How Nations, Like Firms, Must Decide What to Make and What to Buy ?

Why Nations are Similar to Firms When Deciding on What to Make and What to Buy

Businesses often decide on what to make themselves and what to buy from outside. Indeed, any business must first determine what its core competency is and which sector it would be based in and then, ensure that its processes, systems, and people are geared around the specific core or skill it specializes in.

For instance, most Western Multinationals have decided that it is cheaper to outsource their manufacturing activities to China and other Asian countries and their service processes including Information Technology needs to India and others.

They have also realized that by focusing on design, innovation, and research that is better carried out at home, they save costs in this manner. Based on sound economic calculations and rational cost benefit analysis, most businesses decide on what to outsource and what to make in-house.

In the same vein, nations taken as a unit and as discrete regions, states, and cities, make decisions regarding what to manufacture or service domestically, and what to import from outside.

For instance, as mentioned earlier, many Asian countries decided that with their large pool of resources and cheap labor, they can manufacture goods and services which can be exported and at the same time, have also decided that they should import those items that are not cost effective to make domestically.

Indeed, China, with its large base of cheap labor, and India, with its English speaking youth, has been among the chief beneficiaries of globalization.

Globalization and the Make or Buy Decision

Talking about globalization, it is an undeniable fact that the explosion in trade and commerce in the latter decades of the 20th Century have clarified and crystallized the Make or Buy decision immensely as most nations that are the in the globalization web by now, have become good at certain processes and systems.

This is based on the famous economist, David Ricardo’s, theory of Comparative Advantage, which states that, nations can benefit from trade to other nations, by exporting what is cheaper in the former and costlier in the latter and vice versa, thereby creating a situation where profits are made by exports, and cost savings are made by imports.

Why the Make or Buy Decision is Fraught with Constraints and Dilemmas

Having said that, one must then turn to the instance of commodities such as Oil and Gas as well as Iron Ore and Minerals which being natural resources and being available in some countries and not others, pose challenges to nations when they decide what to make and what to buy.

The fact of the matter is that as not all nations are similarly endowed with all natural resources, the nations which are rich in some resources often are at an advantage over those countries that are endowed with such resources.

This explains the exponential increase in wealth of the Arabian and the Gulf States as well as Russia and some Latin American countries which being rich in Oil and Gas deposits have found it much easier to accumulate wealth since the global economy runs on Oil to the extent that even a minor disruption would bring the entire world to a standstill.

Indeed, this is the clear example of how nations cannot always have the upper hand in deciding on what to make and what to buy as, like any home or firm, there are some crucial and critical necessities which have to be purchased from outside.

Technological Capabilities, Human Capital, and the Make or Buy Decision

Talking about commodities, one also finds that even when some nations are rich in resources, they are unable to exploit them because they either do not have the technological capability to extract and export in a cost effective manner, or they find that they can benefit through raw material exports (though many feel that this is clear waste of national resources).

Indeed, countries such as India have often been quoted for the inefficient manner in which they manage their natural resources since they do have the necessary capabilities to extract Iron Ore and process it into Iron and Steel, and yet, they are one of the leading commodity exporters in the world.

The Specific Case of China (Building up Human Capital) and India (Make in India Policy)

However, this situation seems to be changing in recent years as more and more countries move up the technology and income curve and in this context, India, under the present dispensation, has been making decisive moves with its Make in India policy that aims to address the gap between exports and imports and redress the imbalance of having natural resources, but being unable to gain from them.

One of the reasons why the Make or Buy decision for nations is fraught with dilemmas and tough choices is because the world of trade and commerce under globalization is impacted by political and geopolitical considerations that complicate matters since the “Give and Take” as part of the globalized world is not always straightforward.

Lastly, the Make or Buy decision is also influenced by how well nations utilize their human resources as can be seen from the determined way in which China has been moving up the labor and human resources curve by building human capital.

Indeed, realizing that while it has more than a Billion of people but who are also not proficient in English and not yet ready to take up cutting edge research and development, it has been working steadily to develop linguistic and innovation capabilities among its people to the extent that many experts predict that the next wave of innovation and the next Microsoft or Google or Apple would be from China.

To conclude, the Make or Buy decision for firms has to be made with utmost thought lest they lose the competitive advantage.