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Eureka: Is globalization stealing local jobs? Eureka: Is globalization stealing local jobs?
by Akli Hadid
2017-08-28 11:24:36
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To put it simply, when factories move abroad, you still get to keep the retail jobs. But the truth is more complicated than that.

The first question that puzzles economists is how come nations prefer to trade within the nation than with other countries, even when most trade barriers are removed.

glob1_400There are hundreds of reasons that can explain this, but I will use three explanations: administrative systems, distribution systems and cultural factors.

Let's first look at the administrative factors. Let's say that you are company A and that you want to set up a factory in a foreign country where there are no trade barriers. You are suddenly confronted with a different procedure system to set up your factory, a different tax code, different registration codes, different interpretations of patent and copyright laws, different laws regarding free and fair competition, different legal systems.

Let's take the example of a country, which I will not name. That country signed a free trade deal with the US. First, many United States businesses had problems with the visa procedure. Although a free trade agreement was signed, you needed to invest at least 100,000 US dollars to start a business in that country. That left a lot of SMEs out. Next, US companies were confronted with the local equivalent of the FDA. Norms in that country were different than in any other countries, some key ingredients or parts were banned in that country, making it difficult to set up a business. Finally, patent infringement laws were rarely enforced and the minute American companies started selling products, local replicas of the product started being sold. Finally, competition laws were virtually non-existant and the minute an American company would start a business, local companies would start selling the exact same product right next to the American company.

Things are not that extreme in most countries. However, when say, American or French companies move abroad, it is usually to set up factories that sell for local consumption. Of course many products are made or assembled in foreign countries and that is why in areas like electronics, textiles, cars or in some cases food you really want to look for a job in retail rather than in factories. There are factories that remain in France or the US, mainly those making specialized parts to be sent for assembly elsewhere. 

The second difficulty companies are confronted with is distribution systems, transport and logistics systems. In some countries some families or groups control retail businesses and make it impossible for companies to allow retails sales outside that group. That means prices tend to be fixed by the retail group or family, which makes it difficult to set sales goals or profit margin goals.

Finally cultural factors play a major role. When foreign companies start businesses outside the country, their set of logic and beliefs doesn't always match that of the locals. Management and leadership questions can arise, misunderstandings are frequent during negotiations and promises are not always kept. Legal systems and courts don't always side with the foreign party, and in some cases foreign parties misunderstand local laws.

Finally, when companies in any given country start making better cars, better clothing products, better food products, better electronics or better consumer products it's very difficult for any given country to allow those products entry.

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