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Economic Monthly Report

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Manufacturing without borders

Mon, Apr 20 2009, 12:08 GMT
by La Caixa Economic Research Dept.

La Caixa

Manufacturing activity is often associated with annoyances such as noise, pollution and waste, masses of workers being exploited and huge factories blighting the landscape. In the developed economies it is also often considered an activity in decline in view of the increase in «clean» services based on knowledge. Furthermore, it is believed it will inexorably shift to emerging economies in order to take advantage of abundant cheap labour while leaving behind a trail of unemployment in the developed economies. These are common ideas that need to be measured against a different and complex reality. This Monthly Report includes various boxes that underline certain relevant facts which help to explain the importance of manufacturing in Spain's economy, its core role in general economic activity and, of course, the profound changes it is now undergoing.

While it is true that the statistics show a relative drop in employment in manufacturing and manufacturing value added in Spain, it is also a fact that this may be explained by a growing recourse to outsourcing or sub-contracting to other companies of operations that were previously carried out in the manufacturing plant itself, such as logistics, machinery maintenance, training, data-processing, research and development, etc. The vast development of corporate services in recent years is largely the result of the outsourcing of operations that were formerly carried out in the manufacturing plant. In this way, industry achieves increased specialization with improvements in efficiency and productivity, key factors in dealing with the heavy competition the manufacturing sector has had to face. At the same time, this process blurs the distinction between manufacturing and services, increasing the knowledge and technology component in industry while reducing the purely physical component in the production of goods.

Another hugely important change is the international relocation of companies or part of the production process through offshoring. The range of operations given over to offshoring has increased over time, as a result of cheaper transport and communications and advances in technology and logistics. When a company decides to move some stage of its production or all of it abroad this creates a flow of foreign direct investment followed by a flow of international trade in goods and services. The vast growth of trade and foreign direct investment in recent decades is the result of the international relocation of companies, a phenomenon closely related to the globalization of the world market in goods and services and the incorporation of major economies in that market.

What is Spain's position in this scenario of international competition? Compared with other European countries, Spain's quota of world exports has been relatively favourable while relocation of operations has been modest apart from some specific sectors. But, as noted in a recent study by the Ministry of Industry, Tourism and Trade, Spain's position is critical, standing as it does «between a developed world specializing in manufactures that are technology-intensive and another emerging world rapidly gaining ground in such products, while at the same time maintaining its strength in traditional operations». These are operations that on average are low technology-intensive and therefore exposed to an increasingly competitive world. The productivity gap in Spain's economy is a reason for concern and demands the development of a competitive strategy that will overcome structural weaknesses and facilitate the success of companies in this more and more global market.

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Published on  Mon, Apr 20 2009, 12:13 GMT