South-Western College Publishing - Economics  
Your New Label to Read “Made in India”?
Topic

International Trade

Key Words Comparative Advantage and International Trade
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Reference ID: A145949503
News Story

Historically, Indian workers have stitched clothing and apparel in small facilities using outdated sewing machines as their only capital equipment. For decades, the Indian manufacturing sector has been hobbled by antiquated labor laws, creaking infrastructure and governmental red tape that thwarted any kind of manufacturing base. For the three-quarters of Indians with less than a middle-school education, few factories has meant few jobs.

Now, whispers of a new India, complete with modern factories and infrastructure, are bringing hope to many of India’s poor and uneducated labor class. Special economic zones—like the model that helped jump-start China’s export-led industrialization—are now spreading in India. Around a dozen new economic zones are already providing manufacturing jobs and at least 75 zones are in the works. Also, less regulation and more development of water and power infrastructure is creating a base for industrial and manufacturing development. Multinational companies like Bayerische Motoren Werke, General Motors, and Intel are seeking to take advantage of a relatively inexpensive workforce and an adequate supply of technically competent labor. These companies and others are snapping up real estate to build factories—further fueling industrial development. Scores of little-known companies are coming from places like South Korea and Italy to set up shop.

“After China, the next great manufacturing story is India—and companies are buying it, because otherwise they wouldn’t be buying property,” said B.B. Menon, who has sold property to BMW and others as COO of Mahindra World City, a special economic zone outside Madras.

India is not the only country planning new factories to produce and export products. Southeast Asian nations including Thailand, Vietnam, and Cambodia, also expect to see similar overseas investment in manufacturing. Even though India lags those countries in infrastructure, it has one big advantage— a population of more than a billion people.

In the vernacular of the economist, India has a comparative advantage in labor. Couple this with their relatively high technical skill level and India can produce some goods at a lower comparative cost than can many other countries. So, when India specializes in producing those products that they excel at producing, they can increase exports to the rest of the world and increase employment among their workers.

The products for which India will likely have a comparative advantage will include manufactured goods that require technical skill and low-cost labor. Not toys, but cellphones. Not hangers, but bras. Not patio furniture, but car parts. Not synthetic shoes, but leather ones.

Within the special economic zones, foreign managers say that whatever used to hold producers back is gone. “I don’t know why people say it was impossible earlier,” said Nokia’s Finnish operations manager Jukka Lehtela, who operates its one of these special zones. “I can prove them wrong.”

Questions
1.

Define comparative advantage.

2. Discuss how producing based on comparative advantage can increase domestic employment in India.
Source Anand Giridharadas, “India, Known for Outsourcing, Expands in Industry”, The New York Times Online, May 19, 2006.
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