.

benefits) in the manufacturing sector in the United States was $12, more than any other
sector such as wholesale trade, finance, or retail trade. This is particularly significant
considering the fact that traditionally less than 20% of manufacturing employees have had
higher education (compared to 30% in the finance and business services sector) (The
Economist 1994). As the typical manufacturing job is moving away from the stereotypical
operator on the assembly line to one that is working in teams, helping design new processes and products, and dealing directly with customers, suppliers and distribution channels, more qualified employees will be attracted to production. This change requires a
greater investment in education, technology, and work conditions. Only if a company has
not,been willing to make this investment, then it must either move its factory to where it
can continue to produce in the old way or abandon manufacturing altogether. Otherwise,
as described in the next section, there is no compelling reason why many forms of manufacturing cannot be continued successfully in rich countries. Yes, the number of low
skilled jobs will decline but manufacturing can still thrive.
3. Does Manufacturing

Really Matter in Rich Economies?

Some have compared manufacturing with agriculture. They cite that manufacturing in
the industrialized world will follow the fate of agriculture: it will fall from being the
dominant sector (as agriculture was until a few decades ago) to one with marginal economic significance (as agriculture currently is in most of these economies). Their argument is essentially based on the rapid pace of productivity improvement in these sectors:
we need only a few agricultural workers to produce our food and, similarly, we will need
only a few production workers to produce the manufactured goods we need. This argument
is too simplistic; it ignores the enormous potential of adding value in manufacturing.
Perhaps if the farmers had expanded into food processing and biotechnology, agriculture would not have been reduced to a marginal sector in rich economies. However, the
typical farmer stayed with the land and did not add much value beyond producing grains,
fruits, vegetables and simple dairy products; thus, in spite of great improvement in productivity, these farmers reached a plateau for generating wealth. Those manufacturers
who, like these farmers, take a narrow view of their contribution in the value chain and
continue to produce the same items, albeit more efficiently, face the same destiny. Demand

THE

GLOBAL

SPREAD

OF PRODUCTION

107

for what they do may reach a plateau or, worse, competition from cheaper or more nimble
producers may grasp their market.
There is no inherent reason why manufacturers should be tied to a comer of the value
chain. They can generate more wealth not only by becoming more efficient (as farmers
did) but also by at least three other ways. First, they can deploy new technologies to
produce more advanced and high-performance products. For example, 3M has grown and
extended its product line by finding new applications for the technologies that it masters.
Applying its knowledge of adhesive technology alone, it has introduced thousands of
successful new products. Motorola produces a continuous stream of high-value new products by pushing the technological frontiers in the fast changing telecommunication
industry. Its latest mobile phone is not much bigger than a credit card and sells for a thousand
dollars, much more than a typical mobile phone available in the market.
Second, manufacturers can produce more customized products and respond faster to
changing customer needs. Dell produces its computers only after receipt of the order and
can incorporate the latest generation of components that are changing at a dizzying speed.
Benetton produces most of its garments in Italy in part to be able to respond quickly to
changes in the market. Even in a commodity product like golf balls, Wilson Sporting
Goods, in its factory in Humboldt, Tennessee, has thrived by becoming very agile. It can
customize golf balls (by putting desired logos or names on them) for an order as small
as a few dozens and can deliver it in 48 h. Its customized golf ball business has grown
lo-fold in seven years. Other examples of such mass customization are Levis custommade jeans (delivered in 10 days) and Andersen Windows individually customized windows and doors. These products are not only sold well but yield good margins.
Third, manufacturers can append more services to their products. The services can start
even before the customer makes the purchase decision (for example, help in defining the
needs and desired characteristics of the product) and continue long after s/he is using the
product (repair, training, upgrading, and so on). Again, Andersen Windows helps the
customer design the windows they need. Boeing, the aircraft manufacturer, helps its customers analyze their aircraft needs, train their pilots and technical staff, answer technical
questions, and set up repair and maintenance facilities; it even guarantees to repair its
grounded passenger jets at any airport in the world.
Many successful manufacturers do all three in addition to improving their production
efficiency. If a manufacturer is able to develop the capability to do both improve productivity and add more value, there is no inherent reason why it cannot thrive in a highly
industrialized country. Moving from the industrial age to the so-called information
age should not be equated with the demise of manufacturing in the rich countries. In
fact, manufacturers have been among the first to deploy information technology to improve
themselves. Many, including the examples mentioned above, have shown that they can
succeed and contribute significantly to their economies. After all, manufactures comprise
by far the largest share of the exports from the rich countries.
4. Is Znvesting in Manufacturing Abroad a Substitute for Investing in Manufacturing at
Home?
The first reaction, especially by politicians and union leaders, is that it is; but for the
majority of cases it is not true. Many companies may seize an opportunity to set up a
factory where labor is cheap, tariff walls are high, and/or tempting subsidies are offered,
but most continue to expand their production activities also at home. These companies
are not really moving their production abroad; rather, they are entering new markets or
creating a global network of specialized factories or both.
It is useful to examine all the reasons why a company manufactures abroad. Figure 4
provides a summary of the main reasons by grouping them into six categories. Among the
six, only when access to low production costs is the prime motivation, is the company
moving its production abroad, in all other cases, investment in a foreign factory is essentially

108

KASFU

FERDOWS

enhancing the position and long term viability of the factory at home. Even in those industries, such as textiles or plastic toys, where access to low production cost is essential, there
are companies that continue to expand their factories at home: Benetton, the Italian garment
manufacturer, continues to invest in its factories in Italy while it has also started factories
in Asia, South America and elsewhere in the world. Similarly Lego, the Danish toy maker,
continues to invest in its factories in Denmark while also building factories elsewhere.
Among the 154 developing countries of the world, the 10 largest recipients of accumulated foreign direct investment in manufacturing in 1995 have been China, Mexico, Singapore, Indonesia, Brazil, Malaysia, Argentina, Hong Kong, and Thailand (The Economist
1996). Most of these countries are highly populated nations and most of the factories set
up by foreigners are intended to capture a share of their rapidly growing national or regional
markets. Foreign factories are also established to serve the customers better; preempt competitors; connect to sophisticated suppliers; collect critical marketing, technological, and
competitive information (for the entire company) ; and attract talented individuals to the
company. The investments in these factories are not substituting the investment at home;
they are complementing it. All the factories of the company work together, transnationahy,
to deliver what the customers in different markets want in the most efficient way.
Transnational

Production:

The Next Challenge in Manufacturing

A clear indicator of the spread of transnational manufacturing is the current controversy

over what constitutes country of origin for many manufactured goods. As production spreads
around the globe, the number of products that can justifiably carry the label of made in one
country is decreasing. For many products, from cars to computers, medical instruments to
pharmaceuticals, telephones to refrigerators, it is aheady difficult to establish what the country
of origin really is: where major components were made, where they were put into subassemblies, and where final assembly and packaging were done. Keeping track of all this is not
only for academic interest; tariffs, quotas, safety regulation and a host of other factors depend
on how the country of origin is determined. For example, a recent ruling in the United States
defines the country of origin for a car essentially on the basis of where it was assembled
(different from the most common international practice and different from how it is done for

PRODUCTION
& LOGISTICS
COSTS
l
l
l
l

Labor

Capital
Materials
Transportation

FIGURE 4. Drivers

Behind

Global

Spread

of Production.

THE

GLOBAL

SPREAD

OF PRODUCTION

109

other products in the United States itself). As one might expect, this ruling is a subject of
dispute and, given all the politics involved, its resolution is not simple.
The difficulty in establishing the country of origin is the harbinger of the new issues
raised by increasing transnational manufacturing. Perhaps the awkward label Made in
the World captures what lies ahead in production more accurately than the traditional
label of made in any one country. It forces a new mindset and points out the changes we
need to make in public policies and management practices.
For managers of manufacturing companies, it is especially important to appreciate the
potential strategic benefits and competitive threats of transnational manufacturing. When
considering a factory abroad, settling for simplistic answers, limited benefits, and modest
expectations would result in underutilization of the companys resources, but in the managerial debates over establishing, acquiring, expanding, shrinking, or closing foreign factories, often the most measurable and incontestable benefits and losses overwhelm other
arguments. Savings in the direct costs of production, gains in foreign exchange, dazzles
of financial subsidies, savings in transportation costs, and protection from trade barriers
are examples of the tangible factors that can easily dominate the discussion and thinking.
The real mastery of the superior world class manufacturers is that they recognize that
a factory in a foreign land can have long-term benefits also in areas beyond production.
They use foreign factories to enter new markets, support their domestic factories, generate
new knowledge, and bring needed skills and talented people to the company. Rather than
minimal investment, they invest for the long term and encourage development of the
managerial competence to perform all that they expect at these sites. They use these
factories strategically as a part of a robust global network to deal with foreign exchange
and other risks, a network in which the factories reinforce each other. That is different
from a company that spreads its production in a series of opportunistic moves in chase of
cheap labor, tax benefits, capital subsidies, or getting inside trade barriers, and ends up
with a collection of disjointed factories in different countries.
Management of an integrated global factory network is a challenge that manufacturing
managers will be facing with increasing frequency. They need all the valuable lessons
that they have learned about improving the operations inside individual factories and their
supply chains but must also learn new ways of transferring knowledge between factories
and crafting strategic charters for each factory in the network.
Leveraging the global network is a potent source of creating competitive advantage. It
is not only for the big multinationals; smaller manufacturers can also do that too. Even
those companies that do all their production in one country must adjust their strategies to
cope with this trend. Soon, if not already, they will be competing with transnational
manufacturers at their doorsteps. They can lobby for protection but that is clearly myopic;
they can abandon manufacturing by outsourcing their production but that is giving up an
important weapon in the competitive battle, or, as I have explained earlier, move into high
value-adding manufacturing. Perhaps the most effective strategy is do the same themselves. They too can spread their production into an integrated global network.
References
The Economist ( 1993), A New Investment
for GAIT,
September l&75.
(1996),
Emerging
Attractions,
October 26, 128.
KOBRIN, J. K. (1991),
An Empirical
Analysis of the Determinants
of Global Integration,
Strategic Management Journal,
12, 17-31.
WOLF, M. (1994),
Can Europe Compete? The challenge,
Financial
Times, February
24, 1994, 11
World Investment Report ( 1993)) Transnational
Corporations
and Integrated International
Production,
United
Nations, New York.
(1995),
Transnational
Corporations
and Competitiveness,
United Nations, New York.
( 1996), Investment,
Trade and International
Policy Arrangements,
United Nations, New York.
World Economic
and Social Survey ( 1996), Trends
and Policies in the World Economy,
United Nations,
New York.