Drivers of Change in Manufacturing

The Transition Towards Added Value

Source: Future of Manufacturing Council, World Economic Forum.

The manufacturing sector is subject to transitions as economies develop, and so do their capabilities. Three stages can be identified with a growing level of added value and complexity, each characterized by different manufacturing strategies and policies.

  • Comparative advantages. In the earlier stages, the concerns are about what comparative advantages a country already has because of its factor endowments. Some may be permanent (e.g., resources), while others may be temporary (e.g., low-cost labor). This stage tends to be factor-driven and can be implemented with limited capital investments and relatively low capabilities. The share of manufacturing in the national GDP increases rapidly.
  • Competitiveness. Later, the focus moves on improving comparative advantages through strategies to promote competitiveness (technology, infrastructure, education, finance, etc.). For instance, investments in infrastructures such as ports, rail, and highways generally promote the competitiveness of the area they are taking place in. This stage tends to be efficiency-driven and requires higher levels of capital accumulation and skilled labor. As a national economy matures, the share of manufacturing in the GDP levels off and may start to decline with the development of services.
  • Capabilities. In an advanced stage, maintaining and improving competitiveness in light of declining comparative advantages facing global competition becomes a priority. Some nations may be developing their own comparative advantages and competitiveness, undermining the competitiveness of others, and inciting them to develop new forms of added value. This stage tends to be innovation-driven and requires a convergence of corporate, government, and social interests to develop capabilities that are investment and skill intensive. Usually, a decline in the GDP share of manufacturing is observed.

These stages are not necessarily sequential since a country can move directly to a higher stage. It can take place when a developing economy enables foreign investments that are able to bring in capabilities that otherwise would not be developed locally in the short or medium terms.