The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. Consider the Boeing Company’s latest commercial jet airliner, the 777. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on. Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at performing their particular activity. A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival, Airbus SAS (Airbus Industrie). Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country.
The global dispersal of productive activities is not limited to giants such as Boeing. Many much smaller firms are also getting into the act. Consider Swan Optical, a U.S.- based manufacturer and distributor of eyewear. With annual sales revenues of $20 million to $30 million, Swan is hardly a giant, yet Swan manufactures its eyewear in low-cost factories in Hong Kong and China that it jointly owns with a Hong Kong-based partner. Swan also has a minority stake in eyewear design houses in Japan, France, and Italy. The company has dispersed its manufacturing and design processes to different locations around the world to take advantage of favorable skill bases and cost structures. Foreign investments in Hong Kong and then China have helped Swan lower its cost structure, while investments in Japan, France, and Italy have helped it produce designer eyewear for which it can charge a premium price. By dispersing its manufacturing and design activities, Swan established a competitive advantage for itself in the global marketplace for eyewear, just as Boeing has tried to do by dispersing some of its activities to other countries.
Robert Reich, the former secretary of labor in the Clinton administration, has argued that as a consequence of the trend exemplified by Boeing and Swan Optical, in many industries it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. Increasingly, according to Reich, the outsourcing of productive activities to different suppliers results in the creation of products that are global in nature; that is, “global products”. But as with the globalization of markets, one must be careful not to push the globalization of production too far. As we will see, substantial impediments still make it difficult for firms to achieve the optimal dispersion of their productive activities to locations around the globe. These impediments include formal and informal barriers to trade between countries, barriers to foreign direct investment, transportation costs, and issues associated with economic and political risk.
Nevertheless, we are traveling down the road toward a future characterized by the increased globalization of markets and production. Modern firms are important actors in this drama, by their very actions fostering increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment – as they should.