The footloose economy

In our economy, industry is here today, somewhere else tomorrow
For The Register-GuardPublished: August 10, 2008 12:00AM

Hynix shutting down operations is yet another reminder, a painful one, about the “footloose” characteristic of modern economic activities.

Economic geographers have noted for quite a few years now that multinational businesses are footloose, and that they are not necessarily tied to specific locations. Instead, firms, and sometimes an entire industry, can close down operations in a geographic area in practically no time at all, and open up new ones in other parts of the country or the world.

The footloose nature is, obviously, related to competition in the marketplace. As firms face competition from others all over the world, which is the case in the global economy, there is enormous pressure to figure out the lowest cost possible. In order to continue to be competitive in meeting the demand, if the location that offers the potential for the lowest cost is a city in far away Vietnam, as opposed to neighboring Ohio, then the economic logic forces the relocation of the activity to Vietnam, everything else being equal.

We were forced into understanding this during the decade after the first oil crisis in 1973, when economic calculations led to a rapid de-industrialization of the old industrial economic core of the United States in the Northeast and the upper Midwest. Iron and steel mills, for instance, were hit hard because they could not compete against the more efficient and low-cost producers in Japan, and later in South Korea. In a short period of time, this industrial core came to be known as the Rust Belt — a reference to the collapse of the once-mighty steel industry, and to manufacturing in general.

The Hynix story is similar: Memory chips are less costly if produced from 300-millimeter wafers, as opposed to the 200-millimeter wafers from which chips were mostly manufactured at the Eugene plant. If customers had to pay high prices as a result of transporting chips manufactured elsewhere, then the Eugene plant might have continued to operate. However, even with the slight additional cost to transport the memory chips from, say, China, the 200-millimeter wafer production won’t offer any price advantage. Further, as the Wall Street Journal pointed out, the elimination of tariffs on Hynix’s exports from its facilities outside the United States might also have contributed to this decision.

Thus, the Hynix decision is a reflection of a question that practically every firm now constantly faces: Is there a location from where the widget can be provided at a price lower than that of the competitor, even after accounting for any transportation cost? If the Magic 8-Ball responds with “yes,” then it is only a matter of time before the operations are relocated.

There is, however, one major difference between now and the 1970s economic crisis. Now, it is not only manufacturing that is footloose. Many activities in the service sector, too, are not tied to specific locations anymore. Which is why, for instance, customer support — a service activity — is increasingly located in India and not here in America.

Customers, too, are beginning to be footloose in the search for lower prices for services. For example, patients from America and European countries go to hospitals in Thailand and India that almost exclusively cater to such “medical tourists,” because medical, surgical and dental treatments are far less expensive there, even after factoring in airfare and lodging.

Outsourcing pregnancy to India used to be one of my standard jokes in the classroom — but not anymore, with commercial surrogacy having grown beyond mere anecdotal evidence to almost an industry status.

So, in such a global economy, where businesses and customers are always in search of better and cheaper locations, what is the bottom line for a community like ours?

The unfortunate reality is that we do not know what industry will be prosperous in the future so that we might entice those firms to locate here in Eugene. Further, the recent Hynix story and the older Sony story are reminders that it is always possible that a firm that comes here might leave after a few years in response to the global marketplace.

All these mean that our collective — and individual — motto ought to be the same as that of the Boy Scouts: Be prepared!