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Study Says Low Taxes Just One of Many Factors Needed for Global Economic Development

Renato De MattaThose who seek our votes like to promise that they can bring manufacturing jobs back to America. Just cut taxes and put up a few trade barriers and watch the blue-collar jobs grow.

But Renato De Matta says it's not that easy.

"Businesses don't decide where to locate their production or distribution facilities based on taxes alone, or any other single factor," says De Matta, a professor of management sciences and global trade and supply chain expert in the Tippie College of Business. "Taxes are just one of many factors that firms take into consideration."

It's not that taxes aren't an important consideration, he says. In the case of some high tax countries, they may be the deal breaker. But they're just one consideration of many, including proximity to the firm's markets, availability of technology, or the education level of a local workforce.

Even things like long-term currency depreciation or appreciation trends are important when companies decide where to build plants, De Matta says. In a recent simulation-based study, he discovered that under certain conditions, when a country's currency depreciated as little as 10 percent for a significant period of time in relation to the U.S. dollar, this could stimulate some firms to relocate their production to the more economically attractive country.

De Matta's finding is part of a larger project he's working on to develop a model for new, flexible global supply chain design problems. He has developed data patterned after several Fortune 500 corporations with production and distribution facilities around the globe and markets in dozens of countries. The data allows De Matta and his research partner, Tan Miller of Rider University, to evaluate how firms alter their production and supply chains in response to global economic changes, whether those alterations are planned or not.

De Matta's research has shown the wide range of factors companies consider when locating manufacturing and distribution facilities. Which country has greater access to the technology they need in manufacturing facilities? Which country has a more educated workforce? Can a less educated workforce be trained easily enough that it would offset the expense of locating in a country with a better-educated workforce?

"You also want to consider taking advantage of the core competencies of your suppliers, so it might make sense to locate closer to them," he says.

Politics play a major role, too, he says. Country A may be less expensive than Country B, but if Country A is politically unstable or is run by corrupt rulers, the company might incur costs that make politically stable Country B a better location.

And basic market forces are always important. For instance, if a U.S. company sells more of its product in China than in the U.S., it's cheaper for the company to locate its manufacturing facility in China. Not only is it closer to its primary market, but the firm spends less money shipping small amounts of product from China to the U.S. than it would spend shipping large amounts of product from a manufacturing facility in the U.S. to China.

One additional key finding of De Matta's study is that firms with more flexible supply chains have the capability to minimize the costs of major disruptions because they can react more quickly to economic shifts or other changes caused by events like natural disasters. He pointed to the earthquake and tsunami in Japan earlier this year as an example. Toyota had facilities in the area devastated by the disasters, and that could have caused lengthy and costly delays in the company's global operations.

"But Toyota had such a flexible supply chain they were able to shift production, so whatever disruptions they had were nothing but a blip," he says. "The key is to develop a system where there is enough potential incremental capacity somewhere else in the supply chain to absorb the shock of, say, a tsunami, or changes in a country's tax rate."


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