RIETI Report September 2007

Design-Based Comparative Advantage: An Explanatory Analysis

Open sharing of knowledge and information is increasingly important to the manufacturing process. This month, RIETI Report features a BBL (brown bag lunch) Seminar with RIETI Faculty Fellow FUJIMOTO Takahiro. In this seminar, Dr. Fujimoto called for a shift to the open view of manufacturing, handing down manufacturing technologies to future generations, and building up organizational capabilities across industries. He cited the importance of a design-based framework of comparative advantage, which indicates the tendency for Japanese industries to demonstrate international competitiveness in products with integral architecture. He concluded his seminar by proposing a future vision for manufacturing capability-building.

This month's featured article

Design-Based Comparative Advantage: An Explanatory Analysis

FUJIMOTO TakahiroFaculty Fellow, RIETI

Professor, Faculty of Economics, the University of Tokyo
Executive Director, Manufacturing Management Research Center
Senior Research Associate, Harvard Business School

Dr. Fujimoto has been a Professor in the Graduate School of Economics, the University of Tokyo since 1998 and was an Associate Professor in the Faculty of Economics from 1990-1998. In 1996 he held visiting positions at Harvard Business School, INSEAD, and Lyon University. His research on technology management, product management, product development, and supplier systems has led to numerous publications including: Coping with Variety: Flexible Productive Systems for Product Variety in the Auto Industry, Ashgate Publishing, 1999 (edited with Y. Lung, J. Chanaron, and D. Raff); The Evolution of a Manufacturing System at Toyota, Oxford University Press, 1999; "Evolution of Manufacturing Systems and Ex Post Dynamic Capabilities," in G. Dosi, R. R. Nelson, S.G. Winter eds., The Nature and Dynamics of Organizational Capabilities, Oxford University Press, 2000; and Nihon no Monozukuri Tetsugaku [Japan's Manufacturing Philosophy], Nikkei Publishing, 2004. Dr. Fujimoto has received many awards for his research efforts, such as the Imperial Prize (2002) and the Japan Academy Prize (2002). He earned his B.A. in Economics from the University of Tokyo and Ph.D. in Business Administration from Harvard University.

July 24, 2007: BBL Report

Design-Based Comparative Advantage: An Exploratory Analysis"

Toward the open view of manufacturing on the basis of design

Dr. Fujimoto in his presentation first explained that by focusing on the concept of design, the horizons of manufacturing perspectives broaden from the field of production to non-production functions, and likewise to the non-manufacturing sectors. For example, a non-life insurance company actually achieved a sales increase after introducing manufacturing concepts to product development.

Design information is the source of added value. It cannot be transmitted without a medium. It is created, embodied, and distributed to customers in the form of artifacts, which in the context of economics are referred to as goods and services. An open view of manufacturing, in a broad sense, means to shape this effective flow to achieve customer satisfaction and economic benefits.

Industrial competitiveness is supported by two elements, one of which is specific technologies . These include, for example, casting, welding, coating, machining in manufacturing, as well as how salespeople communicate with customers in retailing. The other is generic manufacturing ("monozukuri") technology , which serves to link different specific technologies into a flow of design information to customers. Dr. Fujimoto asserted that manufacturing technology can be applied to different industries and that it has to be open for the purpose of facilitating innovation on the shop floor. This cannot be achieved without an agent that bridges different industries and disseminates the manufacturing technology. According to Dr. Fujimoto, a promising approach is to reeducate experienced workers in their 50s and to pass on their monozukuri knowledge to young workers in their 20s. In fact, his group at the University of Tokyo trains long-serving workers from different fields as monozukuri instructors. He has witnessed that their kaizen (continuous improvement) capabilities prove effective at factories in unfamiliar industrial sector.

Comparative advantage of design locations

Dr. Fujimoto went on to discuss the conventional theory of comparative advantage. He noted that in its narrow sense it fails to properly answer many of the questions as to what specifically Japan should import and export in the era of complicated intra-industry trade resulting from a globalizing economy. As a complementary approach, he proposed a design-based framework of comparative advantage, in which the engineering concept of design is integrated into the economic concept of comparative advantage for improving its persuasive power to real-world trade phenomena.

Specifically, he suggested that greater emphasis should be placed on location of the design facilities. This field-based approach to industrial economics sees product architecture (or design philosophy) and organizational capabilities as two pillars. Generally speaking, it is relatively difficult to move organizational capabilities across borders given that they are locally and historically embedded. Therefore, it is advisable to build a comparative advantage on the basis of unevenly distributed organizational capacity for achieving a sustainable international division of labor.

Balancing profit, market, and productive performance

In addition to profitability, organizational capabilities are today used as another indicator of industrial performance. But the question of how they can be measured remains. According to Dr. Fujimoto, it is essential not only to examine firms' profitability, which reflects performance in the capital market, and products' market performance (surface level competitiveness) but to make a close analysis of productive performance (deep level competitiveness) at the facility level. Deep-level competitiveness is observed, for example, when plants or design facilities compete over improvement in productivity, quality, and lead time to win approval by the management. In Japan, during the so-called lost decade, the shop floor was strong whereas the headquarters was weak. Dr. Fujimoto stressed that Japan's manufacturing industry should achieve good balance between a strong shop floor and strong headquarters.

Identifying a compatible product architecture

Design is a process of linking an artifact's functions and structures. There are two product architectures or basic approaches to designing a marketable artifact: modular and integral. The modular architecture envisions simple one-to-one correspondence between a product's functional and structural elements so that a product can be designed by a mix and match of pre-designed components. The United States and China are among the nations that, for certain historical reasons, tend to excel in this approach. Integral architecture, on the other hand, assumes complex many-to-many correspondence between those elements, so that designing an integral product requires concerted activities of organizational members. It is considered to be typically suited to Japanese organizations. Statistical data confirm that Japan exports, rather than imports, those products based more on integral architecture.

Based on a prediction that a certain type of organizational capability is accumulated disproportionately across different countries through evolutionary processes, and a dynamic fit exists between certain organizational capabilities and product architectures, Dr. Fujimoto hypothesizes that fit and unfit for a product architecture can be mapped geopolitically. For example, ASEAN nations and India (excluding Bangalore) may demonstrate their competitiveness in the area of lower-priced, labor-intensive, and integral products; Japan (and a part of Europe as well) may still find its comparative advantage more often in higher-priced, technology-intensive, and integral ones; China in lower-priced, labor-intensive, and modular ones; Korea in capital-intensive and modular ones; the U.S. in higher-priced, technology-intensive, and modular ones.

Can Japanese firms compete in technology-intensive products?

While it is important for Japanese companies to incorporate integral factors that appeal to customers into their products, Dr. Fujimoto alerted that an overemphasis on integral architecture is likely to result in a loss of cost competitiveness, which ignores customer needs. Obsession with integral architecture without building up organizational capabilities is meaningless from the point of view of competitive advantage. He pointed out that, at first, they should try a modular design on their products, which is much cost-effective. Some products will turn out better with an integral architecture during the course of development and such products are what Japan is good at.

According to his remarks, Japanese firms tend to deemphasize the early stage of product development in which scientific knowledge is gathered through a cross-border open network. Rather, they are quick in solving design problems through trial and error after actual product engineering starts. For this reason, Japanese firms may excel in moderately complex and integral products, but may fail in extremely complex and integral products that are technology-intensive. When many products become increasingly complicated and science-based, Japanese firms must build their scientific coordination capabilities, in order to avoid loss of comparative advantage in integral products that used to be their stronghold.

The importance of adopted monozukuri innovations in existing industries

There is a school of thought in Japan that argues that innovation will lead to more value-added productivity and to economic expansion. But it is not clear what kind of innovation brings about the magnitude of productivity increase that can sustain the economic growth that such arguments assume. Dr. Fujimoto said that it is necessary for Japanese firms to share organizational routines for effective manufacturing ( monozukuri ) across different industries, because economic expansion is impossible without major cross-border movement in innovation, for which the basic ideas are adopted from other sectors and firms. He argued that the abovementioned monozukuri instructors may play a pivotal role in activating such adopted innovations.

Dr. Fujimoto also argued that the national budget for science and technology should not be allocated only to specific frontier technologies that are aimed at creating entirely new industries. It should also be allocated to development of human resources that contribute to diffusion of manufacturing technologies across industries, or to the promotion of adopted manufacturing innovations in existing industries.

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