Many people probably have the mental image of an “export product” as something which is physically assembled in one place in one country (e.g a Volvo in Gothenburg) and then shipped abroad. Also, the traditional view is that countries have certain “comparative advantages” which determine which kind of export products dominate. For instance, Sweden has high costs and high-skilled labour, why Sweden would do well in specializing in high-tech – while India has an abundance of cheap and unskilled labour and, consequently, should specialize in products like textiles.
But that is an over-simplified view of the world. In recent decades, trade patterns have shifted dramatically. Lower transportation costs – container traffic – and lower communication costs – internet and e-mail – have meant that also small companies can be global, have different units and departments in other countries, buy from suppliers all over the world and sell in many countries. This has meant that intra-firm trade across borders in most countries now is bigger than trade between firms.
Furthermore, tasks and skills of labour are much more specific than previously. While a country like India some years ago could be described as a low-cost, low-skills country that is not so anymore. There are high-skilled salaried workers – in places like Bangalore, Mumbai and other cities – that can compete with workers in Stockholm and Gothenburg. Comparative advantage thus becomes “kaleidoscopic” and is prone to rapid changes as technology and skills evolve over time.
In these “global value chains” where R&D, design, assembly, distribution and sales are tied together within firms who operate in several countries, the importance of countries per se actually diminish. These companies rarely choose to operate in India or Sweden just because of the fact that they are India and Sweden, specifically. They choose locations which happen to be in these – or other – countries, because they seek skills, clusters of excellence and costs which fit into their global value chains. In that sense, it is cities and clusters –as well as universities, housing and schools, quality of life and a lot of other more intangible aspects – which compete and decide where companies locate, recruit and develop.
This is a much more complex world than previously. It is a world of constantly evolving technology, stiff competition and shifting advantage – in global production matrixes and value chains. Tough – yes! But also a world with great opportunities. Firms from poorer countries do not necessarily have to compete only with cheap labour anymore, depending on their assets and personnel they may enter the global value chains at any stage.
This does not mean that the role of nations disappears. Even though nations do not compete themselves, they still are crucial in building a business climate which is attractive and which helps create competitiveness for those firms, cities and clusters which do compete on the global market. Consequently, they have a great responsibility to create a business environment which makes it possible for local firms to step into the matrixes and supply chains of global trade at any stage – not only the low-cost level.
This has implications. For instance, in global value chains, services become more important. Financial services, legal services and trade services (transportation and distribution) glue the different links of the value chain together. Here, the skills level is often high, and good institutions are crucial. This applies to a number of different areas.
Unfortunately, this is often where India is less efficient. We all know the poor state of the physical infrastructure, not least the lack of deep-sea ports and the problems of energy supply. Furthermore, the financial sector is still primarily domestic, which holds back productivity and hampers trade finance. To top it, there is endemic corruption. These factors diminish the willingness of global companies to expand their operations in India, as well as they hamper the competitiveness of Indian firms.
I don’t mean to sound rude or presumptuous. But I believe that India has great opportunities in this brave new world of global trade – its huge population and growing middle class, its increasing level of technical expertise. But to capitalise fully on these assets, India needs to improve its infrastructure, education and energy security – as well as open up its financial sector and come to grips with corruption.
If these challenges can be addressed in a strategic and long-term fashion, there is no limit to how far India can go.
Klas Eklund is Senior Economist SEB and Adjunct Professor of Economics, Lund University