Week 3: Contracting decision
Article 1: Why locate manufacturing in a high-cost country? A case study
of 35 production location decisions
1. Abstract
This paper is interested in the decision to locate final assembly specifically in a high-cost (high
GDP per capita. This paper focuses on the key linkages between production, market, supply
chain, and product development. These linkages are examined using three key concepts from
theories of organization design: formalization, specificity, and coupling.
2. Introduction
Difference between value chain & supply chain:
• Value chain consists of all the activities related to the ideation, development,
manufacture and sale of industrial products
• Supply chain in turn, encompasses those activities of the value chain that are directly
related to the manufacture of the product and its components; R&D is thus not
considered to be part of the supply chain
Decision to locate manufacturing:
• Traditional
• New recent phenomena:
• Western manufacturers are “bringing manufacturing back home”
• Not just economic attractiveness but also drivers of economic value: organizational and
technological interdependencies become relevant.
The first aim is to analyze their location decision. The second aim is to to examine the policy
implica tions of location decisions: When and why should policy makers be interested in
production location decisions?
3. Elaborating our understanding of location decisions
Three distint approaches of loaction decisions
Location perspective
Decisions about the geography of economic activity are guided by locational factors, such as
proximity to markets, access to knowledge, and the relative cost of production inputs.
, Organizational perspective
Decisions about the geography of economic activity are guided by organizational factors, such
as plant roles in the firm's network and inter-functional interdependencies
Temporal perspective (focus on time)
Decisions about the geography of economic activity are guided by temporal considerations.
3.1 Research concerns
• Many empirical research articles assume that managers consider locational factors
fully rationally
• Level of analysis: An individual firm may make hundreds of different location
decisions for hundreds of products
• Econometric regression: seldom addresses such tradeoffs, tensions, and conflicts
• Working with premises rather than facts.
Article 1: Why locate manufacturing in a high-cost country? A case study
of 35 production location decisions
1. Abstract
This paper is interested in the decision to locate final assembly specifically in a high-cost (high
GDP per capita. This paper focuses on the key linkages between production, market, supply
chain, and product development. These linkages are examined using three key concepts from
theories of organization design: formalization, specificity, and coupling.
2. Introduction
Difference between value chain & supply chain:
• Value chain consists of all the activities related to the ideation, development,
manufacture and sale of industrial products
• Supply chain in turn, encompasses those activities of the value chain that are directly
related to the manufacture of the product and its components; R&D is thus not
considered to be part of the supply chain
Decision to locate manufacturing:
• Traditional
• New recent phenomena:
• Western manufacturers are “bringing manufacturing back home”
• Not just economic attractiveness but also drivers of economic value: organizational and
technological interdependencies become relevant.
The first aim is to analyze their location decision. The second aim is to to examine the policy
implica tions of location decisions: When and why should policy makers be interested in
production location decisions?
3. Elaborating our understanding of location decisions
Three distint approaches of loaction decisions
Location perspective
Decisions about the geography of economic activity are guided by locational factors, such as
proximity to markets, access to knowledge, and the relative cost of production inputs.
, Organizational perspective
Decisions about the geography of economic activity are guided by organizational factors, such
as plant roles in the firm's network and inter-functional interdependencies
Temporal perspective (focus on time)
Decisions about the geography of economic activity are guided by temporal considerations.
3.1 Research concerns
• Many empirical research articles assume that managers consider locational factors
fully rationally
• Level of analysis: An individual firm may make hundreds of different location
decisions for hundreds of products
• Econometric regression: seldom addresses such tradeoffs, tensions, and conflicts
• Working with premises rather than facts.
