Global Manufacturing

What potential issues may arise for innovation in global manufacturing?

Introduction

The basis of development in the economy is innovation, and as such, a fundamental part for advanced and developing economies to grow. It has become an ill-defined, but widely used term in the 21st century1Courvisanos, J., & Mackenzie, S., (2014) "Innovation Economics and the role of the Innovative Entrepreneur in economic theory". Chercher, Reperer, Avancer - p.41 .  Firms particularly in global manufacturing have been encouraged to gain a competitive edge through innovation. The survival of companies depends on the way they can build their business through innovation. The focus of this article will be on issues that may arise in innovation for global manufacturing (specifically human capital and transportation). It will distinguish evolutionary theories of economic change, from neoclassical theory, which merely views economic development and growth via capital accumulation2Cesaratto, S., (1999) Savings and economic growth in neoclassical theory. Cambridge Journal of Economics - p.774 [Online] Available: http://www.econ-pol.unisi.it/cesaratto/CJE99 (accessed 5 March 2016) . In the evolutionary theories paradigm, the socio-economic world operates in a more complex system that exhibits tendencies for change and adaptation3Beer, F. A., (1996) Evolutionary Paradigms in the Social Sciences. Special Issue, International Studies Quarterly 40, 3 (September 1996): pp. 315-433. [Online] Available: http://cfpm.org/jom-emit/1997/vol1/beer_fa.html(accessed 5 March 2016) . The economy is regarded as a closed system by neoclassical economists, one which exhibits mechanical equilibrium tendencies4Denis, A. (2004). The hypostatization of the concept of equilibrium in neoclassical economics. City University, London [Online] Available: http://www.staff.city.ac.uk/andy.denis/research/equilibrium.htm (accessed 5 March 2016) .

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Innovation, the bread, and butter of global manufacturing

As far as global manufacturing is concerned, innovation is the bread and butter of the industry. It cannot stay stagnant and rely on capital accumulation to drive growth, as competitors in the industry constantly work on innovation and developments. The concept of diversity in evolutionary theories relates to differences, decisions, and different characteristics that differ in the global system that companies evolve in. These are key explanations of differences in the system of innovation, which tend to explain the innovative inter-country and inter-industry performance5Freeman, C. (2002). "Continental, national, and sub-national innovation systems—complementarity and economic growth." Research Policy 31: 191-211. ,6Kim, L., and R.R. Nelson. (Eds.) (2000). Technology, Learning, and Innovation - Experiences of Newly Industrializing Economies. Cambridge University Press. . Continuity in innovation is another important concept which aids future growth and depends on early decisions, current performances, and actions. There have been recorded historical phenomenon regarding this concept, an example would be coal wagons in Britain7Scott, Peter. (2001). "Path Dependence and Britain's ‘Coal Wagon Problem'." Explorations in Economic History 38: 366-85 .

This type of continuity on a day to day basis is developed through routines that reduce transaction costs and learning for employees. Of course, there can be resistance to change, which in turn can slow innovation and adoption of new skills and techniques in the medium to long run8Nelson, R.R. and S. G. Winter. (1982). An Evolutionary Theory of Economic Change. Harvard University Press. . Routines on a day to day basis, as well as other newly acquired skills and activities, will help with the learning process. Learning by using and doing will contribute to the development of implicit knowledge, that can be hard to transfer and often in-still in individuals and organizations. It is vital that employees absorb knowledge through the use of inter-company spill-overs9Ruttan, V.W. (2001). Technology, growth and development. An induced innovation perspective. Oxford University Press, New York and Oxford. . This educational information can also be codified and transferred10Dosi, G. (1988). "Sources, Procedures, and Microeconomic Effects of Innovation." Journal of Economic Literature 26(3): 112-1171. .

Investing in human capital for global manufacturing

However, investing further into the human capital can at times set back firms in global manufacturing due to the rising costs of training courses. Employees will naturally absorb newly acquired skills in some form on a day to day basis by learning and doing, further training and human capital investment may still be required in order to meet the needs for highly skilled workers in advanced economies11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . By investing further into developing skills of workers, labour costs will initially rise even in the developing countries11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . Workers who acquire new skills may be poached by competing firms 12Simonetti, R., & Orsenigo, L., (2010) Book 2 – Doing Economics: People, Markets and Policy, Chapter 19 – ‘Managing the knowledge economy’, Milton Keynes, The Open University:p.119 . This also means that the competing firm did not have to forego in investing into training its own staff, thus saving vast amounts of money which can then be invested elsewhere in the business. For example, a short course can cost anywhere from a modest £300 for a day to £1500 for a day course in global manufacturing13Project Metal (2016), Metal Courses. [Online] Available: http://www.project-metal.co.uk/prices (accessed 5 March 2016) ,14University of the West of England (2016) Professional course Advanced Manufacturing. University of the West of England [Online] Available: http://courses.uwe.ac.uk/Z41000066/2016#entry (accessed 5 March 2016) . Majority of employees usually opt to directly invest in their own future, rather than having to rely on the employer to foot the bill. The companies could in turn use it against the employees by not releasing their contracts, or taint the employee’s reputation specifically in small industries, such as in information security, and it may hinder their future job prospects15CGI Security (2012) Five pieces of advice for those new to the infosec industry, CGI Security [Online] Available: http://www.cgisecurity.com/2012/09/five-pieces-of-advice-for-those-new-to-the-infosec-industry.html (accessed 5 March 2016) .

It is often the case that, many organizations are reducing budgets for training comprising innovation and growth16Eagle, M. (2016), The true cost of cutting your training budget. Thales Learning and Development [Online] Available: http://www.thales-ld.com/blog/true-cost-cutting-training-budget/ (accessed 5 March 2016) . More investment in training would greatly improve service delivery and innovation from the staff, it is also often the case that employees have to invest in their own future from their own funds, as mentioned earlier, to move ahead in an industry, this is more so evident with temporary employees17Global Knowledge (2014) Almost Half of Temporary Employees Fund Their Own Training. Global Knowledge [Online] Available: http://blog.globalknowledge.co.uk/2014/03/21/almost-half-of-temporary-employees-fund-their-own-training/ (accessed 5 March 2016) . Perhaps this is for the best, as far as employees are concerned, as there are no complications or hindrance to moving to a new company in the future.

Furthermore, whilst many organizations contemplate to further invest in an employee’s skills, this may also stagnate future innovations, particularly in industries such as science and technology, where constant new innovation is being pushed on a daily basis. Relying solely on the employee to foot the bill for training and gaining new innovative skills for the firm is not just selfish from the employer’s positions, but can set precedents for employees to move on in frustration from the lack of support. Specifically, in niche global manufacturing industries such as science, acquiring experienced physicians can prove to be more difficult than paying smaller amounts of money for further training the employee and keeping them happy in their current position. In the U.S. for example, a standard physician can cost as much as US$150,000 to recruit 18McLaughlin, J., (2013). 6 Tips to Engage, Retain and Recruit Physicians. Becker’s Hospital Review [Online] Available: http://www.beckershospitalreview.com/hospital-physician-relationships/6-tips-to-engage-retain-and-recruit-physicians.html (accessed 5 March 2016) . Even when employees stay put in an organization for a considerable time, acquiring further talent will also entail similar issues. In certain regions, the population is aging, for example in Europe and Japan11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . This means that the global manufacturing industry is facing large scale retirements11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . This is particularly the case in the development of drugs, where a talent pool of physicians and engineers are desperately needed. Whilst recruiting from developing economies could be the answer, it will also drive up costs for those talents, as they become more in demand. This is, in turn, may hinder investment into further developments as more money is spent on acquiring new talent.

Human skill and talent is essential for innovation

In science and technology, human skill and talent are essential for innovation19UAE Government (2015). Science, Technology & Innovation Policy in the United Arab Emirates. UAE Government: p.25 [Online] Available: http://www.uaeinnovates.gov.ae/docs/default-source/pdfs/science-technology-and-innovation-policy-en.pdf (accessed 5 March 2016) , which underlines Schumpeter’s theory that human capital/entrepreneurship is essential in the involvement of effecting the innovation needed for economic development:

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“The economy does not grow into higher forms by itself”. “The history of every industry leads us back to men and to energetic will and activity”20Schumpeter, J. A. (1912). Theorie der Wirtschaftlichen Entwicklung (The Theory of Economic Development): p.75, Leipzig, Duncker und Humblot. .

(Schumpeter, 1912).

On the other hand, in neoclassical economics, human management in innovation are ignored, while science and technology are considered to be the forefather of innovation21Sanidas, E. (2005), Organizational Innovations and Economic Growth: Organosis and Growth of Firms, Sectors, and Countries: p.70, Cheltenham, UK and Northampton, USA, Edward Elgar. .

Whilst employment is rising globally in global manufacturing, it seems to decline in advanced economies due to the rising costs, compared to the developing world11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . This also means, that, it does not create better jobs in the developing world, as prices for labour will be pushed down by human capital from the developing economies11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . Therefore, economies such as the UK’s, are moving away from the typical manufacturing industry, and combining it with services “manu-services” 22Sissons, A., (2011) More than making things, A new future for manufacturing in a service economy. A Knowledge Economy programme report. The Work Foundation. [Online] Available: http://www.theworkfoundation.com/assets/docs/publications/284_more%20than%20making%20things.pdf (accessed 5 . With better investment into human capital, firms will be able to innovate and develop new technologies/products which are key drivers for competitiveness11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, .

However, human capital isn’t the only issue that can cause delays in the introduction of new technology. Albeit, predominantly innovation relies on human skill and knowledge23OECD (2011) Innovation relies on human skill and knowledge. The Organisation for Economic Co-operation and Development [Online] Available: http://www.oecd.org/innovation/inno/47164461.pdf (accessed 5 March 2016) . Transportation also plays a lesser role in the introduction of new products/technologies. The costs of transporting physical goods and the costs can determine how quickly new innovations are introduced into new markets. This is particularly the case with physical goods, as companies need to find new cost-effective ways of introducing innovations into a market. If a market is worthwhile and big enough to do business in, many set up production facilities in those low-cost regions to reduce costs11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . The software/service industry may be indeed at a higher advantage, as most of this can be transported via the internet and different online networks. Even many service-related offers from banks can now be accessed from anywhere in the world with an internet connection, greatly reducing the cost of delivery to the customer. This allows the service provider to further invest in training in its own staff. Unfortunately, this is the downside of physical manufacturing. The cost of moving goods from A to B can increase the overall cost of production and delivery.

Transport also plays a role in innovation

However, human capital isn’t the only issue that can cause delays in the introduction of new technology. Albeit, predominantly innovation relies on human skill and knowledge23OECD (2011) Innovation relies on human skill and knowledge. The Organisation for Economic Co-operation and Development [Online] Available: http://www.oecd.org/innovation/inno/47164461.pdf (accessed 5 March 2016) . Transportation also plays a lesser role in the introduction of new products/technologies. The costs of transporting physical goods and the costs can determine how quickly new innovations are introduced into new markets. This is particularly the case with physical goods, as companies need to find new cost-effective ways of introducing innovations into a market. If a market is worthwhile and big enough to do business in, many set up production facilities in those low-cost regions to reduce costs11Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, . The software/service industry may be indeed at a higher advantage, as most of this can be transported via the internet and different online networks. Even many service-related offers from banks can now be accessed from anywhere in the world with an internet connection, greatly reducing the cost of delivery to the customer. This allows the service provider to further invest in training in its own staff. Unfortunately, this is the downside of physical manufacturing. The cost of moving goods from A to B can increase the overall cost of production and delivery.

Summary

Nevertheless, evolutionary economics plays an irresolute role in the development and innovation of international markets. This article reviewed two areas where global manufacturing could face issues in the future, innovation has to constantly be at the forefront of economic development. Human capital is an essential part of innovation, as new ideas and developments stem from human input, whereas transportation is an essential vehicle in the delivery of physical products in global manufacturing, which also aides the delivery of new innovations to new regions.

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References
1 Courvisanos, J., & Mackenzie, S., (2014) "Innovation Economics and the role of the Innovative Entrepreneur in economic theory". Chercher, Reperer, Avancer - p.41
2 Cesaratto, S., (1999) Savings and economic growth in neoclassical theory. Cambridge Journal of Economics - p.774 [Online] Available: http://www.econ-pol.unisi.it/cesaratto/CJE99 (accessed 5 March 2016)
3 Beer, F. A., (1996) Evolutionary Paradigms in the Social Sciences. Special Issue, International Studies Quarterly 40, 3 (September 1996): pp. 315-433. [Online] Available: http://cfpm.org/jom-emit/1997/vol1/beer_fa.html(accessed 5 March 2016)
4 Denis, A. (2004). The hypostatization of the concept of equilibrium in neoclassical economics. City University, London [Online] Available: http://www.staff.city.ac.uk/andy.denis/research/equilibrium.htm (accessed 5 March 2016)
5 Freeman, C. (2002). "Continental, national, and sub-national innovation systems—complementarity and economic growth." Research Policy 31: 191-211.
6 Kim, L., and R.R. Nelson. (Eds.) (2000). Technology, Learning, and Innovation - Experiences of Newly Industrializing Economies. Cambridge University Press.
7 Scott, Peter. (2001). "Path Dependence and Britain's ‘Coal Wagon Problem'." Explorations in Economic History 38: 366-85
8 Nelson, R.R. and S. G. Winter. (1982). An Evolutionary Theory of Economic Change. Harvard University Press.
9 Ruttan, V.W. (2001). Technology, growth and development. An induced innovation perspective. Oxford University Press, New York and Oxford.
10 Dosi, G. (1988). "Sources, Procedures, and Microeconomic Effects of Innovation." Journal of Economic Literature 26(3): 112-1171.
11 Manyika, J., et al, (2012). Manufacturing in the future: The next era of global growth and innovation. McKinsey Global Institute. McKinsey & Company: p.26, p.30, p.55, p.63, p.69 & p.75, p.104, p.126, p.127
12 Simonetti, R., & Orsenigo, L., (2010) Book 2 – Doing Economics: People, Markets and Policy, Chapter 19 – ‘Managing the knowledge economy’, Milton Keynes, The Open University:p.119
13 Project Metal (2016), Metal Courses. [Online] Available: http://www.project-metal.co.uk/prices (accessed 5 March 2016)
14 University of the West of England (2016) Professional course Advanced Manufacturing. University of the West of England [Online] Available: http://courses.uwe.ac.uk/Z41000066/2016#entry (accessed 5 March 2016)
15 CGI Security (2012) Five pieces of advice for those new to the infosec industry, CGI Security [Online] Available: http://www.cgisecurity.com/2012/09/five-pieces-of-advice-for-those-new-to-the-infosec-industry.html (accessed 5 March 2016)
16 Eagle, M. (2016), The true cost of cutting your training budget. Thales Learning and Development [Online] Available: http://www.thales-ld.com/blog/true-cost-cutting-training-budget/ (accessed 5 March 2016)
17 Global Knowledge (2014) Almost Half of Temporary Employees Fund Their Own Training. Global Knowledge [Online] Available: http://blog.globalknowledge.co.uk/2014/03/21/almost-half-of-temporary-employees-fund-their-own-training/ (accessed 5 March 2016)
18 McLaughlin, J., (2013). 6 Tips to Engage, Retain and Recruit Physicians. Becker’s Hospital Review [Online] Available: http://www.beckershospitalreview.com/hospital-physician-relationships/6-tips-to-engage-retain-and-recruit-physicians.html (accessed 5 March 2016)
19 UAE Government (2015). Science, Technology & Innovation Policy in the United Arab Emirates. UAE Government: p.25 [Online] Available: http://www.uaeinnovates.gov.ae/docs/default-source/pdfs/science-technology-and-innovation-policy-en.pdf (accessed 5 March 2016)
20 Schumpeter, J. A. (1912). Theorie der Wirtschaftlichen Entwicklung (The Theory of Economic Development): p.75, Leipzig, Duncker und Humblot.
21 Sanidas, E. (2005), Organizational Innovations and Economic Growth: Organosis and Growth of Firms, Sectors, and Countries: p.70, Cheltenham, UK and Northampton, USA, Edward Elgar.
22 Sissons, A., (2011) More than making things, A new future for manufacturing in a service economy. A Knowledge Economy programme report. The Work Foundation. [Online] Available: http://www.theworkfoundation.com/assets/docs/publications/284_more%20than%20making%20things.pdf (accessed 5 March 2016)
23 OECD (2011) Innovation relies on human skill and knowledge. The Organisation for Economic Co-operation and Development [Online] Available: http://www.oecd.org/innovation/inno/47164461.pdf (accessed 5 March 2016)

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