Part I

Development

  1. Discuss in detail, using one of the theories of development, how a region/country can go from a 'have not' to 'have' (or to use Jared Diamond's terminology - go from a country with 'no cargo' to one with 'lots of cargo').

To understand how a country or region goes from being a ‘have not’ to a ‘have’, it is essential to understand how development takes place in the world. While the Malthusian Population Theory directly establishes the link of a region’s growth with its primary resources and agricultural activity, there are multiple factors at play when it comes to overall regional growth. The Demographic Transition theory is more apt at describing the link between economic growth and population growth. As per this theory, over a period of time, human population does not grow at the same rate. Demographic transition indicates the shift of population growth from a high equilibrium point (high birth rate, high mortality rate) to a low equilibrium point (low birth rate, low death rate). As this transition takes place over four stages, the economy also transforms with the population transition.

There are predominantly three economic sectors in which the human population indulges to survive and produce/consume economic resources. These sectors are called:

  1.           i.          Primary Sector – Agriculture, mining, forestry, fishing, etc;
  2.         ii.          Secondary Sector – Manufacturing;
  3.       iii.          Tertiary Sector – Retail, services, etc.

At the high equilibrium point, majority of the population participates in primary economic sector activities, thereby producing ample food resources. This in turn encourages high birth rate as there are more resources to support the population. However, due to the lack of technological advancement, mortality rate is also very high in primary sector economies. But with time, mortality rate starts declining and the population size starts growing. Progressively, the population can start engaging in secondary economic activities like manufacturing. Technological advancements further restrict the mortality rate. But since a part of the population is engaging in secondary activities, the food production is adversely affected. Despite better farming practices, storage techniques and alternative methods of food production at one point, population may grow to a size where it can’t be supported by the current food resources. That is when population growth plateaus and birth rate also starts declining.

Lastly, with participation of the population in tertiary economic activities such as retail, trading and services, economy starts growing at an unprecedented rate. Even those areas where natural resources are limited can contribute to tertiary level economic activities. This further pushes the birth rate down as there are less and less people participating in agriculture. Eventually, population growth reaches a low equilibrium point where:

  • Birth rate and mortality rate are low;
  • Economic resources are sufficient to support the population;
  • The country/region becomes from a ‘have not’ to a ‘have’.

Trade

  1. Explain the two theories of trade, with examples from readings. What role does trade play in economic geography, i.e. why does it matter?

Trade plays a crucial role in economic geography, effectively influencing the rate of economic growth by the nature and extent of trade. This could be well understood with the help of two trade theories:

  1.       i.              Comparative advantage theory – this theory, proposed in late 18th century, stresses on the technical finesse and utilization of specialization as means of increasing trade of a country. Comparative advantage theory suggests that a country should concentrate on economic specialization by producing and trading goods which are more efficiently produced in the country. This economic specialization is generally given the technical know-how and the lower cost of production. Thus, when the entire economy specializes in the production of a resource which can be produced more efficiently and at a lower cost, a resource surplus can be reached. This surplus resource can then be traded with other countries at competitive prices, thereby providing the economy comparative advantage in trading over other economies. For example, Japanese economy is known for its technical advancements and the plethora of industries built around that comparative advantage. With better technological know-how and relatively efficient and low cost production of a huge capital (in terms of technically efficient factories, tools, machinery and equipment), Japanese economy can take ample comparative advantage by trading this capital with the outside world.
  2.     ii.              Factor endowment theory – this theory dictates that differences in efficiency among regions are dependent on resource endowment. While some regions have location advantage of being naturally well-endowed with particular resources, others may be naturally deficient in them. The easy availability of a particular resource encourages the economy to develop secondary and tertiary sector, utilizing that particular resource intensively. Surplus and easy accessibility of a natural resource results in low cost of production of capital that can be traded with the outside world. For example, Middle Eastern countries having abundantly available oil and its derivatives build their economies intensively around oil trading with the outside world.

As is evident from aforementioned trade theories, trade plays an important role in the development of economic geography. Even though it leads to a markedly unilateral economic growth, always proving advantageous for the exporting nation, it does make specific resources location access to the global market. The prospect of trade helps in directing an economy towards the development of:

  1. Production and utilization of naturally abundant resources;
  2. Cost and labor efficient practices for generating tradable capital;
  3. Mediums of accessibility and transportation with the world market.

Eventually, trade allows economies to put their geographies to advantage and compete for higher capital and returns in the world market leading to a faster economic growth.

Part II

Summary

The article describes Rolls Royce’s staffing and production strategies, distinguishing it markedly from other industry leaders. While other industry paragons are taking productions to low wage countries and multiplying production dynamically, Rolls is focusing on skilled labor and establishing efficient locations to open its production units. The Rolls production plant in Norway is the case discussed in this article, exemplifying the stress that the company pays on highly paid but skilled labor in an environment where cutting edge engineering can be developed. Also the focus of Rolls remains on producing technologically advanced products which are not cost effective, but cater to niche demands of its customers. Rolls focuses on engineering and product development; however it suffers from the shortage of skilled labor, making it a key issue in this article. Even though Rolls Royce is participating actively in developing talent pools by collaborating with universities and governments, it is becoming increasingly difficult for them to fill vacancies as candidates are finding better opportunities in finance area. This is affecting productivity of the company and also leading to rejection of clients due to unavailability of workforce.

Why is Rolls moving its plant to Norway?

With Rolls production strategy relying heavily on manufacturing efficiency and cutting edge engineering, a production plant in Norway allows Rolls to cater to some well paying niche markets. Norway, being a world leader in advanced shipbuilding gear offers cutting edge engineering options to Rolls Royce. Operating in brutal North Sea and Arctic conditions have made the Norway market highly demanding, and Norwegian shipping gear is of the highest quality, fitting the engineering needs of Rolls perfectly. Shipping clients of Rolls Royce pay premium for Norwegian gear as it reduces collisions, which allows faster loading and cutting costs. Systems fitted with Norwegian gear also allows supply vessels to pull much closer to oil rigs in rougher seas making Rolls decision of opening a production unit in Norway worthwhile.

Does Norway have a comparative advantage in manufacturing that requires highly-skilled workers? Does China have a comparative advantage in manufacturing that requires unskilled workers?

Norway offers engineering solutions to manufacturers which require highly skilled labor. This is due to the fact that much of the technology is machine intensive and labor is required to program machines into building products at micro-precision levels. Since it requires highly skilled workforce to work in such a technically evolved environment, Norway has a comparative advantage in manufacturing, requiring highly skilled labor. On the contrary, China offers labor intensive manufacturing solutions, which require relatively low skilled or unskilled workers; which China has in abundance. Manufacturers are known to outsource part of production to China which does not require technically advanced operations and also share the minimal required technical know-how with the Chinese manufacturers. While low cost and greater productivity is assured with the unskilled Chinese labor supply, cutting edge technical products cannot be a comparative advantage for them.

What are the intellectual property concerns of Rolls-Royce about locating production facilities in China? Are these concerns secondary to the workforce skills in the company's decisions about locating manufacturing facilities?

Rolls Royce has maintained a relatively neutral front on the ineffective protection of intellectual property rights in China. China is knows in the world market for not offering sufficient protection to intellectual property, and many companies have lost millions due to the leaked technical know-how in the Chinese market. While safeguarding trade secrets and production practices is of the essence to any manufacturing company, Rolls is more concerned about the quality of workforce that China can offer. Chinese comparative advantage lies in unskilled labor which is available in huge numbers. Though working on the strategy of productivity and manufacturing efficiency, Rolls cannot afford to choose an unskilled workforce. With the kind of engineering demands that clients of Rolls have, highly skilled labor is always required at Rolls’ production units. This makes China an undesirable place to locate a manufacturing facility for Rolls Royce.

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