Who make more profit in this case?
A Japanese electronic company designs an Audio/Video gadget and have it assembled in a developing country. The components of the gadget are come from Japan, Korea and Taiwan. The workers of the developing country mainly responsible for assembling the components and ship the final products to the USA. The Japanese firm chose this country because of its cheap labour and unenforced environmental regulations, Most people from this developing country keep telling me that they make more money from this product than the Japanese firm. How can that be?
Economics - 5 Answers
Random Answers, Critics, Comments, Opinions :
1 :
The gain of the economy is not one round. The main important thing is jobs.Jobs mean income for many.Based on the high MPC, the multiplier effect will function significantly.The host country might have to trade many things in order to get the cooperation project rolling, including tax holiday, infrastructure, exemption of immigration law etc. The Japanese company will earn money for sure. But it has to teach its workers to improve skilled, and be and think like Japanese, that means loyalty and efficient. That is the gains the host country is counting.
2 :
lower wages much lower executive compensation, lower cost of capital, less greed , that is about it i think. ergo my vote goes to the country other than japan
3 :
WHat you should be looking at is the 'value added' and the difference between cost and revenue; a cost to one is a revenue to another. Teh manufacturing industry basically turns raw materials or semi-finished goods (rm/sfg) into goods fit for consumption. The rm/sfg go through a series of processes that move them towards the finished goods state; and every stage of the production process value is being added to the rm/sfg; it is this value added that determines, to a large degree, who benefits most; it's basically who contributes most to the value added. In your example, the value added will be even clearer than if the product was manufactured only under one roof, since the value of imports and exports are clearly stated - at least should be for customs and excise purposes. When the components come from Japan/Korea/Taiwan, they cost something. The assembly and packing is added in the developing country, and the final product shipped to the USA. Where the value added is highest is an empirical question. It is obvious that assembly takes place in the developing nation because it is cheaper for the firm to do this that in Japan. However the cost needs to be defined. USA tariffs duties and quotas The USA often has quotas for products from different countries. And it is actually possible that the gadget gets into the USA at a preferential rate since it came from a developing country than if it had come directly from Japan. In such cases, there often is a minumum % of value added that needs to take place in the developing country before it can benefit from the preferential treatment. Hence it could be possible that the developing nation's Vaue Added is higher than Japan's. Add to this the fact that Japanese production often takes place in developing nation in factories run and managed by Japanese expatriates, you will understand that it is not unlikely. Environmental Regulations As you mentioned, the developing nation has unenforced environmental regulations. It is possible that the production process requires some discharge of pollutants either into the atmosphere or into the sewerage system. In Japan for example, there are quality controls on such effluents. The cost of cleaning the waste before it goes out of the factory can be prohibitive. Hence moving the 'pollution causing' part of production into the developing economy makes sense, given that the huge costs of pollution control are circumvented. The higher the costs of pollution control, the more likely it is for a larger part of value added to take place in the developing nation. Taxation It is possible that the taxation regime in the developing economy is very generous to the firm. SOme economies, in need of investment even offer fixed period tax holidays for the investor. Hence the Japanese firm would prefer to shift as much of value added to the developing economy so that they have tax free revenues rather than have to pay taxes on production processes that take place in Japan. The larget the taxation gap, the more likely is it that your friends are right. In sum, there are many reasons why it could be possible for the developing nation to be contributing more to the production process than the Japanese firm. ALso you should also remember that your friends see the Japanese firms expenses in the economy (wages, local taxes...) as money made by the developed nation, and the Japanese firm only looks at its profits. Hence the more competitive the market for the product, the lower are the margins, and the more likely it is that your friends are right.
4 :
Take motor bike. All the part except engine are make locally. Engine said Japanese only Japan can make which they sell at very high price to their sub-company at developing country. Therefore they shift all their profit back to Japan.
5 :
Let us say, the total cost of the item is $10. Assume that Japan sells the item to US at $12. So Japan makes profit of $2. Now, if they pay $3 to the labourers in the developing economy, definitely, they make more. Is it not? This can happen even when 3 or 4 countries are involved and only one country is involved. Suppose, X (of Japan) buys steel from Y of Japan at 6 $. He makes it into some component (say sheets) after spending $2 extra. So his total cost is $8. If he sells at $10, he makes a profit of $2. Let us look at Y. If he buys iron ore at $2, spends $1 and makes it into steel, his total cost is $3. His profit therefore is $3. This way, Y makes more than X, sitting in the same country. This journey of the product from iron ore to steel sheet is called a value chain. Many players will be involved in the value chain. The profits of each player will differ. It is not necessary that the final person will make more than the previous persons. I HOPE the above answers the question.
