# What factors allow manufacturing to succeed in a developed country?

I am undertaking some research regarding differences between manufacturing sectors across countries.

I have noted that China has taken a lot of the less skilled manufacturing work away from developed countries. It clearly has a comparative advantage with regard to unskilled labour. Generally, it will be difficult for developed countries to compete with the wages of the lesser developed countries.

This has resulted in the decline of manufacturing in some countries such as Australia (12.6% of GDP in 2000 to 6.7% of GDP in 2015) or the US (14.2% to 12.3%). Whereas other developed countries are still able to successfully manufacture. Germany for example has had ~22% of GDP from manufacturing for the last 15 years.

What factors allow manufacturing to succeed in a developed country?

I am expecting it to be related to:

• Regulation
• human capital
• size of domestic market
• trade deals

I am interested in references in particular.

## 2 Answers

A massive simplification would to look at developed (high wage) countries as experiencing two forces.

There is the offshoring pathway. Low skill manufacturing can be offshored to lower waged countries. Output in the home country decreases.

Then there is the technological pathway. Automation and innovations can work to take the bottom out of employment, saving on wage costs. Manufacturing will become increasingly dependent on a more skilled employee. Output in the home country increases.

The expected trend is one away from the low skill manufacturing (think clothing) towards more complex, bespoke products (think 3D printed prosthetics).

The overall environment is notably more complicated with government subsidies, global supply chains and trade deals among others things all being important.

Deloitte Access Economics have released a manufacturing competitiveness report which covers elements of this.

China is a an exceptional case.

1. China is the world biggest manufacturing hub. This mean all the upstream and downstream material can be found there. Any other country attempt to "race to the bottom" can hardly compete with such resources and cost advantages.
2. Manufacture in China is also undergo automation
3. There is massive number of China higher education graduate
4. A huge domestic market

OTH, Germany is yet another exceptional.

1. Manufacturing and support consumption mentality is part of Germany industrialisation culture. There is always incentive for Germans to source reasonable price material locally (kind of corporation synergy) than all out for the cheapest quote.
2. Unlike others country (although it is Germans that "invent" the modern university structure), Germany also enact technical school and technical university.
3. There is reputable consumer association (e.g. Stiftung Warentest) and quality assurance test entities (e.g. TuV) that keep track of consumer product quality.
4. Germany export lots of manufacturing machinery.

Perhaps you will like to checkout UK manufacturing GDP (1996 17% , 2016 10%). Contradict to many understanding, Germany industry regulation and minimum wages are not least stringent than UK.

Here is the world bank manufacturing vs GDP trends.

In fact, it is impossible to assess sustainability of "success manufacturing country". All the above factors are only simple reference. All the country socio-political will tell you contradict stories, all the success failure "economy paper reference" are mostly hindsight bias, as long as they are within 50 years time range.

Anyway, this is a not a answer for "success factor", merely "possible factor". Currently, there is not a single economist ideology able to bring a conclusive proven model. Most of the factors mentioned are not replicable due to variable in those details.

• If you claim that these factors are behind the success of manufacturing in China/Germany, please provide references. – Tobias Jan 9 '17 at 14:10
• @Tobias : TL;DR; There is no such reference for all this factor combine. I doubt there is any economist able to "create model" for such complex model. In addition, this is typical econ question that you cannot get any proven answer. – mootmoot Jan 9 '17 at 15:22
• For many economic questions there is a large body of worked out theory and quite convincing empirical evidence. Unless you provide some, your answer is a collection of baseless claims and should be heavily discounted. – Tobias Jan 9 '17 at 18:19
• @Tobias A hindsight on real world is really not quite convincing empirical evidence. Ironically, even hindsight paper backfire after extended period. – mootmoot Jan 9 '17 at 19:05
• Thank you for this answer. You do bring up some good points, particularly about German industrialisation culture. I agree with @Tobias that they need to be referenced. Any evidence adds value and without this it is just conjecture. – Jamzy Jan 9 '17 at 23:27