Tuesday, June 12, 2012
Risk Management and Insurance Blog
Why do seemingly similar companies differ in productivity and profitability? Some argue that “location-specific” factors (such as education levels and attitudes of the local workforce, trade unions, supplier networks, and corporate culture) could be important for explaining these differences. Understanding the role of “location” in company performance is particularly relevant because of the increasing importance of global manufacturing. Business leaders want to know: are multinationals really able to transfer their best practices to different countries?
Scholarly research on this subject has not yet reached a consensus. Some researchers report that organizational practices and productivity levels can be replicated at plants in different countries, while others find that companies have difficulty transferring the practices of plants in the home country to their overseas operations. Many of the studies conducted to date, however, suffer from methodological weaknesses that call their conclusions into question.
My co-author and I used an innovative research method to tackle this question. Our study (“Would You Buy a Honda Made in the U.S.? The Impact of Production Location on Manufacturing Quality,” NBER Working Paper No. 18005) looks at whether “location” matters for manufacturing quality in the context of the automobile industry. This is an interesting case because of the perceived quality gap between American-made and Japanese-made cars. Japanese auto manufacturers have established assembly plants in the U.S. and some of the most popular Japanese car models are assembled both in Japan and in the U.S. Using a unique data set of over 565,000 used-car transactions at wholesale auctions, we tested whether the long-run value and quality of otherwise identical cars depends on where they were assembled.
Our research found that on average there are only minimal differences between the sales prices of used Hondas and Toyotas assembled in Japan and the same makes assembled in the U.S. This suggests that U.S.-based plants making Japanese cars have successfully adopted their parent companies’ high-quality manufacturing practices. Yes, it is possible to manufacture great cars in the U.S.!