Globalization of Production: Insights from the Hard

Disk Drive Industry

PETER GOUREVITCH, ROGER BOHN and DAVID MCKENDRICK *

University of California at San Diego, USA

Summary. Ð Rapid change in the geographical location of production raises important questionsregarding the welfare, development potential, and competitive position of di�erent countries andregions. This paper explores in detail the geography of economic activity in a speci®c industry, thehard disk drive (HDD) component of the computer industry. Firms in the HDD industry arebreaking the production system into ever smaller distinct steps, and spreading the physical locationof these steps around the world. Firms from the United States dominate the industry. Our ®ndingssuggest that globalization has enabled US ®rms to sustain their dominant position in the industry,preserve employment in the United States (and possibly expand it), and increase employmentworldwide, most notably in Southeast Asia. Ó 2000 Elsevier Science Ltd. All rights reserved.

Key words Ð Southeast Asia, Singapore, globalization, industrial clusters, employment

1. INTRODUCTION

The globalization of production has properlybecome among the most controversialphenomena of this decade. On the one hand,globalization is credited with creating moree�cient ®rms and thus more e�cient allocationof economic resources and higher grossnational products. On the other hand, globali-zation is blamed for growing income inequality,deteriorating neighborhoods and regions, anderoding social safety nets. For supporters of the®rst position, globalization promotes employ-ment by expanding the economy throughgreater e�ciency, and shifting resources tohigher value-added activities. For supporters ofthe second position, globalization hurts thelow-wage employees in the advanced countriesand disrupts societies around the world. Inshort, ``globalization'' has become a hot buttonphrase, the object of both optimism and pessi-mism. 1 Moreover, the reduction of barriers totrade and investment as well as recent tradeagreements appear to have encouraged apowerful internationalization of productionwhich has grown considerably faster thaninternational trade since the mid-1980s(UNCTAD, 1996).

Rapid change in the geographical location ofproduction raises important questionsconcerning the welfare, the development

potential, and the competitive position ofdi�erent countries and regions. Where do ®rmslocate particular activities and why do theychoose one site over another? What impactdoes the globalization of production have onthe economies of the home and host countriesof multinationals adopting global productionstrategies? How does globalization a�ectnational welfare and the distribution of wealthwithin countries? Can, and should, publicpolicy play a greater or lesser role in shapingboth the process of globalization and theresponse to its e�ects? Answers to all of thesequestions have become controversial, andproperly so, for they touch on deep issues ofsocial welfare, international relations and ®rmmanagement.

In this paper we explore the pattern ofglobalization as connected to employment andwages in a speci®c industry, the hard disk drive(HDD) component of the computer industry,and the forces which shape location decisions.One way to begin to think about these issues isto consider two extreme and stylized depictionsof industry globalization. In a fully borderlessworld, with managers having perfect informa-

World Development Vol. 28, No. 2, pp. 301±317, 2000Ó 2000 Elsevier Science Ltd. All rights reserved

Printed in Great Britain0305-750X/00/$ - see front matter

PII: S0305-750X(99)00122-9www.elsevier.com/locate/worlddev

* The authors are grateful to the Alfred P. Sloan

Foundation for its generous ®nancial support. Final

revision accepted: 22 June 1999.

301

tion, workers willing to move, capital free to¯ow anywhere, and no regulations, culture, orother impediments to the free ¯ow of factors ofproduction, ®rms could locate anywhere. Wemight thus expect disk drive ®rms to distributetheir assembly and production sites ratherwidely around the globe. Alternatively, in aworld with extensive regulation, costly ¯ows ofinformation, divergent cultures, and politicaland cultural barriers to the free ¯ow of work-ers, capital and material, we might observe anintense concentration of HDD production andeconomic activity in regions and districts.

The real world, of course, is more compli-cated than either of these characterizations.Most industries, including HDDs, exhibitfeatures of both of these contrasting models ofbehaviorÐglobal dispersion and regionalconcentration. These twin processes are centralfeatures of the industry that we document here.Globalization thus arises from the interactionof ®rm strategies and public policies. Firms arein¯uenced by each other and by public policies;public policy toward an industry is in¯uencedby ®rms' needs and market forces. Decisions by®rms shape the distribution of bene®ts throughtheir e�ect on employment, spending, invest-ment, research, and taxes. Decisions bygovernments shape the distribution of bene®tsthrough the impact of regulatory, tax and ®scalpolicy on the incentives of ®rms and workers.

Despite the importance of these issues, it isnot easy to ®nd empirical work that carefullydescribes the production system in ways thatcan link patterns of globalization to thecontroversial issues of welfare e�ects on states,regions and social categories. This paper seeksto ®ll some of our gaps of knowledge byexploring in detail the geography of economicactivity in the HDD industry. Most analysis ofglobalization is conducted using economic orcensus data that aggregate measures ofproduction, employment and wages andthereby lump together the behaviors of manyunrelated organizations. By doing so, theydownplay the interdependence among ®rmsand present a highly limited view of economyand society. One virtue of our paper is that itstudies the location of related ®rms in a valuechain. Our approach rests on the generalobservation that ®rm decisions usually involveproblems of collective rationalityÐsituationsthat involve more than one organization wheredecisions are made with reference to otherorganizations. In making a foreign investment,for example, it matters to a business ®rm

whether a competitor or customer has alreadyinvested abroad. This makes the industry levelof analysis very useful for clarifying some of thedynamics behind globalization.

The disk drive industry is an especially rele-vant case for exploring these issues because webelieve it is a leading indicator of pressures andtrends other industries will face as the barriersto globalization continue to drop. Withworldwide revenues of more than $30 billion,hard disk drives is a very dynamic industry withproduct life cycles of less than 18 months andprices falling at 40% a year for more than adecade. Hard disk drives are ``high-techcommodities,'' with intense technologicaldevelopment yet low product di�erentiationand ®erce price competition. The industry hasstriking variances in the geographical locationof activity, depending on what indicators areused. In 1995, over 80% of the world's harddisks were made by US ®rms. Yet in the sameyear, less than 5% of drives were actuallyassembled in the United States, while 15 yearsago over 80% of the world's total driveproduction and almost all drives made by US®rms were assembled here. In 1995, only 20% ofthe world's employees in the HDD industryworked in the United States, yet over 60% ofthe wage bill paid by US ®rms were earned inthe United States.

The evidence we have gathered suggests thatwhile US employment in some job categorieshas su�ered from globalization, it is most likelythat without globalization the job loss wouldhave been greater. Moreover, globalization haspossibly increased US employment because ithas resulted in more competitive US ®rms,which, in contrast with many parts of theconsumer electronics industry, dominate theHDD industry. Thus, competitive success andglobalization seem closely related. In theirstruggle to survive, ®rms in the HDD industryhave pursued every source of advantage theycan extract from location strategies. Firms arebreaking the production system into eversmaller distinct steps, and spreading the phys-ical location of these steps around the world,both through wholly-owned subsidiaries andthrough a global supply chain. Thus by glob-alizing, US ®rms have lowered costs whilecontinuing to innovate. In so doing they havesustained their dominant position in theindustry, preserved employment in the UnitedStates (and possibly expanded it), and increasedemployment worldwide, most notably inSoutheast Asia.

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We start with a brief portrait of how theindustry is organized. Then we locategeographically each step in the value chain,providing alternate measurements of globali-zation. We stress the signi®cance of wages spentin each country, rather than headcount of jobs,as an indicator of the geographical distributionof activity. Next, we explore the dynamics thatin¯uence these location choices, emphasizingthe ``wage±skill'' relationship. We explore someways public policy interacts with managerialincentives and strategy. Finally, we seek to linkthe HDD example to broader issues in theglobalization debate.

2. THE VALUE CHAIN:DISAGGREGATING THE PRODUCTION

PROCESS

To measure globalization in an industry, wemust begin with a portrait of the value chain,which consists of the full sequence and range

of activities that go into making a ®nal prod-uct: research, development, parts fabricationand subassembly, tooling, repair, service,marketing, management, etc. The value chainincludes the supply chain of physical compo-nents, as well as the ancillary activitiessupporting production, such as equipment,sales, etc. Contemporary producers havebroken the steps of the value chain into manydiscrete pieces. They have then analyzed theeconomics of each piece and located themaround the world to achieve a number ofobjectives. Final assembly, the ``made incountry X'' label, tells us only one aspect ofthis complex chain, and often by no means themost important one.

(a) Major steps in the value chain

Hard disk drives are built in four mainsubchains: electronics, head subassemblies,media, and motors, as shown in Figure 1.During ®nal assembly the subassemblies are

Figure 1. The hard disk drive value chain (Sources: Various. Shaded items are conceptually part of the value chain butnot included in our numbers at present).

GLOBALIZATION OF PRODUCTION 303

combined, mainly in clean rooms. The ®nishedHDD is tested, and reworked if necessary. 2

ÐElectronics includes semiconductors,printed circuit boards (PCBs) and theirassembly, ¯ex circuits that connect the PCBto the rest of the HDD, and discrete compo-nents.ÐHeads are devices that read and write thedata. They are manufactured in stages,beginning with very highly automated andtechnically complex wafer fabrication, fol-lowed by the labor-intensive activities ofhead-gimbal assembly (HGA) and head-stack assembly (HSA).ÐMedia constitute the material on whichthe information is stored, the ``platter'',and can be made of aluminum or glass.Typically, aluminum blank substrates arenickel-plated and polished before the plat-ters are sputtered and ®nished. As withheads, media are a very high-technology as-pect of HDD production.ÐMotors spin the media with extreme preci-sion. One Japanese company, Nippon Den-san, has about a 75% worldwide marketshare.

These four parts constitute the major subas-semblies of disk drives. In addition to theseactivities, the value chain includes steps that areoutside the core ¯ow of materials but areextremely important:

ÐTools and equipment. These make compo-nents, assist in assembly, or test outputs atvarious stages of assembly. Firms vary intheir use of automation and purchase versusin-house manufacturing of tooling. Almostall test instruments are made by specialistsuppliers.ÐResearch and Development (R&D). In anindustry with breathtakingly short productlife cycles, R&D is of great importance. Itcontinues to be overwhelmingly located inthe United States and Japan. 3

ÐSales, service and management. These arecritical functions for an industry with intensecompetition and rapid technological change.After-sales service is becoming a particularlyimportant competitive tool, involving suchvalue-added activities as repair, operatortraining, and engineering support.

Some companies making HDDs, notablyIBM, have historically been heavily verticallyintegrated, and have done most of these stepsthemselves. The degree of vertical integration isquite variable across companies and over time,however. Thus only by looking at the value

chain, without limiting ourselves to the ®rmswhich ``make (assemble) HDDs,'' can we assessthe industry's globalization. The best measuresof employment and value in the HDD industrywould be the sum of all the steps noted above. 4

Our analysis emphasizes companies that makedisk drives, media, and heads, with limitedcoverage of semiconductors and HDD equip-ment.

(b) The globalized production chain: produce orbuy?

Globalizing production poses some impor-tant strategic choices for ®rms concerningcontrol of key functions and the balancebetween in-house activities and contracting toother ®rms. Take, for example, ®rms from theUnited States. In many other segments of theelectronics industry, US ®rms have gone over-seas by subcontracting ®nal assembly to low-cost Asian suppliers. In the HDD industry, incontrast, US component suppliers and ®nalassemblers have established overseas produc-tion networks within their own ®rms. Theyshow an ability to manage manufacturingwhich challenges some commonly heldassumptions of US manufacturing inferioritycompared to the Japanese and other Asianproducers (McKendrick & Hicken, 1997). 5 Weillustrate these choices by looking at Seagate,the world's largest manufacturer of HDDs.

Seagate assembles all of its disk drives in-house. Furthermore, it is almost self-su�cientin recording heads, printed circuit boardassemblies, and makes many of its own disksand spindle motors. Despite the risks associ-ated with vertical integration during economicdownturns, Seagate is convinced that it needsto maintain the technology and manufacturingcapability in-house. Market pressures arebrought to bear on ``internal suppliers'' bysourcing some percentage of its componentsexternally. Being vertically integrated givesSeagate the capability to make or buyÐtoadjust its internal and external purchasesÐbutin any event it retains control over the tech-nology and the processes.

Although Seagate has kept control of almostall production, it has globally dispersed itsoperations to an extraordinary degree. A singlecomponent may be worked on in ®ve countriesand cross two oceans while Seagate is buildingit up through its value chain. Seagate developsnew products (and processes) at seven locationsin the United States and in Singapore. It

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assembles disk drives in Singapore, Malaysia,Thailand, and China. In heads, the companyfabricates its wafers in the United States andNorthern Ireland, and cuts them into bars andassembles them into HGAs in Thailand,Malaysia, and the Philippines. It makes mediain Singapore and motors in Thailand. Itmanufactures printed circuit cables in Thailandand assembles the electronics onto printedcircuit boards in Indonesia, Malaysia andSingapore. It is the largest nongovernmentemployer in Thailand and Singapore.

Component ®rms have also gone overseaswithout subcontracting. Komag, for example,designs and manufactures thin-®lm disks.Established in 1983, Komag now has facilitiesin the United States, Japan, and Malaysia, isthe world's largest independent thin-®lm mediamanufacturer, and competes primarily withShowa Denko, Mitsubishi Chemical, and FujiElectric, all of Japan. About 1,100 of its 2,900employees (in mid-1995) worked overseas, oralmost 40% of all employees. Likewise, Read-Rite develops and manufactures recordingheads for hard disk drives and (like Komag) isthe world's leading independent supplier in itsmarket segment. Founded in 1983, more than90% of its employees were located overseas bymid-1995. Read-Rite manufactures wafers at itsheadquarters in California and in Japanthrough a joint venture, cuts the wafers andassembles them into HGAs at its Thailandsubsidiary, and ships the HGAs to Malaysiaand the Philippines for assembly into head-stacks.

The experiences of these companies show theneed to distinguish the geography of locationfrom the geography of control. Location meanswhere production is physically situated, in theUnited States or overseas. Control means whodirects the production, a US ®rm or a foreigncontractor. Going overseas is not the samething as losing control.

3. MEASURING THE VALUE CHAIN:JOBS AND WAGES

Debates about globalization often revolvearound the nationality of activity: where is thisor that product or component produced? Thisturns out to be only one de®nition of nation-ality, and perhaps not the best one. Dependingon which measure is used, it is possible to getjust about any number for the US share of theindustry. In a business sense, the United States

is still the dominant country in the industry,and US residents are earning most of themoney paid by US HDD ®rms. But by othermeasures, however, the United States is lessthan half the industry, and by some measures isbelow 5%. We provide below seven di�erentmeasures of location/globalization within threebroad categories of location: nameplate,employment, and wages.

We have documented the locations andheadcount of most plants in the value chain,and from this construct the various measures.

(a) Location by nameplate

What is the nationality of the producer andwhere is the ®nal product actually assembled?These are usually the most visible of theglobalization indicators.

(i) Nationality of the ®rm that does the ®nalassembly of HDDs

The nationality of ®rms can be de®ned as thecountry of incorporation of the controllingparent. By this measure, US ®rms dominateglobal production with 85% of world output bydollar value (88% by units), followed by Japanwith 15%. 6 This tells us something important:US ®rms overwhelmingly dominate this globalindustry to a degree not matched by much elsein the modern economy, from consumer elec-tronics to automobiles. Among segments of thecomputer industry, for example, only micro-processors rival HDDs in domination by US®rms.

(ii) The geographic location of ®nal assemblyIn what country is the HDD ®nally put

together (thus getting the ``made in Singapore''or similar sticker)? By this measure, the USshare in 1995 was 5% (and nearly zero in 1998).Thus, while the largest producers of HDDs areUS-owned and managed, a substantial amountof the work done in the industry lies outside theUnited States. This measure suggests that thereis very little US presence in the HDD industry(Table 1). Southeast Asia, especially Singapore,is the primary location of ®nal assembly with64% of world output. Two-thirds as much ®nalassembly takes place in Europe (principallyIreland, Germany, and Hungary), as in Japan.US ®rms shut down most remaining ®nalassembly activities in the United States in late1995 and early 1996. 7

GLOBALIZATION OF PRODUCTION 305

(b) Location by employment

The nationality of employment is anothermajor indicator examined by all sides of theglobalization debate. Disaggregation within thevalue chain helps clarify the reality. Althoughvirtually no drives are ``assembled in the UnitedStates,'' a substantial amount of the industry'semployment is ``American,'' more than anyother single country.

(i) The location of employment by headcountWe estimated 1995 employment by location

and activity for each ®rm in the HDD industryvalue chain. 8 Of a total world employment of287,000, the United States has the highestheadcount of any single country, with almost20%. Southeast Asia is the dominant region:Singapore and Malaysia have about 12% each,while Thailand has some 13%. Japan, whose®rms are important based on nameplate, hasless employment by headcount even thanChina.

The geographic distribution of employmentis highly di�erentiated by stage of the valuechain. While only 9% of employment in headsand 7% of HDD ®nal assembly are in theUnited States, more than 50% of mediaemployees and about 32% of those in semi-conductors work in the United States. A largeportion of global employment in productionand test equipment is located in the UnitedStates. Head subassembly is the most laborintensive stage of production, with over 40% ofheadcount, followed by ®nal assembly with22%, while the rest of employment is widelydistributed in other steps of the value chain. Wewill show in section 3 that the labor-intensivestages are predominantly o�shore. This skewsoverall headcount.

(ii) Fraction of employment controlled by US®rms

Two-thirds of all workers in the industry areemployed directly by US ®rms. In some otherbranches of electronics, US ®rms globalizedtheir production by subcontracting manufac-turing to overseas ®rms, but HDD ®rms glob-

alized by setting up fully owned and controlledsubsidiaries overseas.

(iii) The domestic-overseas split of employmentby US ®rms

Looking only at people who work for US®rms in the industry, about 29% of them are inthe United States. The vast majority of theremainder are in Southeast Asia. Employmentis clearly in¯uenced by the nationality of theproducer. US ®rms hire more Americans thando foreign ®rms. Measured by numbers ofpeople, HDD is an industry dominated by US®rms most of whose employees are locatedoutside the United States.

(c) Location by wages

We have just measured employment byheadcount and by position in the value chain.This tells us a lot about globalization, but itdoes not answer a very important question:What is the actual wage bill paid in eachcountry? Looking only at the number of jobsdoes not measure the value of the jobs, andthese ®gures are thus deeply misleading aboutthe geographic distribution of the return toemployment. Some stages of this industry, suchas R&D, require highly skilled workers, withextensive training and education who are paidat a high wage. Other stages of production,notably head subassembly, use large numbersof low-wage, low-skill workers.

To determine the geographic distribution ofthe value of employment, we estimated the sizeof the wage bill, taking into account the varyinglevel of wages according to skill level. 9 Wedivided workers into two skill levels: high-skil-led, for whom we used engineering salaries, andaverage-skilled, for whom we used nationalaverage factory worker wages. We used grossestimates of the ratios between skilled andunskilled workers in each country's portion ofthe HDD industry.

(i) The location of wages paid in each countryThis re¯ects the actual amount of wages

paid, re¯ecting the di�erence in wages that goto di�erent skill levels in di�erent countries.

Table 1. Location of HDD ®nal assemblya

US Southeast Asia Japan Other Asia Europe Total

4.6% 64.2% 15.5% 5.7% 10.0% 100%

a Source: Gourevitch, Bohn and McKendrick (1997).

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Measuring employment by headcount revealsnothing about the ¯ow of wages in industriesthat have globalized. Not surprisingly shares ofUS and Japanese employment are larger on awage basis than on a headcount basis, with theUnited States ®rst at just under 40% of world-wide wages and Japan second at almost 30%.No other country has a share larger than 10%,and the entire Southeast Asian region has onlyabout 13% of the world's wages despiteemploying 44% of the workers.

Thus, using wages as a proxy for economicactivity, we estimate that approximately 40% ofthe industry's worldwide economic activitytook place in the United States. Figure 2summarizes the information and comparesheadcount with wage-based measures. Thedisproportionate role of Southeast Asia inheadcount, and of the United States in wages,is clearly visible.

(ii) Location of wages paid by US ®rmsLooking at the economic activity of US ®rms

in isolation is also interesting. Much of thecontroversy in the United States about global-ization has to do with the impact of thatprocess on wages and employment. Much ismade of the ¯ow of jobs to Southeast Asia, butour data show that although only about 30% ofjobs in US-owned ®rms are still in the UnitedStates, over 60% of the wages they pay are paidin the United States. Both of these numbers arehigher for United States than for foreign-owned ®rms. Nor have the US ®rms sent wageso�shore by outsourcing to non-US ®rms.Healthy US high-technology ®rms, no matter

how global, pay a large chunk of their wage billin the United States.

Table 2 compares the di�erent indicators ofindustry nationality discussed above. Lookingat ®rm ownership, the industry is dominated bythe United States. Looking at location of ®nalassembly, the United States is negligible andSoutheast Asia dominates. Location ofemployment and of wages are more useful thaneither of these. They show a more variedpicture: Southeast Asia plays host to moreemployees than any other region, but morewages go to employees in the United States;among US ®rms, more than one-quarter oftheir employees work in the United States andalmost two-thirds of the wages are paid there.

With only one year of data, this is a staticportrait. Fifteen years ago nearly all theemployment and wages generated by UScompanies were physically in the United States.Thus the majority of employment has goneoverseas, and much of what has gone overseashas been in the less technically di�cult stages ofthe value chain. As other countries, likeSingapore, move up in skill levels, will theentire system go o�shore as happened withtelevisions, perhaps to return to the UnitedStates as subsidiaries of foreign owned ®rms?We cannot fully answer this question, but wecan explore some of the causes of locationdecisions which illuminate it.

4. DRIVERS OF LOCATION DECISIONS

In the previous sections, we described thevalue chain of the HDD industry and showed

Figure 2. Location of employment and wages in the HDD value chain (Source: As for Table 1).

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the location of employment and wages paid bycountry and place in the value chain. Thissection seeks to analyze this data by exploringsome causes of location decisions by HDD®rms. What accounts for the patterns weobserve? There are clearly a multitude offactors, but for this industry at least, threeclasses of explanations stand out: labor cost/skill issues, agglomeration e�ects, and govern-ment policy.

(a) Factor costs: the role of technical di�culty,skill levels and labor costs in location

One explanation for the location of di�erentparts of the HDD value chain is surely the costof labor and its supply at various skill levels.Low skilled labor is cheap in some places, andrelatively expensive in others. Expertise, espe-cially of engineers with skills needed forparticular stages of production, is available insome locations but extremely scarce in others.A fundamental relationship in world labormarkets is that cost of unskilled labor and theavailability of skilled labor are correlatedacross countries. So, we would imagine thatcompanies seek to place their technically moststraightforward but labor-using activities inthose locations that have the greatest abun-dance of inexpensive low skilled labor, andtheir most ``high-tech'' engineering-intensiveactivities where highly skilled labor is the most

plentiful. Intermediate activities, those requir-ing a mix of labor skills, should be placed incountries with intermediate levels of wages,expertise and skilled labor.

This relationship helps explain shifts in thelocation of activities over time. Tasks that wentto Singapore when that country had lowwagesÐassembly of low-end drivesÐhavemoved elsewhere in Asia as Singapore's wageshave risen. New activities requiring higherlevels of skillÐmedia fabrication, assembly ofhigh-end drives, semiconductor wafer fabÐhave moved in, often from the same companies.Thus Singapore has ``moved up the valuechain''. It is important to emphasize that``moving up the value chain'' is a linguisticsimpli®cation. Movement is not up a simplesequence that mimics the ¯ow of material, fromcomponents to subassembly to ®nal assembly.Rather it is from less to more skilled activities,whatever their sequence in the physicalproduction process.

The relationships among wages, skillrequirements, and location can be representedgraphically by plotting the actual locations ofemployment in di�erent stages (Figure 3). Each``bubble'' in Figure 3 shows the workers in thatstage in that country. The area of the bubbleshows the number of employees, its verticallocation shows the average factory wage in thatcountry, and the horizontal location shows theapproximate skill level. Ordinal rankings were

Table 2. Summary of alternative indicators of nationality of production, 1995 (All numbers expressed as percentage ofworld total)a

US Japan S.E.Asia

OtherAsia

Europe Othercountry

Total

All ®rmsNationality of HDD®rm (% of unit output)

88.4 9.4 0 2.2 0 0 100

Location of ®nalassembly (% of unitoutput)

4.6 15.5 64.2 5.7 10.0 0 100

Employment in valuechain

19.3 8.3 44.0 17.1 4.7 6.5 100

Wages paid in valuechain

39.5 29.7 12.9 3.3 8.5 6.1 100

US ®rmsLocation of ®nalassembly (% of unitoutput)

5.1 13 66.8 3.9 11.2 0 100

Employment in valuechain

28.5 0.9 55.3 5.9 2.9 6.5 100

Wages paid in valuechain

62.4 3.5 19 3 4.6 7.5 100

a Source: As for Table 1.

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used for skill levels, with no attempt to subdi-vide the workers in a given process step intodi�erent skill levels.

Figure 3 shows some support for thehypothesized relationship between skills neededand national wage levels in countries involved inthe industry. From the lowest wage countries(China) to higher wage ones, the mix of activi-ties shifts toward higher technology processes.China, with the lowest wages at $.39 per hour, isused almost entirely for head subassembly, thelowest skilled and most labor-intensive activityin HDD production. Thailand and Malaysia,with average wages $1.61 and $1.53, respec-tively, do some disk drive assembly as well.Singapore (average wage $6.29) has employ-ment predominantly in disk drive assembly.

Moving to the high-wage countries, the keyrole of the United States is clearly visible, withsizable employment levels in all activities excepthead subassembly and disk drive assembly. The

highest technology steps of the value chainÐhead fabrication, semiconductor fabrication,equipment, and R&DÐare done almostexclusively in the high-wage countries, mainlyin the United States but also in Japan. 10

Despite the importance of wages and skilllevels in in¯uencing location decisions, thereare a number of anomalies in the pattern ofFigure 3Ðdecisions that cannot explained bythe wage/skill hypothesis. Korea has about thesame wage levels as Singapore, yet activitythere is shifted toward lower skills than Singa-pore. There is almost as much media manu-facturing employment in Thailand as inSingapore, despite the 4:1 ratio of wages.Meanwhile, most low-wage countries have noHDD-related production at all.

In short, the geography of employment inHDD does not ®t cleanly with a predictionbased on wages and skills alone. There are alsotheoretical di�culties with this explanation.

Figure 3. Wage level versus technology level: empricial data (Source: Gourevitch, Bohn and McKendrick (1997)).

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First, as wages are a small percentage of totalcost (around 5% of ®nal assembly costs), canthey really explain location decisions? Intensecompetition makes even small savings relevant,so as long as wages are not zero, companies willseek to reduce labor costs. But if wages fall as acomponent of production, other factorsbecome more relevant and a single mindedemphasis on labor cost becomes harder tojustify as an explanation of behavior.

Second, the mix of workers and other ele-ments of production are a matter of strategicjudgment by management, not a given deter-mined exogenously by technology. Quantum'smanufacturing partner MKE uses highlyautomated factories with only a handful ofemployees per shift, while Seagate uses labor-intensive methods with thousands of employeesto do the same task. Not surprisingly, MKEhas only recently shifted some of its operationsoutside Japan and Singapore.

A third problem with the labor cost expla-nation lies in the way ®rms estimate wage costs.It has been common, for example, for manu-facturers to allocate ®xed overhead expensesproportional to wages. Doing so makes work-ers seem very costly, so that savings on laborseem to provide an immense bene®t. Thispractice has been criticized by analysts, and thebest accounting practices have shifted to bettermeasure the role of wages, but the practice, andits liabilities, appear to continue.

A fourth di�culty with the wage/skill expla-nation is the link between wage rates andmanufacturing performance when productionis shifted geographically. The costs of manystages of the HDD value chain are yield-driven,which means that e�ciency is diminished andcost increased by scrap and rework. Sincematerial costs are higher than other variablecosts, especially in the later stages of the valuechain, low yields can dramatically raise costs.As wage costs are a small percentage of totalcost, it takes only a few percentage pointsreduction in yields to outweigh any lower wagerate.

Because yield is so important, managingtechnology transfer across great distances is akey component of e�ective managerial practicein globalization. Moving from prototype tovolume, and from a ``®rst stage'' manufacturingsite (where volume production is standardizedand yield perfected) to a ``second stage''manufacturing site (where yield is stable andlow factor costs the only relevant variable)poses challenges to coordination, and may

a�ect the ability to reach extremely high yieldrates. Long distances, unskilled workers, inad-equate infrastructure, poor services and othercoordination factors may swamp the savingsfrom direct labor costs. 11 All of these maya�ect the ability to achieve the high yield ratesrequired. The systems devised to manage tech-nology over long distances have become for theHDD ®rms key ingredients of their compara-tive advantage, about which they are quiteproprietary.

Wage±skill relationships are certainly a keyelement of location decisions, but not the onlyones. Among the other in¯uences, agglomera-tion e�ects and public policies play importantroles. 12

(b) Agglomeration e�ects

Agglomeration e�ects have been heavilydocumented in location-oriented studies. Aninteresting characteristic of the HDD industryis that it is both globally dispersed andregionally concentrated. In e�ect, the industryparticipates in and bene®ts from two kinds ofstrong agglomerations, each of which plays afunctionally distinct role. In the United States,Silicon Valley continues to hold a substantialshare of research, design, development,marketing and management. Prototype manu-facturing continues to take place there: thereare plenty of clean rooms, robots, testingfacilities, and component manufacturing thattakes place in the region, even if there isvirtually no ®nal assembly. Minnesota andColorado also serve as important clusters. Themajor counterpart to this kind of agglomera-tion outside North America is Japan. WhileJapan does not dominate ®nal HDD assemblythe way it does other elements of the electronicsindustry, it is the other major location of thehigh-end research, design, and development inthe HDD industry, and it manufactures somecritical components in the system.

Southeast Asia, and Singapore in particular,represents the second kind of agglomeration.This region dominates ®nal assembly, most ofthe labor-intensive subassemblies, and low-techcomponents such as baseplates.

Clearly, some kind of concentration occurs inkey regions. The United States and Japan playhost to the principal research, design anddevelopment work related to disk drives.Southeast Asia, and to a lesser extent Europe,assemble and manufacture components. Thesetwo types of agglomeration are thus inter-

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twined and complementary. Decisions, know-ledge, and management ¯ow among SiliconValley and Tokyo, Singapore, rural Thailandand China. The concentration of key activitiesin certain cities and regions thus suggests someimportant ways agglomerations bene®t indus-try and, in turn, how ®rms are able to integrateactivities that are physically separated by longdistances. Firms must tie together research andproduct development, which is located in oneagglomeration, and assembly and componentmanufacture, which are located in another.

(i) The global management of high-tech R&D,face to face contact, and long-distancecommunication

Certain R&D activities remain stronglyrooted in concentrated areas, while low-wagelabor is obviously widely dispersed. Moderntechnology shrinks distances. Information¯ows electronically and conveys valuablecontent about design, markets, and technique.At the same time, face to face relations matter alot. Managers ¯y long distances to monitoroperations. Is this duality likely to persist andin what areas?

The United States has the highest concen-tration of skilled people. That concentrationacts as a magnet to hold related activitiesnearby and attract new ones. Singapore wouldlike to move up the value chain into R&D; canit do so, and for what activities? What is likelyto remain in Silicon Valley or elsewhere in theUnited States? How do ®rms manage thecoordination of design with manufacturingover great distances? Some ®rms regard theirskills in this regard as among the most valuableof their assets, proprietary knowledge not to beshared. As technological development pushesthe knowledge boundaries, manufacturingtolerances grow ever tighter. These mayincrease the importance of manufacturingskills, and their relationship to design. Just howwill this in¯uence location?

(ii) Proximity to marketsSome observers think that being near the

purchasers of ®nal product is important, be itbecause of specialized information, or theservice demands of consumers. By this logic,®rms upstream in a chain of production movetoward those who are downstream. By thislogic also, the HDD businesses globalized to benear their customers. The same point has beenmade about Ireland: HDD manufacturers wentthere because big players in computers are

located in Ireland, Scotland, and parts ofEngland. Other observers doubt that proximityto markets matters very much in location;computer assembly is located in Japan, theUnited States and Taiwan, but there is verylittle ®nal assembly of disk drives in theselocations.

(iii) Proximity to suppliers and service activitiesAs the value chain spreads out (R&D in one

region, ®nal assembly in another, componentsupply in yet a third), the coordination amongthese elements becomes increasingly important.The capacity to supply components and servi-ces (repair, installation) gains in importance. Itmay be important for steps down the valuechain to be near items above it.

(c) Public policy: the role of targeted incentives

Companies' globalization strategies takeplace in the context of markets and nationaleconomies whose rules are determined bygovernments. Public policies are thereforeimportant in how ®rms develop internationalproduction strategies and in their locationdecisions. One simple example drives the pointhome: there are many low-cost wage areas inthe world, yet the hard disk drive industry hasconcentrated in a few countries. Why do HDD®rms locate particular production process insome countries, and ignore some countriesaltogether?

Many aspects of government policy arerelevant. One is the deliberate, self-consciouse�ort by government to court the HDDindustry or ®rms connected to it. Singapore isthe most spectacular example. In the early1980s, the Economic Development Board(EDB) of Singapore decided to target the elec-tronics industries, including HDDsÐin sharpcontrast to Hong Kong which pursued a laissezfaire policy of not targeting any sectors or ®rms(Berger & Lester, 1997). Singapore's policyrationale lay in the concept of ``agglomeration''e�ects: concentration of the HDD industrywould launch spillover e�ects. Other countriesin Southeast Asia have followed suit, thoughnone have targeted hard disk drives in sosingular a fashion as Singapore. In Europe,Ireland has become Europe's pole of concen-tration for HDDs (along with other elements ofthe electronics industry). As a matter of policy,the Irish Development Agency (IDA) focuseson ®rms rather than a speci®c sector, but thee�ect has been to attract clusters of ®rms in

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related areas, among them HDDs. Thus, onecause of HDD concentration has been thedeliberate decision by some governments tofocus their attention on it.

Based on our interviews with governmento�cials and corporate executives, the mostpowerful policy instrument available togovernments appears to be taxes and subsidieswhich go straight to the ``bottom line.'' Singa-pore, Thailand, Malaysia, and Ireland allprovide substantial tax holidays to ®rmslocating their activities there, and these arenoted by executives as important in¯uences ontheir location choices. Indeed, many intervie-wees rate it above labor costs in importance onlocation decisions. Other subsidies also aid thebottom line, including subsidies for land andbuildings, labor force training, and researchactivities. Generally, these policy actions aretargeted to speci®c companies, and are createdby direct negotiation between governments and®rms. In both Singapore and Ireland, forexample, the government Development Agen-cies negotiate directly with ®rms, packaging acluster of tax write-o�s and other incentivesencouraging ®rms to come to the respectivecountries.

While these policy measures are ®rm-speci®c,other policy moves are more general. Theseinclude trade barriers, local content rules, thespeed and ease of regulatory processes, infra-structure and communications systems, and thelegal infrastructure in development areas. Oneattraction of Ireland, for example, is that itsmembership in the European Union allows®rms to meet local content and other regulatoryrequirements for the very large Europeanmarket. Similarly, ®rms pick China in part toget inside its complex regulatory apparatus andto be in place to receive regulatory favors.

Regulation can provide an element ofcomparative advantage among governments.Singapore is often praised for the speed of itsregulatory processÐ``one-stop shopping'' atthe EDBÐand the e�ciency of its harbor,airport, and telecommunications systems. Bycontrast, some other countries that executiveshave considered for factories get low marks forinfrastructure, regulatory slowness or interfer-ence, and other barriers. Indeed, the UnitedStates is frequently criticized in the industry notonly for wage levels but for regulations andinattention. In Silicon Valley, for example,HDD ®rms note that both regional regulatoryobstacles and the strict statewide regulationsare important reasons not to locate new activ-

ities there. At the same time, ®rms do notappear to pay much attention to low cost orless regulated regions of the United States. USregional development agencies are criticized forthe lack of information, awareness, initiative,and capacity. The EDB of Singapore is oftenheld up as a contrast: it knows a great dealabout both the entire industry and the needs ofspeci®c HDD ®rms, and is thus able to focus onindividual ®rms and make deals with them.HDD executives complain that no US agencies,state or federal, come to them with the samedegree of knowledge or authority.

Globalization puts relentless pressure onpolicy makers. SingaporeÕs success drove upwages, causing companies to move low-skillactivities to cheaper locations, and thus creatednew pressure for Singaporean o�cials to attractnew jobs. The EDB then shifted policy to moveSingapore toward higher skills in the valueadded chain: it linked its tax breaks to tech-nology transfer, it moved training subsidiestoward engineers, and it increased the R&Dbudget. All of this takes money which has to befound somewhere, raising costs for the econ-omy as the whole. In turn, this ongoing processin Singapore puts pressure on the United States(and Japan) to provide reasons for ®rms tokeep jobs at home. Public policies thus in¯u-ence ®rm decisions in the industry, and at thesame time governments are in¯uenced in theirpublic choices by international economic forcesof competition with other countries and among®rms themselves.

5. IMPLICATIONS AND CONCLUSION

Using the evidence from hard disk drives, wereturn to the controversies about globalizationnoted at the beginning of the paper.

(a) The welfare e�ects of globalization

Does globalization hurt the economy? In theHDD industry, it is certainly the case that thepercentage of industry jobs in the United Stateshas fallen dramatically since the inception ofthe industry. Does the fall in the share of diskdrive industry headcount located in the UnitedStates prove that globalization hurts USemployment? It is impossible to tell by lookingat only one industry. The impact of change inone case requires a comprehensive cross-secto-ral dynamic analysis for the whole economy.The overall e�ect turns on the absorptive

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capacity of the economy: as jobs leave one ®rmor industry they may be growing in anotherthrough the logic of specialization which lies atthe core of the global market economy. More-over, as foreign countries gain jobs from theUnited States, their purchasing power rises,allowing them to buy other US products. Tradeproduces greater wealth through specialization;the decline of one line of work in a particularcountry does not prove the disappearance of allwork, but the shift from one activity to a moreproductive one. It may even be the case thatthere are more jobs in the HDD industry in theUnited States than there would be withoutglobalization, as international specializationlowers overall costs and expands demand forthe product enough to raise total employment.US ®rms globalized many years before theirJapanese competitors; if they had not done so,the Japanese might have captured highermarket shares, pushing US ®rms and employ-ment well below current levels.

Does globalization hurt wages of the low-skilled? The overall welfare e�ect of globaliza-tion for the United States could be positive, yetthe distributional e�ects are severe on certainparts of the population. Certainly low-skilledjobs in the HDD industry are the ones thathave left the United States, and the growth ofHDD jobs in the United States is largely at thehigher value-added end. Again, a single indus-try study cannot settle this argument one wayor another. It can say that low-skilled worker inthe United States are the most immediatelya�ected by moving some production processesoverseas. Moreover, it is they who pay thesearch and transition costs of ®nding a new job(moving, upgrading skills, more education).Despite these drawbacks, the role of globali-zation in generating economic growth has abene®cial impact: an expanding economy canabsorb displaced workers while a contractingeconomy cannot. US dominance in the HDDindustry may well derive substantially from itsskills in globalizing (McKendrick & Hicken,1997). The appropriate comparison would thenbe the impact on US low-skilled employment ofa less globalized but weaker, or even nonexis-tent, industry.

(b) Understanding the patterns of globalization

In addition to the strategic leadership shownby US multinationals, the geographic patternobserved today is due to the evolving interac-tion of three locational determinants: factor

costs, public policy and agglomeration econo-mies (McKendrick, 1998). The industry hascome to be organized into two kinds of clusters:one is technological, the other operational. Inthe beginning of the industry, disk drive prod-uct development and assembly were concen-trated together in one location. But over time,functional di�erentiation became a strikingfeature of disk drive location, with assemblylocated almost entirely outside the country oforigin while product development continues tobe carried out almost entirely at the ®rmsÕfounding locations. Component fabrication(heads and media) shifted later than assemblyand as of 1997 was still done in both regions.Although much of the literature discusses theproximity of clustering of competitors withoutdistinguishing between function, research canbene®t from disaggregating functional activitieswhen considering industrial clustering. Thereare low-wage, low-skill components in the eventhe most high-tech industry, and there are high-wage, high-skill elements in all but the mostbasic sectors.

In examining where ®rms have chosen to sitedi�erent activities, the concept of wage±skillratios proves quite useful in suggesting whichparts of the value chain move over time. Aswages rise in Singapore, low-skill jobs areleaving for other parts of Asia. Other jobs,though, are entering Singapore as they leavehigh wage/skill areas like Japan and the UnitedStates. The items that move are not ``up'' or``down'' in the sequence of the value chain, butrather the lower skilled activities within eachstep of it. Thus lower skill activities in heads,media, and ®nal assembly may all emigratewhen wages rise, while the more skilled activi-ties of each segment remain in place.

The geographical disaggregation of the valuechain has important implications for argumentsabout proximity and clustering in explaininglocation. These two kinds of clusters resultedfrom the interactive inducements of lowerfactor costs, supportive public policy andagglomeration economies. That is, locationdecisions emerged from this three-way interac-tion to generate the industryÕs geographicstructure. The interaction of these three factorso�ers strong explanations for the centrifugalforces dispersing assembly away from theUnited States, and the centripetal forcesretaining product development at home. R&Dfor heads, media, and drives may bene®t fromproximity, while some lower skilled manufac-turing activities can be thousands of miles

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away. At the same time, some kinds of manu-facturing activities need to be proximate to oneanother. Measurements of proximity e�ectsmay blur this phenomenon by insu�cientlydistinguishing between each category ofproduction. Most empirical research on indus-try location does not capture this interactiveand functional character of location.

(c) The interaction of public policy andcorporate strategy

Public policy has a strong impact on locationdecisions. Firms seeking low wages in aparticular wage/skill combination have manycountries from which to choose. Just wherethey go is strongly in¯uenced by conditionsover which public policy has considerablecontrol: tax and other subsidies, infrastructure,regulatory policy, education and training, andresearch systems. Singapore captured the ®rststeps of globalization in the HDD industrybecause it went aggressively after these ®rms.The EDB is widely admired as a major playerin the system of this industry. The concentra-tion of previous sitings in a particular regionsuch as Singapore and Southeast Asia generatesagglomeration and network a�ects that in¯u-ence subsequent location choices. Thus havingattracted pieces of the industry, Singapore thenbene®ts from those choices.

Firms move to locations where policy makersare attentive to their requirements. The Singa-porean government has shown that policiestargeted at speci®c industries, such as HDD,can succeed in attracting investment, and rein-vestment. This is especially true in the absenceof countervailing e�orts by the ®rms' homegovernments. In the case of the United States,which has been the home to the disk driveindustry's most successful ®rms, designingpolicies to retain the industry may be especiallychallenging to implement. As a large country,the United States may have too many industriesfor policy-makers to monitor, as well as toomany levels of jurisdiction: federal, state andlocal governments. This makes it di�cult for®rms to receive su�cient attention from policymakers regarding their particular competitivecircumstances; it also makes them vulnerable toforeign inducements.

International competition thus puts pressureon governments and citizens to provide theservices and conditions that attract ®rms: awell-educated work force, infrastructure, taxbreaks, regulatory e�ectiveness. Some of these

measures require money, especially labortraining, research and infrastructure. Raisingthat money can be left to individuals andmarketsÐrisking the classic underinvestmentassociated with the provision of public goods.Or it can be funded by taxesÐrisking the ¯ightof capital in search of lower taxes from othergovernments, in which case governments facecompetition from other governments. Govern-ments thus face contradictory pressures. Theymay lower taxes to attract investment, but theythereby jeopardize the income stream neededfor education, research and infrastructure,items of great importance as countries move upthe value chain of world production. Globali-zation thus puts micro-incentives of costreduction in tension with macro-issues ofoptimal social and economic policies inproviding public goods required by the econ-omy and the ®rms in it.

(d) Conclusion

Globalization produces contradictory incen-tives. To ®rms' managers, globalizationprovides substantial opportunities for takingadvantage of ``competition among countries''for investment, which leads to tax subsidies,deregulation, and other inducements to relo-cate. At the same time, however, they facesubstantial managerial challenges in trackingjust what are the costs and bene®ts of activitiesin di�erent locations. Issues of yield, labor andother factor costs, taxes, local content rules,trade barriers, regulation, research, diversi®ca-tion, risk hedging, technology management,intellectual property rulesÐthese cannot beintegrated into simple algorithms that dictatedecisions. Managers must satis®ce, saving onsearch costs, looking relentlessly for more,better, and cheaper information with which tomake decisions.

The globalization of the HDD industryduring the past two decades reveals thecomplexity of these processes at work. Evalu-ating the ¯ow of bene®ts from globalizationvaries considerably according to the indicatorused. The United States continues to receivesubstantial bene®ts from this industry becauseUS ®rms retain signi®cant advantages inlocating research, product development andcertain elements of production here. But thevalue chain has shifted a range of activitiesoverseas. The ability of US employees toreceive bene®ts, as opposed to the dominantmarket position of US ®rms, depends on

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whether being located in the United Statescontinues to provide comparative advantagefor these activities. Drive assembly and manyelements of component production havemoved. Will research and design stay here,sustained by a system of research, education,and development speed? Or will other countriessucceed in drawing away those elements of thesystem as well?

While the experience of the disk driveindustry o�ers a number of insights into theglobalization process, a single case obviouslyplaces limits on generalizability. Other indus-tries may di�er in important ways. For one,they may not be as e�ectively managed fromthe point of view of the home country. USdisk drive companies were extremely quick tograsp the advantages of manufacturing abroadwhile keeping control over production, butthey also kept product development and otherhigher value-added activities at home. In thissense, the industry has not been ``lost'' toother countries along some measures that areimportant to US national welfare. Anotherlimitation is how the industry is organized.The value chain is composed of activitiesconducive to the geographic dispersiondescribed in this paper: ®nal assembly neednot be proximate to HDDs' major markets,and a range of disk drive components and

tasks can be physically separated from designacross large distances. Other industries mayface greater constraints on their geographicdivision of labor. 13

So complex are the variables in play that wecannot predict the long-run future of individ-ual companies or the industry as a whole.Short of a major collapse of the world tradingsystem, we can only be con®dent that this willremain a leading industry with which to trackand measure globalization processes. Publicpolicy makers, as well as investors, employeesand managers, need to re¯ect carefully on justhow these processes work and how theydistribute bene®ts. Disaggregating the industryinto ever-smaller pieces of the value chain, aswe have done here, is an empirical fact, ananalytic necessity, and a key ingredient inmanagerial and policy decision-making. Itcon®rms both the simple critique of globali-zationÐthat jobs leave the USÐand thesimple defenseÐjobs are preserved and evencreated by the application of comparativeadvantage. Sharing the resulting costs andbene®ts of globalization is a matter not onlyfor politics and the political process, but alsofor the ®rms and managers who face thechallenge of formulating and implementing thestrategies necessary to survive in extraordi-narily competitive environments.

NOTES

1. For an overview of the debate over globalization,

see Rodrik (1997). Note that in some quarters, ``global''

connotes statelessness. In his analysis of the history and

theory associated with the term, Hu (1992, p. 108), for

example, says global means that ``the company has

really transcended nations in the sense that it is

indi�erent as between di�erent countries and has no

home nation''. See also Henderson (1989). For the

purposes of this paper, ``global'' is interchangeable with

``international'' and is a shorthand for economic activ-

ities being distributed across more than one country.

We do not mean to imply that the organizations

spearheading the globalization process are in any way

stateless.

2. In principle, value chain analysis should go all the

way back to basic components and all the way forward

to ®nal sales. Integrated circuits, for example, are made

from bare silicon wafers, which are made from silicon

ingots, which are made from sand; disk drives are just a

component in computers, which in turn are a component

in computer systems. To render the research task more

manageable, we have gone downstream only as far as

®nished HDDs, and upstream only to semiconductor

fabrication. We similarly limited our investigation in

other subchains.

3. We include technology development, product

design, process development, and pilot production in

this category.

4. This value chain is not the same as a total input/

output analysis, which would include additional ele-

ments that generate employment: transporting products,

buying electricity and other services, basic research in

universities, etc.

5. The main surviving exception is Quantum, which

subcontracts its manufacturing to MKE, a subsidiary of

Matsushita of Japan. A variation of this theme is IBM,

which makes high-end drives, then extends their product

GLOBALIZATION OF PRODUCTION 315

life by licensing them to NEC when they shift toward the

low-end.

6. We include Quantum, which subcontracts the

manufacture of its drives to MKE of Japan, in the US

numbers.

7. Firms do continue to produce in the United States,

largely, though not entirely, in pilot lines; Seagate

supports modest volumes of production in Oklahoma

City. US production thus was about 1% of the world

total in 1997.

8. The major gaps include our coverage of Japanese

®rms, which is less complete than our coverage of US

®rms, and our coverage of indigenous supplier ®rms in

Malaysia and Singapore. For about 15% of employ-

ment, we know employees work in the industry but we

do not know what country they are in, what activity they

work on, or both.

9. For methodological reasons, in the discussion below

we use wages paid (employment times wage rate) rather

than value-added. Presently we are using national

average wage data, rather than actual wage levels in

the HDD industry. For a further discussion of the

methodology used to calculate these numbers, see

Appendix 1 of Gourevitch, Bohn and McKendrick

(1997).

10. Our data on semiconductors are not detailed.

Figure 3 oversimpli®es the distinction between semicon-

ductor fabrication, done in the high-wage countries, and

semiconductor assembly, usually done in low-wage

countries.

11. For example, in one case we analyzed, a 10%

change in yield has more impact on cost than a $20 per

hour change in the wage rate. See Terwiesch, Bohn and

Hampton (1997).

12. On the agglomeration or ``district'' e�ect see Rauch

(1993). Economists' analysis of agglomeration traces

back to Alfred Marshall (1960). See Krugman (1991)

and Porter (1990). On issues of regulation see Gilpin

(1975), Wade (1990), Haggard (1990), Gere� and

Korzeniewicz (1994), Cowhey (1993), and Richards

(1997). On the interaction of variables see Rauch

(1993) for a discussion of the ways government policy

overcomes ®rst mover disadvantages and induces

concentration and the agglomeration a�ect.

13. We are grateful to a referee for suggesting these

points.

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