11.4: Import Substitution Industrialization

Import Substitution Industrialization

Many countries or regions find that adhering to the principle of comparative advantage works poorly for their economies and people. Certainly, the manufacturing regions of America’s Rust Beltsuffered from the effects of comparative advantage as America increasingly embraced free-trade. Michael Moore’s well-known documentary Roger & Me is a tragic-comedy about the consequences of General Motors' decision to move manufacturing jobs from Michigan to Mexico. Governments in places unable or ill equipped to compete in a free-trade environment often turn to a variety of trade barriers to protect industries from outside competition. Import tariffs, import quotas, and safety measures are just a handful of strategies used by protectionists to reduce foreign competition. Many countries, particularly in Latin America, adopted a policy known as import substitution industrialization which severely limited the importation of manufactured goods. Generally, they tried to protect their so-called infant industries, at least until those industries grew enough to compete on the world stage.

Figure World Map - Most governments, including the United States, engage in protectionism despite repeated condemnations of the practice. Source: Wikimedia

The strategy had some local successes, especially in terms of encouraging the development of low-skill manufacturing (textiles, electronics, etc.). However, the small domestic markets of many of these countries made it difficult to develop capital intensive, heavy industries, like automobile manufacturing, even with trade protectionism policies. Import substitution policies were also discouraged by capitalist countries, like the United States, even though most economically developed countries, like the US, pursued similar protectionist policies during the 19th century. Many of the overt import substitution policies were abandoned by the 1990s, partly upon the insistence of the International Monetary Fund, a global finance organization that refused to lend money to governments that persisted with protectionist policies. Though officially frowned upon by nearly every industrialized country today, almost every government engages in a variety of clever protectionist practices designed to shield home industries from foreign competition. Breaking with the Republican Party, President Trump embraced numerous protectionist policies, raising tariffs on a variety of goods including washing machines, solar panels, steel, and aluminum. Imports from places like China, Mexico, and Korea fell as the prices of those goods rose for consumers. Not surprisingly, those countries retaliated by raising tariffs on American goods, especially agricultural products, shipped to those countries.

Land

The cost of land is another major consideration for those who want to build a factory. When the raw materials needed at a factory are cheap to transport or widely available (like water), then factory owners have more options in terms of location. Generally, that is not the case - locations vary wildly in terms of profitability. Some land is just too expensive for industrial purposes. Factories are rarely built near downtowns, for example, because cheaper land is available at the edges of cities where land is more plentiful. Factories remaining in crowded, inner-city neighborhoods also often suffer from spatial diseconomies of scale because freight (truck) access is difficult and slow. Taking delivery of materials and shipping finished goods over congested street networks and/or jammed freeways increases costs and reduces profits. Locations near uncrowded freeways are ideal because they permit both workers and materials to easily travel to and from a factory. If rail or water transport access is available, then transport options become even more cost effective.

Weber’s Location Model

Most manufacturers have complex sets of material and delivery costs to consider before locating a factory. Alfred Weber’s Least Cost Location Model provides site location analysts with a basic tool to evaluate several weighted input considerations. In the most basic version of the model, only transportation costs are considered. Therefore, the best place for a factory is closer to the input or output with the highest transport costs. In the example illustrated on the right, the factory (F1) is located nearest supplier 4 (S4) because transport costs are highest from that location. Should the cost of transportation to T1 (the town) increase significantly, the least cost location for F1 would move toward the top of the triangle. There are, of course, other factors worthy of consideration when siting a factory, but Weber’s model remains an important tool as people choose where to build factories today.

Figure Infographic. Weber's location triangle helps us understand that the least cost location for certain economic activities is dictated by the cost of transportation.

Bulk Reducing – Bulk Gaining

The nature of the specific manufacturing process also has implications for where some products are made. For example, if the finished product made by a factory is cheaper to ship than the raw materials, then it makes sense to manufacture the product close to the source of the raw materials. Factories that operate under this condition are called bulk reducing industries because the finished product is lighter, or cheaper to transport than the raw materials. Geographers, therefore, note that these products have a raw material orientation. The lumber industry is a great example. Logs are expensive to transport. It would be very inefficient to ship logs directly from the forest to your local Home Depot without cutting the logs into boards first. Instead, logs are trucked to sawmills built near the forests where trees are felled. Sawmills process logs (timber) into boards (lumber) that can be neatly stacked on a truck or train car that efficiently (cheaply) transports the lumber to market. As a bonus, portions of the log unusable as lumber, including sawdust and wood chips, that remain after milling can be used to make additional products like plywood and particleboard, which can also be stacked and efficiently shipped

Figure : Simsboro, LA. Abundant forest lands and the difficulty of efficiently transporting logs require sawmills to be placed as close to the forest (raw material) as possible.

The same logic that informs the location of lumber mills pushes other industries to do just the opposite. These are bulk gaining industries that have a market orientation. These sorts of industries make products that get heavier and/or more expensive to transport during the manufacturing process, and the main input is widely available. Coca-Cola is a good example. The “secret recipe” for Coke is kept in a vault near company headquarters in Atlanta, Georgia, where most of the world’s supply of concentrated Coca-Cola syrup is produced. Since the main ingredient in a bottle of Coke is water, which is available in all big cities, it makes no sense for Coca Cola to manufacture soda in Atlanta before shipping it to the rest of the world. Instead, Coca Cola ships only the concentrated syrup from Atlanta in large drums to thousands of bottling plants around the world, where local water, sweeteners, and carbonation are added to the syrup as the mixture is placed in cans/bottles just before the cans/bottles are sealed for shipment. Each bottling plant is franchised, and each franchise is awarded a specific geographic distribution region within which it has exclusive rights to manufacture and sell Coke products. Because each franchisee uses local water, Coke and Pepsi often taste different when you buy one in another town.

Figure : Rainier, OR - Rail cars containing logs and lumber wait delivery to the sawmill and lumber yards respectively. Milling operations co-locate here near forests and shipping opportunities to cut transport costs.

Workers employed in industries with significant location constraints often make higher wages than those working in footloose industries because industries with significant location constraints cannot profitably move production elsewhere in search of lower wages. Workers in locationally constrained industries engage in less wage competition than workers in footloose industries. For example, dockworkers at major ports can negotiate very high wages because of the great difficulty of relocating a port.

Figure : Dublin, Ireland. Guinness Stout is brewed exclusively in Dublin to preserve the taste. This business model is highly unusual for major beer companies who chose to bottle locally rather than ship globally.

Capital

The final factor of production and commonly considered by those making industrial site location decisions is capital, or, investment money. Investors are necessary for industrialization. Capital comes from investors, who may be wealthy individuals, groups (shareholders) or banks that specialize in investment capital. A special type of investor, known as a venture capitalist,specializes in making high-risk loans to startup companies in hopes of reaping great rewards if the fledgling company “makes it big”. Some regions have many venture capitalists and/or ordinary investors, and other regions do not. California has a great number of venture capitalists, and their willingness to take chances on new ideas and technologies are partly responsible for California’s robust tech industry.

Capital has other forms as well. Investments to upgrade existing factories, for example, may make workers more productive, and occasionally makes workers unnecessary when robotic machinery replaces workers. This sort of capital boosts productivity and profits, though it may eliminate jobs. Capital affects other less visible factors of production, and not all of it comes from companies who reap the rewards. Governments are a very important source of indirect capital for many companies. Because it is indirect, many Americans conveniently (or purposefully) overlook the role of government in the establishment, promotion, and maintenance of all sorts of businesses. Highways, airports, port facilities, universities, public schools, etc. are tax-funded investments that businesses use to make a profit. In other parts of the world, especially Asia, governments work directly with businesses to promote the interest of businesses.

Indirect government capital is the reason why factories do not always locate in the locations with the cheapest labor. In recent years, many US jobs have gone to China where wages are low. But that logic doesn’t compel factory owners to move to Zaire, Haiti or Guatemala where wages are even lower. Why? The answer is government capital. Efficient governments, like China’s, work very closely with companies to attract the investment necessary to build and equip factories. Governments in some developing countries may not have the resources needed to attract foreign investors. Many governments are also absurdly corrupt. So, even if factory owners wanted to locate where labor is cheapest, a variety of government-supplied infrastructure investments are often absent in the regions with very low wages. Industries need quality roads, bridges and port facilities for shipping and receiving. Factories need adequate electrical power, fast and reliable internet, and phone connections. Factories need educated workers, so governments must invest in their children, and not just the boys. Workers must be reasonably healthy, so countries with government-run health care systems are attractive to factory owners because workers are healthy, and factory owners do not have to pay for expensive health care for each worker.

Figure Philadelphia, PA - Miles of highways, streets, electrical lines are among the hundreds of government investments that benefit industry. Geographers see these relationships in images such as this.

Human capital is also necessary – and this may be less a factor of cash investments. Factory operators need workers who are culturally ready for the regimented grind of factory life. A very important component of industrialization appears to be the availability of a pool of qualified women to work in factory settings. This sits at the intersection of economic capital and cultural capital. If family, government and cultural systems discourage or prohibit women from engaging in wage labor, chances are poor that such locations will enter the modern world economy. In regions where conservative versions of Islam, Hinduism, and Christianity are dominant, numerous well-educated female workers can be scarce. Other cultural elements that contribute to the likelihood of industrialization are things like worker honesty, loyalty, and pliability, among others.

Motown vs. Small Town

Cultural, political and economic conditions have contributed to the redistribution of the industry within the United States as well. Automobile manufacturing, for example, was for many years, the most important US industry. Detroit, Michigan was the headquarters of automobile manufacturing giants Ford, General Motors and Chrysler. In the early years of the Automobile Age, Detroit had several geographic advantages over other cities that built cars. Detroit had plenty of industrial laborers and vast hardwood forests that supplied wood for car bodies and wheel spokes. They luckily also had some human capital as well. Entrepreneurial engineer types, particularly Ransom Olds (Oldsmobile) and Henry Ford, pioneered manufacturing strategies in Detroit that helped their companies build reliable, inexpensive cars for a mass market. Other companies soon emerged from the original companies and competition bred innovation.

Figure Tuscaloosa, AL - Daimler-Benz built a factory in Central Alabama where they could take advantage of a quality but placid workforce, access to domestic and overseas transportation networks and generous subsidies from local and state governments.

By the 1970s, Detroit’s dominance in the automotive market and a lack of competition within the industry had allowed the auto industry to become a three company oligopoly that bred industrial complacency. American cars in the 1970s were poorly built, overpriced, gas-guzzlers. After the price of gasoline skyrocketed, Japanese cars became popular. Japan had been making small cars that were fuel-efficient for many years. Honda and Toyota also had pioneered several manufacturing techniques and strategies that allowed them to make cars that were more reliable and cheaper than those that were built in Michigan.

A significant retooling of the American automobile industry occurred in the 1980s, and a key element of it was a spatial reorganization of the industry. American, Japanese and German auto companies all built new factories in the US, but no new factories were built in Detroit. Instead, auto factories closed in Michigan. The new factories were often built in small towns within about 200 miles of Cincinnati, Ohio because that area is the least-cost location for both the receipt of parts into factories and the shipment of new cars to American consumers(see figure above: Weber’s Triangle). BMW, VW, and Mercedes Benz built factories further south because more of their parts and customers were international, and being closer to ports was important. None of the post-1980 car factories were built in large cities. Automobile companies sought rural, or small-town employees because they sought workers who were anti-union, pliable, hardworking and happier with their pay in a low wage environment. Small town plants became the rule. Marysville, Ohio; Georgetown, Kentucky and Spartanburg, South Carolina got new factories, while cities like Detroit, Cleveland, and Buffalo lost them. Even the Chevy plant in Van Nuys, California was closed.

Figure : Map of automobile assembly plants in the Eastern United States. Tesla is the only car factory on the West Coast.

In the 1980s, American car manufacturers adopted another key Japanese business innovation called just in time delivery. Rather than building warehouses to store car parts (bumpers, tires, fenders) near main assembly plants, companies like Honda have the parts they plan to use assembling cars delivered daily thereby eliminating most warehousing jobs in the supply chain. Quality control is better with just-in-time delivery because if a supplier is sending defective parts the problem is evident immediately before thousands of defective parts are shipped to the main assembly plant. Suppliers to the main manufacturing plant, therefore, must be within one day’s drive of the main assembly point. As a result, in the 1980s, numerous parts factories were built in small-towns surrounding main assembly plants. Various sub-assembly plants compete to win contracts with the main manufacturer and drive them to seek low-cost, non-union labor. Generally, this puts downward pressure on wages, benefits; undermining gains made by union workers and others.

Just-in-time manufacturing was very different from the supply chain strategies used by most American factories in the 1970s. Consider That Ford’s River Rouge factory at one time was the largest integrated factory in the world, at over one-mile in length and over a mile wide. Iron ore was delivered to one side of the factory and finished Ford Mustangs came out the other. One hundred miles of railroad tracks inside the mill helped keep production rolling. Workers used bikes to pedal from one part of the factor to the other. Almost all who worked there were well-paid members of the United Auto Workers union.

However, the spatial economics of the plant were less efficient than just-in-time manufacturing, so Ford’s River Rouge plant was shut down in 2004, after nearly 80 years of operations.

Just-in-time production allows car companies to outsource a lot of the work once done by union workers to non-union plants scattered around the Midwest. Union workers lost leverage in their struggle for good benefits and higher wages. However, just-in-time delivery created opportunities for workers in some parts plants (e.g., brakes manufacturer) to interrupt the entire supply chain. Since no large inventory of any single part is kept at the main assembly plant, workers in a parts sub-assembly plant can go on strike, which forces not only the main assembly plant to stop but all the other parts suppliers must stop as well because suppliers do not produce parts without an order from the main plant. Workers in a unionized factory in Dayton, Ohio did just that in the mid-1990s, causing nearly all of the General Motors assembly plants, and numerous sub-assembly plants to shut down.