Economic growth is one of the most important agenda in most of the countries plan of things to do. But economic growth in a global perspective is defined by export and import.
Mechanics of trade
Some countries made petroleum, others made sugar. When they realised that they could make use of each others things then they started exchanging stuff like maybe a barrel of oil for a sac of sugar.
Gradually, things got complicated when their became hundreds of countries and hundreds of things to trade with and for. Then they created a concept of international market, a place with a commonly agreed upon item to exchange for everything. Like a gold bar of a fixed mass may get you a barrel of oil or a sac of sugar or a few litres of mustard oil.
Gradually things evolved further, scientific and technological advancements made it possible to make things more and more efficient. As a result, some countries can grow X kg of sugarcane per acre while others may grow 5X given their technological prowess. Note that earlier this was just a function of climate and soil conditions but now a new dimension, scientific prowess got added too.
Now, economic growth is essentially defined by the increase in total income of residents or in total value of products and services produced. Breaking this down, economic value essentially is how much you make. If you earn â‚ą10lacs then you add 10lacs to economy measured by GNI/GDP.
Two ways of value creation
We trade globally, so, when we sale things to other nations, i.e. export, we give our product/service to them in return of a cost, i.e. some economic value. And when we buy things from other nations, i.e. import, we take their product/service to them in return of a cost, i.e. some economic value. So, by exporting, we earn money and by importing, we spend money. It’s simple!
There are two ways the value is being created in the entire scheme of things (even more important with science and technology as relevant as they are today):
Production: Creating products and services to provide to people i.e. a user-driven approach. e.g. firms or nations that make things, take Foxconn, a China-based firm specialised in manufacturing electronic equipments.
Innovation: Creating new technologies, inherently making more useful things or production easier. i.e. a growth-driven approach, note that this is not economic growth but techno-scientific growth. e.g. firms or nations that decide what to make and how to make, take Apple, a US-based firm specialised in designing electronic equipments.
And these two co-exist side-by-side.
Apple designs iPhones, one of the most sought after phones in the market for around a decade now and Foxconn manufactures them for Apple.
In economic scheme of things, Apple experiments, designs and tests technologies in US and successively decides the final design to manufacture.
Apple gives contracts to Foxconn to manufacture these devices and Apple buys it from them and sells them worldwide.
What Apple is doing is essentially a manifestation of the entire process described above.
Apple designed a product, no value till now.
Next step, they get it manufactured in China and other countries and buy it from them, here Apple spends some value and Foxconn gains that value, i.e. US loses some value and China gains some value;
Next step, Apple sells those devices across the world, let’s say in India, here Indian people spend some value and Apple gains that value, i.e. India loses some value and US gains some value.
Where’s the money?
Who all made money in this entire process?
US and Apple gained some value and lost some value. To make it profitable the value they gained must be more than what they spent.
Foxconn and China on the other hand made some value by building the iPhone, for which they used some of the raw materials they had or got from other nations and the workforce they have, that raw materials and the workforce also cost some value. For Foxconn and China to be profitable the value they gained must be more than what they spent on raw materials and the workforce.
Indian people spent some value on those iPhones but they didn’t earn anything from it, let’s say if that iPhone could be used to create value by say being used as something needed for a business, if over the time this value creation can exceed the value spent on iPhones, then Indians and India also made a profit.
Interestingly, everyone can make a profit here.
US and Apple gained their profit mainly due to strong expertise in their innovation pipeline.
China and Foxconn gained their profits mainly due to strong expertise in their production pipeline.
India and Indians gained their profits by using the product acquired in creating value.
This brings us to a very interesting insight, for continued economic growth, we need to critically analyse and incorporate best combination of strategies and decisions to maximise our potential for value creation.
Choosing production vs innovation
It’s a very subjective choice depending on where you’re in both time and space. Today, it’s smart to do R&D as compared to having a production line in US (maybe it’s not in India). Why?
What do we need for R&D?
Experts of specific domains that are most easily available in US and it would be relatively difficult to gather a group of experts on most of the scientific domains in India than in the US.
Some of the experts may relocate to India from US but in some later stage we might need some other domain experts to collaborate with which would also be relatively easier in US.
If a firm is focused on R&D, it makes more sense in general for them to have R&D centres in US and not India.
What do we need for production?
A skilled/semi-skilled workforce and raw materials.
Workforce is not a problem in developing and heavily populated countries since in US due to sustained growth and less population essentially meaning smaller workforce, the wages are higher on an average as compared to India or China where wages are low and more population meaning larger workforce.
Then comes the raw materials, on this parameter countries vary a lot, China and India might have easier and affordable access to raw materials for different products.
If a firm is focused on producing electronic equipments or sugar, it makes more sense in general for them to have their production line in China and India respectively and not in the US.