Understanding and using labor arbitrage to accelerate growth through exports

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But as its economy has matured, China has moved beyond assembling imported inputs into final products. It now produces many intermediate goods and conducts more R&D in its own domestic supply chains. In computers and electronics, for instance, Chinese companies are developing the kind of sophisticated smartphone chips that China once imported from advanced economies.

Global labour arbitrage also occurs in the instance of impoverished labourers moving to nations that pay a higher wage in most industries. Often an economically well off nation will totally eradicate its barriers to international trade, combining its own people with those from nations with a lower labour cost. This move tends to increase the supply of labor relative to capital in the prosperous nations and potentially decreases wages, according to the laws of supply and demand (of and for labor). However, this decrease can be offset by job creation due to skilled immigrants, as discussed in the last section. Throughout history, firms have sought to control labour costs, so the concept of labour arbitrage is not new. Historically, companies were located near their workforce and remained in those regions for long periods.

  1. Many investors like this type of trading because it provides liquidity and encourages market efficiency by identifying price discrepancies and fostering price convergence.
  2. A number of factors have caused this shift in how companies now engage in labor arbitrage, a shift that started following World War II and has continued into this century.
  3. In industrial plants, 5G can support augmented and virtual reality–based maintenance from remote locations, creating new service and data flows.
  4. It simply underscores the underappreciated role of services, which will be increasingly important for how companies and countries participate in global value chains and trade in the future.

Building more vertically integrated domestic industries enables China to capture more value added—and simultaneously bring jobs and economic development to its poorer inland provinces. If viewed this way, trade in services is already more valuable than trade in goods. This perspective would substantially shift the trade balance for some countries, most notably the United States. This exercise is not meant to argue for redefining national trade statistics. It simply underscores the underappreciated role of services, which will be increasingly important for how companies and countries participate in global value chains and trade in the future. More recently, trade intensity (that is, the ratio of gross exports to gross output) in almost all goods-producing value chains has fallen.

Moreover, companies today can more easily opt to engage in labor arbitrage for pieces of their production, engaging contingent workers and other kinds of workers for different components of their products or services. Labor arbitrage is the practice of searching for and then using the lowest-cost workforce to produce products or goods. The term labor arbitrage is limited in its daily use; it is more likely to be used in academic papers and business-consulting reports than in everyday business discussions, although the practice itself is common and widespread. Even if your company does not adjust salaries based on cost of living, you could still save money when hiring remote workers, such as if that enables you to limit office space rent. Opening up your employee search to more areas can also expand your talent pool and help you find more diverse candidates.

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For every shirt you export, whatever you earn over above the 30% trade-able portion of costs, becomes an incremental earning for the economy. True the surplus is captured by the exporter in the first instance, https://1investing.in/ but it is something “earned” by the unutilized capacity of non-trade-able portion of the economy. A change in value of the Dollar does not alter the 2 basic things at the core of the economy.

Moreover, the share of trade based on labor-cost arbitrage has been declining in some value chains, especially labor-intensive goods manufacturing (where it dropped from 55 percent in 2005 to 43 percent in 2017). In the future, however, automation and AI may amplify this trend, transforming labor-intensive manufacturing into capital-intensive manufacturing. This shift will have important implications for how low-income countries participate in global value chains. A dramatic increase in commodity prices could stall global economic recovery and also be the catalyst for emerging markets to revalue their currencies upward against the dollar and euro to reduce the high cost of imported commodities. Even the prospect of such a revaluation could cause large dollar and euro asset holders, such as sovereign-wealth funds, to accelerate the diversification of their holdings away from those currencies into foreign direct investment in emerging markets. We usually think of the global economy in terms of outputs such as cars and packaged goods.

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In essence, 1% of the rooms (15,692/1,479,179) shows up on Marriott’s balance sheet. The rest show up on the books of its affiliates, franchisees or on the balance sheets of lodging REITs. I hope to cover the economics and reporting structures of lodging REITs in my next column. Nearshoring – Relocating a business function abroad to a low-cost neighbouring country. To conduct the research, we examined the Thomson Financial database of all publicly traded venture-backed companies founded since 1970.

Navigating its complexities, however, requires a well-thought-out strategy, a suite of modern tools, and the wisdom to embrace cultural diversity. When you hire from other countries (or even other parts of your country), you’re expanding the skill level at labor cost arbitrage meaning your company. No matter what kind of company you have, you can take advantage of labor arbitrage to lower your costs and improve your company’s bottom line. Employers that don’t allow some remote work are likely to lose out on top-talent knowledge workers.

But overall, China is gradually rebalancing toward more domestic consumption. In many value chains, value creation is shifting to upstream activities, such as R&D and design, and to downstream activities, such as distribution, marketing, and after-sales services. The share of value generated by the actual production of goods is declining (in part because offshoring has lowered the price of many goods). This trend is pronounced in pharmaceuticals and consumer electronics, which have seen the rise of “virtual manufacturing” companies that focus on developing goods and outsource actual production to contract manufacturers. In 2017, gross trade in services totaled $5.1 trillion, a figure dwarfed by the $17.3 trillion global goods trade.

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For example, in the 20th century, some US-based firms began outsourcing their manufacturing operations to Mexico. Service processes can also be automated by artificial intelligence (AI) and virtual agents. The addition of machine learning to these virtual assistants means they can perform a growing range of tasks. Companies in advanced economies are already automating some customer support services rather than offshoring them. This could reduce the $160 billion global market for business process outsourcing (BPO), now one of the most heavily traded service sectors.

It seems quite plausible that we could have a repeat of the commodity price movements of 2008 in late 2010 and 2011, even if developed-world GDP growth is only modest. Ramping up production in China, India, and other countries to capture the economic returns from the increasing supply of high-quality, productive labor requires more commodities to produce more output. Since the global law of one price applies to commodities, this means that, with all else held equal, producers in China and India end up paying more than they would if those countries’ currencies were stronger. Simply put, commodity prices are too high in emerging-market countries and too low in developed-world countries. To some extent, the rebalancing of global economic activity from developed to emerging markets simply reflects economic laws of gravity. In a world where ideas can flow freely and countries are at different stages in adopting modern modes of production, communication, and distribution, less developed nations should grow more rapidly than their counterparts in the West as they catch up.

And secondly, the value to price ratio of the local priced portion of the economy. In fact, though there is such a thing called labor arbitrage, and it is important, the success of SSEs owes more to elimination of rent seeking within their value chain, rather than labor arbitrage alone. Notice it is just one firm recruiting people, training people, find jobs overseas, and then executing the contract.

Yet the productivity of Chinese and Indian labor is rising rapidly and, in specialized areas (such as high-tech assembly in China or software development in India), may equal or exceed the productivity of workers in wealthier nations. Given such differences, more and more companies around the world are locating production in emerging markets. In conclusion, labor arbitrage can be a powerful tool for companies looking to optimize cost efficiency and maximize profits in global operations. However, it is important to carefully consider the potential legal, ethical, economic, reputational, and cultural impacts before engaging in this practice.

The growing trend of globalization has an impact on businesses as well as the lives of consumers, business owners and workers. One of the effects of globalization is labor arbitrage, which refers to the movement of workers or jobs because of changing economic conditions. While some labor arbitrage is a natural part of a complex global economy, too much can cause unintended social, political and economic problems.

These nations continue to deepen their participation in global flows of goods, services, finance, people, and data. Labor arbitrage is a powerful tool for businesses looking to optimize cost efficiency and maximize profits in global operations. However, it is important to understand the potential legal, ethical, economic, and reputational impacts before pursuing this strategy.