Local vs. Global Production

The article myself and Kristiana will be talking about entitled “Local vs. Global Location of Firms and Industries”, deals with how a firm in a marketplace determines where to produce their product. In world where distance is becoming less and less of an issue due to technological advancements, firms are now more seriously considering producing their products globally as opposed to locally.  Many economists have tried to provide a permanent solution to whether a firm should outsource its production or not, but due to the complexity of the matter we may only attempt to clarify and explain key tendencies.

The article starts with the simplest idea for why a given firm would choose to produce elsewhere. This most basic rationale states that if the total production cost of producing locally exceeds the costs of producing globally, then the firm will choose to produce outside of its region.  We see this today with many large trans-national corporations like Nike for example, who have determined that the costs saved in areas like wages and rent outweigh the costs of import taxes and shipping. The article also covers the idea of clusters and how they work. A cluster is a large group and a system of functionally related firms, knowledge, skills and specialized institutions in a particular geographical location. When a certain cluster is sufficiently full, a firm will then choose to move to a new area where a new cluster can be formed.

We were exposed to a perfect example of this dilemma in our visit to the Villa Della Torre vineyard. As producers of high class wine, they possess an absolute advantage in their location for their product. So as it makes perfect sense for them to produce their wine locally, they face the decision of where to sell it. Because Italy is a cluster for high end wines, from a business point of view it makes sense for them to export to places that highly value their product but lack the ability to produce it themselves. This globalization of their product relies heavily on pitching it as a local production. Although they are selling to a global market their main selling point is that sense of local authentic Italian wine.     

-Hayden McCartney