Monday, April 29, 2013

What does "onshoring" mean for developing countries?

A report just published by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) finds that mid-sized manufacturing firms in the UK are likely to end the offshore outsourcing of production to Asia over the next ten years, slashing the trade deficit by GBP20 billion and creating 200,000 jobs at home. 

While the RSA is correct in identifying a new "onshoring" trend, it may understate the role of large multinational corporations (MNCs) in this process. The report also focuses almost entirely on the consequences for merchandise trade and fails to see the impact on global foreign direct investment (FDI) flows. This is an important omission from the point of view of developing countries, for whom this new trend provides an opportunity to improve their development strategies.

In the report, mid-sized businesses (MSBs), those larger than the traditional small and medium enterprise (SME) but smaller than MNCs, are seen as playing a key role as these changes occur, because they have "the agility of smaller companies combined with the scale required to invest in new production technologies". 

However, two of three key examples of the new onshoring trend cited in the report are MNCs, General Electric and Apple (the third is the Raspberry Pi). Surely MNCs, which usually have well-funded long-term R&D and tend to have interconnected facilities spread across the world, are also well placed to move production back home when it is profitable to do so?

The RSA sees rising resource costs, increasing regulations on emissions, new production technologies and changing patterns of demand as combining to discourage global manufacturing. Mid-sized companies will not be, in the long run, exporting at high volume, the report concludes. Instead they will be producing more in the country of use or very close to it, and owning productive assets abroad.

The report concludes that these changes will reduce global trade and includes a model showing the impact on the UK's balance of trade. However, it fails to examine the implications for global FDI flows, which are surely likely to increase as MSBs replace exports with local production, as MNCs have already been doing for several decades.

The RSA makes recommendations for action by the MSBs, government and "supporting organisations" including lenders, the media and academia. MSBs should increase exports to increase market access, turnover and market experience. They should invest in new production technologies and in productive assets overseas, strengthen management capability and do more to retain skilled workers. Government needs to reduce uncertainty for MSBs by creating a more stable policy framework, provide more training and research, and clarify inward and outward investment rules. 

What does all this mean for developing countries? These have recently (at least until the 2008 crash) been receiving increasing amounts of FDI and may well be concerned at signs of the new onshoring trend in the developed world. 

They should indeed be worried if their development strategy is based on exporting cheap manufactures. Such a strategy is already threatened in the long-term by new technologies such as 3D printing, which is still in its infancy but will eventually enable consumers to produce custom-built items that fit their needs precisely and do not need to be transported across an ocean. 

A more feasible development strategy will be a greater focus on the development of manufacturing capacity aimed at satisfying the domestic market, as well as investment in services and innovative research, with FDI playing a supporting role. As international merchandise trade reaches a plateau, global FDI flows and trade in services will increase more rapidly.

You can download the complete report here.

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