Question

3. A globalized production process has the following four stages, shown with the ratio of highly skilled (human capital) to low skilled labor (HIL) in each activity A) Research and development; product design B) Assembly of basic parts and components C) Transformation of parts and components into semi-finished products D) Final assembly, packaging, distribution, and sales of finished goods 1/4 1/2 3/4 The two countries are South Korea and Vietnam; you can assume that Vietnam is the low wage country for L-workers and will specialize in the lowest H/L activities. Rank the four activities on the "value chain" line like the one below, ordered from lowest to highest HIL. a. Lowest HIL Highest HIL b. Suppose that initially only the lowest HIL activity is performed in Vietnam, while the other three are performed in Korea. Show how the value chain is "sliced" (where is the dividing line between Vietnamese and Korean production?) and calculate the average HIL ratios in Korea and Vietnam. NOTE: You can assume that equal amounts of labor are used in each stage, so that you can take simple averages of the HIL ratios to get average HIL for each country c. Now suppose that, as a result of investment by Korean firms in Vietnam, one more activ- ity (stage of production) is "offshored" (relocated from Korea to Vietnam). How does the "slicing" of the value chain change? Show how the dividing line shifts. What happens to the average HIL ratio in each country? Calculate and explain What is the effect of this offshoring on the relative wages of high-skilled workers (human capital), WH/Wi in each country? Analyze using relative supply and demand graphs (as in chapter 7 of Feenstra-Taylor and the class PowerPoint presentation). [HINT: You may assume that the numbers you calculated reflect relative demand, (HIL), so show how demand curve shifts and how that affects the equilibrium relative wage in both countries.] What would happen if Vietnam raises the educational level of its labor force, so that the relative supply of highly skilled workers (HIL) increases? Would you necessarily see the same result as in part c? Why or why not? (Answer qualitatively using a graph). d. e.

Answer 1

The value chain line will be as follows:

- Vietnam - Final assembly, packaging, distribution and sale of the finished goods. (Lowest)

- Vietnam - Assembly of basic parts and components.

- Vietnam - Transformation of parts and components into semi finished products.

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- Korea - Research and development; product design. (Highest)

Based on the assumption that Vietnam is low skill labor one can assign the assembly line to this country and research and Development can be kept with Korea.

Having similar production activity in both the countries will increase the cost of production.

Once the product is developed and designed the production can be off-shored to Vietnam.

The below graph will show effects of offshoring from one country to the other. It will affect the supply of skilled and unskilled labour:

W. 3 W- W, プー-. Quantity of Low-skill Labor Quantity of High-skill Labor (a) Technological change and low-skill labor (b) Technological change and high-skill labor