Factor advantages today depend on people much more than resources, as expertise has become more important than what is entrapped in nature’s endowments. Therefore supply chains must concentrate equally on those advantages that come from people efficiency and innovation as from factor advantages that come from resources. Global centers of excellence have shifted from one country to another not for any other reason than this.
The old world trade model is passé as pointed out brilliantly by Richard Baldwin in his thought provoking book, The Great Convergence.
If you were thinking that trade depended on comparative advantage and could be also modulated by government authority to any extent, you are wrong. Post 1990 world has moved to a globally integrated supply chain model where countries and associated enterprises have moved to synchronize themselves to be an integral part of a delivery system from cars, components, electronics, equipment and a host of other products and services.
How to get a piece of this link would depend on your ability to be globally competitive; the harsh reality on which capital gets allocated has no other language but the language of efficiencies and ability to innovate.
Think of the automotive supply chain and you will see how this re-balancing has happened in front of our eyes. Before the 1990s the auto majors were mostly making their stuff from design to delivery stationed in one single geographic region. It was not so because the cost of logistics was only high but because technical expertise resided in one eco-system where knowledge and skills were anchored. Think of Michigan or Munich or Stuttgart or around centers of excellence in Japan. This gave unique competitive advantage to auto makers to concentrate their prowess in making brilliant devices and to scale up their cost advantages to the benefits of consumers that could create lasting value.
Globalization changed this paradigm as cost of logistics shrunk manifold and development of human potential across geographies opened up new avenues for innovation. Some countries like China excelled in manufacturing (every aspect of it from procurement to production), while India moved several notches up on information technology and innovation abilities that could create enormous value at fraction of the costs.
There was no need to run the same model from conceptualization, design, engineering, procurement to production and distribution from one single location or geographic region. For all you know the best designers were in Korea for electrical items and in Germany for the mechanical ones while procurement of these items could be best done from China to be assembled in Vietnam.
The Smart Phone supply chain model of today is even more spread out with no single region doing all of the work from design to production.
Factor advantages today depend on people much more than resources, as expertise has become more important than what is entrapped in nature’s basket. Therefore supply chains must concentrate on those advantages that come from people efficiencies and innovation rather than from factor advantages that come from resources.
Think of Switzerland and you will see it has so limited natural resource, but it so integral to the global supply chains as high tech innovation has to touch this country in some way or the other, whether it is precision machine tools or pharmaceuticals or sophisticated high technology items as in nanotechnology.
For being part of an integrated global supply chain all you need is global competitiveness in the areas were you want to play. If you want to be in production you better create infrastructure for logistics cost reduction on a scale that no one can get near you. If oranges from Himachal to Chennai is going to be costly than the same from New Zealand, you better work on these deficiencies.
If you are going to play on design innovation, you must have the ability to attract the best talents to your universities, only then can you muster the courage of doing this; in fact even for manufacturing this holds good. Thankfully in some small ways the hundreds of technical institutes in Tamilnadu helped the automakers to concentrate on production activities in the South of India as supply of technical skills was the fore-runner to that decision.
So if any country wants to be part of global supply chains, it must have the skills and expertise, merely having the market or the natural resources is not good enough; if it were so then Africa would have much more integrated to the global supply chains, which is a work now in great progress thanks to some efforts by some great African countries.
Being part of a global trade network as opposed to a closed domestic economy has its advantages and some countries have proved that it pays off much more. On the other hand not being part of global supply chains has huge disadvantages, which some countries have learnt the hard way.
That is precisely the reason why bilateralism as opposed to multilateralism fails; trade never would balance as it is impossible to put a money value for every exchange that happens in the people area, which can easily be done for the exchanges that happen in the trade area.