5-1 Discussion The Effects of Globalization

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Apr 3, 2024

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Does global sourcing, either relocation of operations or purchase of components globally, offer an advantage or disadvantage to an organization? The large number of organizations that have taken advantage of global sourcing seems to attest to the advantages to be gained from this strategy. The apparent advantages sought include reductions in cost, improved productivity, market expansion, and competitiveness. This trend is not new, nor does it seem to be ending. A growing number of political commentators, industrialists, and researchers fear that— driven by the realities of competition—virtually all production competencies will migrate from developed countries. Economists tend to see the relocation of industrial activities to low-cost countries as an inevitable result of the liberalization of international trade and investment policies, combined with decreasing transportation and communication costs. (Andersen, 2006). Manufacturing labor costs are significantly more expensive in the U.S. than in countries like India and China. Companies that employ lowered labor costs can benefit by allocating cash for other uses. As well, these low-cost countries can provide skilled workforces to manufacture products conforming to global quality standards. Increased production capacity is another major benefit of global sourcing. China and India have dedicated significant portions of their economy toward manufacturing, and they also have the technical labor force to run manufacturing plants. When compared to the U.S., the technical labor force has a higher skill set (Das, 2020). While global sourcing, either relocation of operations or purchase of components globally may be appealing due to the apparent benefits, it does not come without some considerations, risks, and disadvantages. The language barrier can be a major obstacle to global sourcing. Communication gaps and unfamiliarity with local codes can disrupt manufacturing objectives. Unfamiliarity with local tariff and tax regulations can diminish savings on production costs. Political instability can severely hamper the supply chain. The political climate of global sourcing locations is a huge consideration as instances of protests, riots, pirate activity, and airport closures can disrupt all sourcing activity (Das, 2020). Finally, shipping costs can be a major factor with regard to financial costs as well as lead times to market. All things considered, many of the challenges to global sourcing can be mitigated with careful planning, support, and partnerships like sourcing agencies. Resources Andersen, P.H. (2006) “Regional Clusters in a global world: Production Relocation, Innovation, and industrial decline,” California Management Review , 49(1), pp. 101–122. Available at: https://doi.org/10.2307/41166373. Das, D.D. (2020) Advantages and disadvantages of global sourcing , Dragon Sourcing . Available at: https://www.dragonsourcing.com/advantages-and-disadvantages-of-global-sourcing/ (Accessed: March 30, 2023).

We are in the midst of a global reallocation of production activities. Driven by the surge of newly industrialized economies, trade liberalization, and decreasing transportation and communication costs, more and more production activities are shifting from high-wage to low-wage countries. For example, close to 80% of Wal-Mart’s suppliers are now Chinese. In comparison, 10 years ago, less than 10% of Wal-Mart’s products came from outside the United States.5 A growing number of political commentators, industrialists and researchers fear that—driven by the realities of competition—virtually all production competencies will migrate from developed countries. Some even claim that innovation activities will follow, since the development of new knowledge is strongly intertwined with production activities.7 The co-location of production and technology development determines the ability to learn, and with it the ability to innovate by reducing cognitive distance8 and competitive learning possibilities.9 This is what is alleged to have happened to a number of industries in the U.S. in the 1980s. Thus, it is claimed, companies will be “hollowed out” and the competences necessary for inducing technology development will gradually shift to low-wage countries. Hence, relocation activities and their consequences to industry competitiveness are regarded with the greatest suspicion.10 Economists tends to see the relocation of industrial activities to low-cost countries as an inevitable result of the liberalization of international trade and investment policies, combined with decreasing transportation and communication costs. First, faced with an increasingly global competition, companies within a regional cluster must seize opportunities to reduce their manufacturing and development costs, thus offsetting any competitive advantages their global competitors may have.21 Second, the reduction of manufacturing and development costs may increase performance in terms of increased productivity and profitability (at least in the short run), which may then satisfy investors and company shareholders.22 While the relocation of production activities is not new, what is new is that not only “simple” or “standard” production activities are being moved, but also knowledge-intensive work.25 This is what is also known as the hollowing out phenomenon Andersen, P.H. (2006) “Regional Clusters in a global world: Production Relocation, Innovation, and industrial decline,” California Management Review , 49(1), pp. 101–122. Available at: https://doi.org/10.2307/41166373 . (Andersen, 2006)

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