Capabilities and Comparative Advantage

26 November 2007 at 12:40 am 1 comment

| Steve Phelan | 

Brad DeLong recently posted an interesting set of questions on his blog about corporate nationality:

  1. Does it matter that a huge hunk of Citigroup is owned by Alaweed ibn Saud rather than some guy who lives on Kentucky or Alberta?
  2. Does it matter that Applied Materials — the company that makes the equipment other companies use to make the chips other companies use to make the gadgets other companies use to market the lifestyle — has its headquarters in San Jose, California rather than in Stuttgart or Shanghai?
  3. Does it matter that Applied Materials has its engineers in San Jose, California and not in Kuala Lampur or Rio de Janeiro?
  4. Does it matter that venture capital firm Kleiner-Perkins is in Palo Alto, California and not in Tokyo or Milan?
  5. Does it matter that Citigroup’s headquarters is in New York rather than in London or Bombay?
  6. Does it matter that Apple’s iPods are made in Shenzhen, China, rather than in Austin, Texas, or Window Rock, Arizona?

The “note to self” questions were followed up by an interesting reader comment:

> Manufacturing does not
> add much value any more.

That’s what people who work in or for New York financial services entities tend to think, anyway. Those of us who still work in US-based manufacturing tend to see things a bit differently. Knowledge comes from doing, not from viewing on a computer screen — and certainly not from viewing financial statements on a computer screen. When that knowledge is gone (or transferred to others) the capabilities follow very shortly. And, I and many others (including many German policy analysts) would argue, the underlying economy some time thereafter.

Seriously — when all the value-adding work is moved to China and India what exactly is the US going to do? England is a cute tourist destination — perhaps we will do the same?

I would suggest reading (1) the history of Hewlett-Packard’s calculator division, including the decision to outsell the whole thing to China and what happened when they tried to bring it back in-house (2) Boeing’s recent experience and statements with super-outsourcing major structural components of the 787.

ERP Expert

A simlar concern is being raised in a forthcoming conference at Bocconi (which will become a JMS special issue).  

Questions include:

  1. Why are companies considering the offshoring and/or outsourcing of core functions (for example R&D) that comprise the heart of a firm’s competitive advantage?
  2. What management processes are being used in companies to formulate and evaluate such decisions? In short, how do companies strategize the decision making process that determines the organizational or geographical spread of value added activities?
  3. What precautionary mechanisms are being put into place to protect proprietary knowledge and capabilities of the firm and prevent the loss of future competitiveness?
  4. What is the extent of (knowledge) spillover benefits that host-nations get from global outsourcing and offshoring activities?
  5. What role do emerging markets and/or emerging market firms play in global outsourcing/offshoring?
  6. How does intellectual property protection affect the offshoring decision?
  7. What implications do outsourcing/offshoring of activities of large multinationals have on entrepreneurship within the organization?
  8. What implications does the outsourcing/offshoring of activities have on international business theories and practices of firms worldwide?
  9. What is the role of intermediate organizational modes or quasi-integration such as alliance or cooperative relationships that lie in between internalization and arms-length outsourcing?
  10. Has codification of knowledge increased? Once codified, are even complex, high value functions are now amenable to outsourcing?

This raises very interesting questions for strategy and national comparative/competitive advantage. If capabilities are a form of human capital that develop over time (in the spirit of Dierickx and Cool’s stock-and-flow metaphor) then offshoring may stifle the flow of human capital creation in a country leading to a loss of capital stock. This, in turn, suggests a need to develop a theory of “dynamic comparative advantage.” It may be possible that offshoring policies create long term risks for national economies.

Entry filed under: Evolutionary Economics, Former Guest Bloggers, Theory of the Firm.

JMS Special Issue on the Entrepreneurial Theory of the Firm The Power of Incentives, Monday Morning Edition

1 Comment Add your own

  • 1. Sai Y  |  1 December 2007 at 7:51 am

    You mean there isn’t a theory of dynamic comparative advantage? Isn’t that an obvious extension of the idea?

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