Multinational corporations (MNCs) are powerful tools of economic development, because they can reap benefits from some of competitive advantages of different countries (think of the factors identified in an earlier lecture), even while using these advantages to earn economic rents for their corporate assets (we discussed corporate assets in an earlier lecture).  We'll use these powerful capabilities of MNCs to help us understand three developments in world economic development:  the international product life cycle, the "new international division of labor," and the breakdown of the fordist system of wealth generation.

 PRODUCT  LIFE  CYCLE  OF  INTERNATIONAL  TRADE  AND  INVESTMENT
• Raymond Vernon, 1966, "International trade and investment in the product life cycle"

• Concerned with only certain industries:

 · manufactured goods that face
 · income-elastic demand (demand increases disproportionately with income), and that are
 · labor-saving in use

 With these assumptions, Vernon built a story of these particular kinds of products facing
1) introduction in the highest-income, highest-wage country where the products found their first demand;  production is small-scale, changing, expensive, and uses highly skilled L;  demand is not very price-elastic, because of differentiation, and the nature of pioneering adopters
2) growth of demand and production in the original country, with declining costs and prices;  some export demand from countries with lower incomes and wages — the high-wage, L-scarce country is exporting L-intensive products
3) maturity of demand in the original country, with standardized and increasingly K-intensive production;  establishment of foreign operations in newer markets to serve them and to overcome real or threatened trade barriers
4) decline of product demand in the original country, with increasing competition from other suppliers and other products;  the cost pressure and the ability to embody the technology in (a) capital equipment and (b) standard operating procedures pushes production "offshore" to low-wage countries, using financial capital and capital equipment from the originating country — the high-wage, labor-scarce country (e.g., the U.S.) is importing capital-intensive products, because the capital and technology are mobile within the multinational corporation (MNC), while the less-expensive L is not mobile.

This dynamic model of production technology explains, for a limited class of goods, US exports of these goods while they are labor-intensive (skilled-labor intensive) and import of these same goods later, when they are capital-intensive (with the capital coming from global capital markets, not necessarily from the countries where production occurs).

 However, this model differs from the factor-proportions (Heckscher-Ohlin) theory:

•  technology changes over time, from labor toward capital;
•  the mobility of technology changes over time
•  standardized technology and financial capital are mobile factors within the MNC

NEW  INTERNATIONAL  DIVISION  OF  LABOR
Think about our simplistic, cost-minimizing model of industrial location (see notes from that lecture).  We noted that as the costs of transportation have declined, interregional (and international) differences in labor costs, tax rates, and agglomeration economies became more important influences on industrial location.

Some researchers have used this increased influence of immobile factors to define a "new international division of labor" (NIDL), in which some low-wage regions of the world use imported technologies to produce moderately labor-intensive products for high-income regions.  While the traditional international division of labor (based on immobile labor, capital, and technology) entailed manufactured exports from wealthy countries and raw-material exports from poorer countries, the NIDL (based on mobile capital and technology and immobile labor) entails

• manufactured exports from wealthy countries among themselves
• manufactured exports of capital goods from wealthy to poorer countries
• manufactured exports of labor-intensive goods from poorer to wealthy countries.

FORDISM   AND  POST-FORDISM

A parable of mass production
Henry Ford recognized that he could dramatically reduce the cost of the Model T if he could produce and sell more of one model than any other automobile maker had ever considered selling.

• One way of increasing demand for the Model T was to reduce its price;
• another way was to increase household incomes so that working-class families could afford a car, especially
• as long as liberal consumer credit was available.

• for the Federal government to use macroeconomic policy to increase household incomes,
• for the Federal government to use its military power to assure supplies of inexpensive imported petroleum, and
• for the Federal government to subsidize the construction of highways and automobile-dependent suburban houses.

• increasing wages and consumption for industrial workers, thereby increasing the market for industrial products.

Fordism
This mutually reinforcing system of big business, big government, and big labor has been called "Fordism."  Basically, it entails standardized mass production at wages that allow the mass consumption that supports the scale that mass production requires.  In addition, institutions such as government macroeconomic policy, military policy, and fiscal policy, and labor unions, support the expansion of markets and the reduction of costs (except labor costs).

The international product life cycle and the NIDL can endanger Fordism, to the extent that some mass production occurs in places that are not markets for mass consumption.  Instead, the mass production in LDCs (using technology and capital from industrial countries) was aimed at export to U.S. markets.  The closed system of mass production and mass consumption became less closed.
The real wages of U.S. industrial workers stagnated, and U.S. consumption becomes more varied:  a large and growing market for expensive goods and services;  a large and growing market for lower-price goods and services.  In addition, some of the LDCs become substantial mass-consumption markets, for even lower-price goods and services.

Post-Fordism
Since the 1970s, communication and production technologies have allowed worldwide production and worldwide competition (in some sectors of the economy).  Industrial competition has increased, and competition has become based not only on cost (which mass production steadily reduced), but also on rapidly changing, specialized products for business, government, and consumers.  Successful manufacturers are learning to produce in smaller, more specialized batches, using flexible equipment and contracted (rather than long-term) workers.

This combination of

• differentiated markets (by income and by tastes)
• flexible equipment
• less stability of employment
• international business competition for large markets
• international government competition for private investment
• international organization push toward liberalized trade policies

The geographic bases of post-Fordism are:

• international differences in labor wages
• international mobility of capital and technology
• emergence of new markets
• international trade.