Post on 21-Dec-2015
Motivation
• A nice way of combining product and process innovation is to introduce the concept of ‘Capability’
• This allows us to develop a key distinction between productivity and quality
• It also allows us to focus attention on the idea that much of the improvements we see in quatity (and productivity) come from innovations in working practices , rather than from R&D
Sources
• Sutton, Quality,Trade and the ‘Moving Window’, Economic Journal , Nov 2007
• Brandt, Rawski, Sutton, China’s Great Economic Transformation, Cambridge University Press 2008
• Sutton, The auto-component industry in China and India: A Benchmarking Study
Capabilitiesd
dc
u c = ‘productivity’
u = ‘quality’
Capability is a pair (c, u) for each technical trajectory (submarket)
Key feature:
The consumers choose products offering the best u/p
Implication: if u>v, the market share of a firm offering u cannot be eroded to zero by any number of firms offering v
Proposition 1
- given any configuration of capabilities
(c1,u1), (c2,u2) . . (cn,un)
there is a lower bound in (c,u) space below which a firm cannot achieve positive sales at equilibrium
(ex. Cournot equilibrium)
Fixed /Sunk costs
• Iso-elastic response of quality(beta)
• Isoelastic response of labour productivity (gamma)
• Unit variable cost = labour cost + materials cost
Proposition 2
Suppose one element in building capability is the expenditure of fixed outlays (“sunk costs”)
- Then competition in ‘capability building’ will lead to a bound on the number of firms ‘in the window’.
So what’s new?
• The model has been chosen so that prices and qualities, and therefore productivity and quality enter in a completely symmetric fashion
• The key point is that unit materials cost sets a floor to price, thus limiting the degree to which changes in wages and productivity can offset changes in quality
Quality vs. productivity
• Once raw materials at international prices are an input….
• Wage adjustment can rescue poor productivity…
• But not poor quality
A Digression ….
• An extension of the model adds a second parameter (horizontal differentiation)
• This can be further generalized to “linkages between sub-markets”
• This extension is important in providing an explanation for cross-industry differences in market structure
σ Linkages Across Submarkets
The Dixit/Stiglitz/Krugman
LineThe Hotelling
Line
Perfect Competition
β
Effectiveness of Capability
Building
A Multi-Country Model
• m industries ; Cobb-Douglas consumers
• r of these are commodity type, many firms
• m-r have n firms in each of countries A,B
• Country C supplies raw material
• Labour supply same in all
• Capability of B firms < A firms
Capabilities, Quality and WagesFirst r goods: qualities =1, Prod. 1/c=1
Remaining goods: qualities u in A, v in B
(Prod. Differs also)
W
L
Ls
Country A
W
L
Ls
Country B
A third country produces (only) an intermediate good, a fixed number of units of which enter into the production of all three final goods
Modelling Pre-Globalisation
• The aim is to exclude competition in “quality” goods, while allowing A and B to source materials from C.
• Two routes:
• (i) Partition country C
• (ii) Unify C but inhabitants are insensitive to quality differences
Three Phases
• Phase I: Impact phase…Capabilities given
• Phase II: Transfer phase
• Phase III: Re-investment (escalation) phase
Phase I : Impact
• There are three regimes, depending on the size of the gap in capability
• Regime I….gap ~ 0
• Regime II…..moderate gap
• Regime III….wide gap
Main substantive argument
• The case for globalisation should rest primarily on the transfer and growth of capabilities it induces
• A fundamental set of mechanisms are driven by the coexistence of high capabilities and low wages
• These mechanisms include, inter alia, • ---self help driven by new incentives• ---Transfers via FDI/ Supply chains, etc.
Speed of Transmission
FASTAuto components: Vertical relations
with shared technology; standardization and
codification of working practices.Domestic Appliances: Horizontal JVs – here
incentives of senior partner are critical (cf.
China).Machine Tools: Public sector bodies etc.
SLOW
The Machine Tool Industry
How trajectories develop/divide
Conventional Machines CNC Machines
Controls
Ball-screws
The ‘machine’
Pre 1970 Post 1970
The Invidious Trade-Off
controls
ball-screws
15% wages
Bought-in Components
Materials, Energy costs,
etc.
15%
15%
55%
A typical cost breakdown
Gross Labour Productivity
3-axis, 15 kW
7.5 kW,165mm
11 kW,350mm
0.25 1 4
size
& c
om
ple
xity
Japan
India Taiwan