Automotive Industry Overview

Advanced Manufacturing Value-added Paradox (AMVAP) 

Economic Development Considerations for Policy-Makers

The path to economic prosperity for a nation is tied to the robustness of its manufacturing sector, and the ability to accumulate productive knowledge and skills resulting in innovative products that can be competitively traded in global markets. This premise was convincingly argued by Ricardo Hausmann and Cesar Hidalgo in the Atlas of Economic Complexity:³⁶ “Our most prosperous modern societies…hold a diversity of knowhow and…are able to recombine it to create a larger variety of smarter and better products.” The more advanced the product sets a nation can produce – and the more advanced the manufacturing processes employed – the greater the prosperity of the nation. 

For policy-makers keen on creating high-value jobs for its citizens, the answer then seems straightforward. Seek out and attract investment from the most advanced manufacturing organizations for the most advanced facilities possible. Indeed, competition to attract manufacturing investment and foreign direct investment between nations and between individual geographic regions within nations is increasing.³⁷ The economic benefit or value-added to the nation – and the specific geographic region – can be significant due to the strong multiplier effect of advanced manufacturing through the economy. 

But do the most advanced manufacturing facilities truly have greater economic benefit or value-added when the focus is on a geographic region versus the nation as a whole? Should local policy-makers seek out the most advanced research and production facilities to locate in their community, or would they be better off with medium- or low-tech manufacturing?

Based on preliminary analysis, the answer is at best complicated – and suggests that while advanced manufacturing at its highest level may be exactly what a nation must pursue to achieve greater prosperity, the local value-added of a geographic region may be better served with manufacturing that lends itself to the creation of geographic clusters of like companies and suppliers in close proximity.

Low-tech manufacturing is easily trumped in terms of value-added to a geographic region by medium- and high-tech manufacturing because of the higher level of skills required and wages paid, as well as the overall level of business and public investment made into the region, which is typically much greater. Additionally, the multiplier effect of medium- and high-tech manufacturing can be greater as robust supplier networks often co-locate in the region to further enable just-in-time (JIT) manufacturing processes, as in the automotive industry. 

But as the product becomes increasingly sophisticated and complex, requiring unique or specialized suppliers contributing complex subsystems and access to advanced global supply networks, as occurs in the aerospace industry, the close proximity of supplier to manufacturing or final assembly facility location often gives way. The critical requirement of access to specialized suppliers and unique global supply networks – not located in close geographic proximity – takes priority. The value-added to the geographic region may actually be less, if clusters of like companies and their supply base are not formed in the region as a result of the need to access highly specialized and advanced suppliers in other parts of the world. 

While a linear relationship was expected between the economic value-added for a region and a higher level of advanced manufacturing, the research instead found more of an “inverted U” parabola. This suggests that there is some level of optimal advanced manufacturing facility for a region, after which a diminishing benefit accrues. This most likely varies considerably, depending on a number of factors including the maturity, vitality and competitiveness of the region’s underlying manufacturing supply network and the degree to which similar manufacturing organizations and public infrastructure – such as research universities and technology centres – are present in the region.