Economic Development, Education and Transnational Corporations

Mark Hanson

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781135984359
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

This book focuses on the questions of: why do some economically disadvantaged nations develop significantly faster than others, and what roles do their educational systems play? In the early 1960s Mexico and South Korea were both equally underdeveloped agrarian societies. Since that time, the development strategies pursued by each country resulted

1 Knowledge transfer and national development

When asked to identify the nations that have gone through an accelerated rate of development since the 1960s, most people point to South Korea, Singapore, Hong Kong, Taiwan, Ireland and most recently, China. Significantly, all these newly industrialized nations had at least one common element at the core of their development strategies – the aggressive pursuit and acquisition of knowledge from industrialized nations. However, the offshoring of manufacturing plants and outsourcing of jobs to less developed countries (LDCs) as part of the globalization process is at the center of many raging controversies, particularly when cast in the context of winners and losers.

The familiar and heated arguments in the United States tend to pit those who emphasize that the United States has already outsourced 2.3 million jobs (and counting) to the cheap labor of LDCs against those who argue that the world’s economies are integrating and industrialized nations cannot build walls around their economies or societies. An important question typically forgotten in this war of words is: what are the impacts on the LDCs that are the recipients of these foreign-owned industries?

Globalization and knowledge migration

The primary argument of this book is that when offshored to an LDC, the foreign, higher-tech transnational corporations (TNCs) knowingly or unknowingly function like educational systems transferring knowledge to local institutions that can accelerate (under certain circumstances) that country up the learning and development curves. By knowledge I refer to, for example, management techniques, innovative technology, technical expertise, job skills, production methods and research and development (R&D) capabilities. The critical local institutions include universities, public schools, vocational training institutions, domestic industries and business centers. In other words, through this type of knowledge transfer, LDCs can (and sometimes do) learn the business, skills and processes of industrialization.

However, the acquisition of foreign industrial knowledge by an LDC is not automatic. Rather, it must be pursued consciously and tenaciously and integrated into a strategy of national development that is supported by the collaborative actions of government, educational institutions and domestic industry. Based on government perceptions and policies, some LDCs clearly pursue such knowledge and integrate it into development strategies while others remain blind to the opportunities presented to them.

But let there be no mistake. TNCs are not outsourcing plants and jobs to LDCs either for philanthropic reasons or to enhance the social good. They are outsourcing only to build their “bottom lines.” That said, whether or not they are aware of it, these same TNCs are playing a major role in the distribution of intellectual capital that is the DNA of both growth and development in the world’s new economy. The Organization for Economic Corporation and Development (OECD) points out that “fostering the production and diffusion of scientific and technical knowledge has thus become crucial to ensuring the sustainable growth of national economies in a context of increased competition and globalization and the transition to a more knowledge-based economy.”¹

As nations and organizations within them accumulate knowledge, they build a base of intellectual capital which, if managed properly in this increasingly inter-connected world of ours, becomes what Meso and Smith call “the only true strategic asset.”² For example, not long ago the author purchased a computer where the processor was made in Hong Kong, the monitor in Taiwan, the keyboard and mouse in China, the hard drive and multiple other parts from the four corners of the Earth, all brought to Mexico for assembly and packaging and finally trucked across the border and delivered to his house by United Parcel Service. At the core of this multiplex display of portability was the strategic asset of knowledge as exercised in its many forms.³

In this new millennium, Peter Drucker observes that knowledge and knowledge management have joined the traditional formulas of land, labor and capital as the keys to national development with knowledge as “the primary resource for individuals and for the economy overall. Land, labor and capital – the economist’s traditional factors of production do not disappear, but they become secondary. They can be obtained, and obtained easily, provided there is specialized knowledge.”⁴ As a development strategy, numerous LDCs (often called Third World countries) are competing with one another to make investment on their territory as easy and attractive as possible. Increasingly, this is done by providing incentives (e.g. tax holidays, free trade, free land, low cost electricity, no unions) in export processing zones (EPZs) to attract TNCs seeking cheap labor and easy access to world markets. Approximately 3,000 EPZs (up from 500 in 1995) have been established in 116 countries (up from 73 in 1995) employing 43 million workers (30 million in China alone).⁵

The foreign-owned manufacturing plants that are established in LDCs are known by many names, but in Mexico they are called “maquiladoras.” The term comes from Spanish history where a miller of grain would keep a percentage of the product as the cost of his labor. The maquiladora, frequently shortened to “maquila,” refers to assembly plants (either foreign owned or Mexican) that take advantage of preferential tariff laws that allow for the temporary tax-free import of raw materials and machinery into Mexico that are included in the assembly of products (e.g. shirts, computers, automobile engines) for final export out of the country.⁶ When the assembled products return to the United States, the American government assesses only an import tax on the value-added (mostly labor) of the work done in Mexico. While maquiladoras are frequently referred to as an industry, in reality they are not. The only common characteristic they have shared historically is the legal framework that provided advantage and promoted inexpensive importing and exporting of goods and services.⁷

A few countries have been skilled and vigorous in establishing and pursuing specific national development strategies that successfully lifted them from conditions of economic depravation to the status of newly industrialized nations. The so-called “forced march” or “compressed development” path toward national industrialization followed by the four Asian Tigers, namely Hong Kong, Singapore, Taiwan and South Korea, is now the object of intense pursuit by the biggest tiger of them all – China.

However, there is a serious and continuing debate regarding the good and bad aspects of this global assembly and forced march industrialization path that frequently pits environmentalists, labor organizations and women’s groups against business groups and government agencies. The former argue passionately that these multinational corporations not only pirate industries and jobs away from communities and families at home but are predatory by nature taking advantage of the weaknesses of nations vulnerable to exploitation of their environments, greedy political systems, young and inexperienced female workers and impoverished economic systems.

Supporters of offshoring shift the unit of analysis from the individual worker to the nation. They argue forcefully that offshoring is essential if the country is to remain competitive in world markets. They stress that as production moves off shore, the TNCs earn greater profits that can be reinvested in business and industry back home; that in the United States, the national unemployment rate in 2006 was a very low 4.6 percent (4.1 percent in manufacturing); that protecting low skill jobs is a drag on an innovative economy; and that the benefits of low inflation, cheaper goods and jobs created back home far outweigh the costs.⁸

Offshoring supporters also stress that in the LDCs the wages received by young women are higher than those paid domestic industries; that no country must accept foreign manufacturing plants against its will; that millions (or even billions) of dollars are pumped by these plants into the local economies of poor nations; and that valuable work-related skills are acquired by the local labor force. Outsourcing and/or relocation from wealthy to poor regions, they argue, is nature’s way and the wounds heal. New England hardly laments the departure of its textile mills or shoe factories decades ago to lower cost plants in the South as the abandoned buildings were quickly filled with the incoming plastics industry. The cycle of technological advancement continued.

While recognizing that both sides of argument make powerful points, as an academic this author’s role is not to advocate one position or the other. Rather, his task is to describe and explain what happens and why and leave the advocacy to others.

Globalization: economic imbalances and opportunities

Just as the earth’s rotation and patterns of prevailing winds are the primal forces that drive the ocean’s currents, there are primal forces propelling the offshoring of manufacturing plants and jobs from wealthy to low income nations of the world.⁹ These forces, although certainly not new in themselves, are the enormous unequal distribution of the world’s wealth and the profit motive of free trade capitalism. What is new in this picture is the willingness of nations to lower their tariff and non-tariff barriers and expose their previously protected economies to the uncertainties of the international market place. This point is underscored by the fact that the share of world trade (exports and imports) in the world’s gross domestic product (GDP) increased from 28 percent in 1970 to 31 percent in 1980, and to 54 percent in 2002.¹⁰ Patricia Wilson suggests why.

The age of ideology is over. Confrontation and conflict are too costly for the world to sustain. Globalization is bringing down political borders, ideological borders, economic borders, and cultural borders. More and more countries try to compete in the global market, opening their borders to the ebbs and flows of international capital, often at great social cost of lowering incomes and increasing inequality.¹¹

How unequal is the wealth of the world distributed? Some 6.2 billion people live on this planet. Of that number, 40 percent receive an average annual income of US$430 dollars, 44 percent receive $1,840, and 16 percent $26,300. Consequently, 84 percent of the world’s population lives in developing countries. At the turn of the 21st century, over 20 percent of the LDC population lived on less than $1 a day; of that number 400 million alone lived in sub-Saharan Africa. To put the issue of poverty in perspective, in Europe the average subsidy of a cow per day is US$2.50, and in Japan nearly $7.00.¹²

The world gross national product (GNP) in 2002 was US$31.5 trillion. Where can the largest shares of this world economic pie be found? Over half goes to three countries: the United States, 32 percent; Japan, 14 percent; and Germany, 6 percent. The six wealthiest countries (out of some 200 total) have 11 percent of the world population but receive 64 percent of the world GNP.¹³ As wealth increases, so does the wage scale, as noted in Table 1.1.

The savings in moving jobs from an industrialized nation to a low-cost country are substantial. A Mexican business journal reports that

in labor alone, a U.S. company may save $40,000 per direct labor employee per year considering a fully loaded wage rate of $20 per hour in the U.S. versus $2 per hour in a low-cost country. A 300-worker operation may potentially bring $12 million in savings per year. This simple math explains why manufacturers must go global if they wish to remain in business.¹⁴

Table 1.1 Four tiers of wages

However, for a nation with serious aspirations toward development, the immediate lack of a greater share of the economic pie is not its greatest deficit. In this age of globalization and international trade, the greatest deficit is the lack of manufacturing knowledge and the capacity to put it to work. As illustrations, this book discusses the story of two poor and disarrayed nations, the United States of Mexico (to be referred to as Mexico) and the Republic of Korea (to be referred to as South Korea) that, in the early 1960s, began seeking the means to move up the paths of economic growth and development. The outcomes differed significantly, and an objective of this book is to explain why.

A reversal of economic fortunes: South Korea and Mexico

For much of the early twentieth century, the political, economic and educational history of Korea was wracked with turbulence and tragedy. At the end of World War II, 36 years of Japanese colonial rule was finally over, but the residue of inflicted damage was everywhere. The occupation policy had limited Koreans primarily to elementary school, and when it ended only 2 percent of those over the age of 14 had completed secondary school. The majority of the 25 million population was illiterate; the impoverished educational system had focused primarily on agriculture thus producing few workers with any degree of technological sophistication, and the only manufacturing experience had been in firms under control of the Japanese.

The Korean Civil War (1950–1953) that quickly followed brought a major migration from north to south further compounding the social and institutional calamities of a nation now divided into two parts. By 1954, still trying to extract itself from the rubble of war, in South Korea the public expenditure on educa- tion as a percent of national income was a disastrous 0.1 percent, considerably behind nations as Burma, 2.5 percent; India, 1.9 percent; Iraq, 2.4 percent; Philippines, 2.4 percent; Japan, 6.1 percent; the United States, 4 percent; and even Mexico, 1 percent. Of the nation’s youth, only 54 percent of elementary and 36 percent of secondary school-age students were enrolled.¹⁵

While Mexico fortunately had no recent wars to contend with, leading up to the 1960s the nation had its own collection of educational and economic problems. The 2,000-mile northern border had always been a problem for Mexico as the families streaming up from the interior overwhelmed the capacity of the municipalities to provide jobs as well as education, health, housing and other forms of basic services. Most efforts, largely unsuccessful, toward improving the weak border situation revolved around establishing programs to attract American tourists and commuters looking for cheap retail goods. With a population of 30 million in the mid-1950s, the illiteracy rate approached 40 percent. Only 45 percent of primary and 6 percent of secondary school-age students were enrolled in school.¹⁶ The traditional unemployment problem became acute on the border when the American government in 1964 terminated the Braceros program, leaving around 200,000 field workers unemployed who had previously followed the crops in the United States during the picking season.

In the 1960s, the world began to change on many levels. Powerful forces began opening doors for transferring knowledge from the industrialized to the developing world. The heightening cold war fashioned international alliances that delivered technical and economic aid to LDC nations, university students from around the world began to stream to centers of learning in industrialized nations, women entered the work place in mass learning new skills, and the emerging computer, transportation and communication technologies made working across borders almost as easy as working across town. Significantly, foreign direct investment (FDI) and job outsourcing began to flow from wealthy nations to poor nations as the former sought locations for inexpensive plants to assemble finished goods at corresponding low cost labor. Senior Me...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Illustrations
• About the Author
• Preface
• Acknowledgments
• Glossary
• 1 Knowledge Transfer and National Development
• 2 Stages of National Development
• 3 National Strategies of Knowledge Transfer
• 4 Educational Reform and National Development
• 5 Conclusions, Analysis and Lessons Learned
• Notes
• Bibliography