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Diversification and knowledge outsourcing

Friday, April 20, 2018
Mary K King

There are many options being presented by the current and past governments and others as to what products and services we should be engaged upon if, when, we diversify our economy. These range from the PP’s government recommendations of the so-called blue economy, and the Chaguaramas boardwalk, its ‘i2i’ and of the current government of an aluminium industry to make motor car wheels, flat plate wire and cable and outsourced financial services. The underlying objective is to produce goods and services that we can export. Hence this depends primarily on the current changing characteristics of global trade and in particular its drivers. Little is being said about these, whereby local promoters of diversification are more concerned about our indigenous comparative advantages—our hot peppers, access to natural gas etc.

We had an experience recently that brought home to us the reality of global trade and in particular its manifestation in manufacturing. We needed some parts to repair our Mini Cooper S motor car. We found many suppliers online who had the parts, some made by manufacturers who did not make the Mini, OEMs (original equipment manufacturers), and also sold by BMW, the manufacture of the Mini.

The formers’ parts were cheaper than the BMW original, but the supplier claimed that they were all of the same quality. The explanation was that BMW does not manufacture many of the parts that go into the Mini. They are sourced worldwide from OEMs, parts designed and certified by BMW. Hence BMW has a worldwide supply chain via which many of the components are imported into BMW’s assembly plants where the Minis are built.

In other words, global trade has come a far way from a country specialising in particular products for export which it manufactures completely, and importing some from other specialising countries. This new trade, driven by economic efficiency, is facilitated by cheap transportation, telecoms, trade and financial liberation and in particular technology. Hence manufacturing and some financial rewards are shifting from the developed world to a few developing countries (Mexico, China, Poland, S Korea). For example by the early 90’s the G7 countries’ share of the world GDP was some 70 per cent. Because of this outsourcing its share has dropped by 2014 to 47 per cent, with China rising to 19 per cent.

However, there is another change in this globalisation. Pre 1990 in the so-called headquarters’ economies there was a high ratio of know-how/labour and in general high wages. In the factory economies there was a low ratio of know-how to labour and low wages. Now, what we are witnessing is a flow of know-how to the factory economies, massively so in China, in which the emerging economies industrialise and the HQ economies de-industrialise. The factory economies embrace policies that encourage knowledge flow while the HQ economies embrace policies that protect knowledge. This sees labour rewards falling in HQ economies while that of its knowledge-owners rise as the HQ busies itself with design and quality control. In the factory economies the middle class rises and poverty is driven back.

But this is only happening in some developing countries, the others are concerned as to why they are not growing also? What do we have to do in T&T, in diversification, to greatly increase our export trade by the on-shore?

Because of the then high communications’ cost in the pre 21st century trade inventions/innovations of the developed world remained and were exploited there. Now with low communications costs from 1990 and the ICT revolution, the new face of globalisation emerged. Hence global value chains developed that are also conduits for knowledge transfer, ie the developed countries providing besides off-shore jobs, there is also knowledge off-shoring.

ICT allowed the developed country firms to precisely control and monitor what goes on in the off-shore factories of the developing nations. Hence the new globalisation has brought major uncertainty in jobs in the developed world. We see the move by President Trump to use tariffs to stymie this aspect of the new globalisation—bring back the jobs home.

The problem is that the US trade barriers will not stop the off-shoring of US or any know-how but it will raise the cost of industrial inputs in say the US as imported parts get more expensive, though still competitive within the US as tariffs on imported goods/inputs take effect. Hence production will shift to the US for US market sales and to US foreign plants for non US sales. But with automation, robots, artificial intelligence, there will be lots of jobs for robots but few for US workers.

What then can we expect from the developed world to whom we also need to export? The developed world will provide the knowledge, the designs, the innovation for the emerging world factories, the supply chains. What the emerging economies have to do is to use its rewards to drive its own innovations, like South Korea, to initially supply the processes of the off-shore factories and also develop its own clusters that produce intermediate and even final products.

For example, one of our colleagues has developed indigenous know-how (a patent) to control electric motors more efficiently. This is local know-how that can be applied in the off-shore factories. Hence the global value chain can indeed in its next version see off-shore knowledge augmented by inventive/ innovative knowledge from the factory economies.

What then is the scope of our foresighting exercise? Should we be considering securing a place in the global product chains initially as opposed to standalone product innovation? Then what is the place of our universities in this space of knowledge outsourcing and indigenous process and intangible innovation?

(Reference: “The Great Convergence” by Richard Baldwin)

Mary K King


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