Another Repost, but good food for thought as we introduce the basic concepts of trade and trade accounting from Chapter 1.
What does "Made in ______" really mean? On Wednesday, we briefly discussed the idea of gross trade versus value-added trade in the context of the iPhone. The argument was that when the final assembly of the iPhone is imported to the US, its full value (say, about $200) is counted as imports from China to the US in the US trade balance. But really China's value-added is only about $6.50. The rest is made up of components built elsewhere, as well as design, marketing, and financial services that are carried out here, in the US. Scott Lincicome offers a nice graphical example showing how these vertical supply chains work, and where things are typically made from start to finish (I do have a minor quibble with him including the sewing machines in the supply chain, because those aren't really "components", but let's look past that).
The bottom line is that vertical FDI allows firms to specialize production of various stages of production in multiple locations to best exploit the gains from trade and comparative advantage.
We will talk more about the gains from trade and comparative advantage in Chapters 2-4 of the textbook, and more about vertical FDI in Chapters 5 and 7. However, the way that comparative advantage is exploited internally by the firm when it engages in FDI highlights the distributional impacts of trade along the lines of comparative advantage: For the country that is sending capital abroad, the shareholders who own the capital win, as do consumers; the workers who were once employed by that firm domestically lose; yet, the net effect is positive.
Nowadays China, the biggest worldwide factory as a example, has become the largest recipient of foreign direct investment and topped the United States which had $57.4 billion of FDI. Global value chains, or international supply chains, are core to this development and traditional boundaries and distances are collapsing.
ReplyDeleteFor instant about Apple Inc., it prefers to apply vertical supply chains work, and we all know that the Iphone is maimly produced in Taiwan,China. But really China's value-added is only about $6.50. The rest is made up of components built elsewhere, as well as design, marketing, and financial services.
Many people living in the developing countries said the FDI is unfair to them, but I believe it's beneficial. Initially, there appears to be a wide consensus that FDI is an important, perhaps even the most important, channel through which advanced technology is transferred to developing countries. Secondly, FDI leads to higher productivity and lower costs in locally owned firms, particularly in the manufacturing sector. There is the evidence that the amount of technology transferred through FDI is influenced by various host industry and host country characteristics. Moreover, as far as I know, the amount of technology transferred through FDI is influenced by various host industry and host country characteristics. More competitive conditions, higher levels of local investment in fixed capital and education, and less restrictive conditions imposed on affiliates appear to increase the extent of technology transfers.