Columbia FDI Perspectives

• The most important product in GSCs often is not the finished good, but rather key components or raw materials. Semiconductor shortages are a classic example because they are critical inputs for many end-product industries, from advanced electronics to automobiles and home appliances. Similarly, pharmaceutical active ingredients are key for essential medicines, while scarce minerals like lithium and cobalt are needed to make batteries for electric cars and smartphones. Emphasizing critical technologies and geographic shortages can help both governments and companies anticipate and overcome supply-chain vulnerabilities. 

• Focus on solutions for high-priority markets. Mature products may have greater opportunities for quick gains than advanced products. While cutting-edge semiconductors require large investments in new and costly wafer-fabrication facilities, the shortage of “legacy chips” used in mature products like cars and appliances might be addressed more quickly by retooling existing factories or alternatively redesigning chips for existing production facilities.

• International production partnerships are often necessary. Contemporary GSCs can be staggeringly complex, requiring intricate cross-border trade and investment collaboration. For example, the COVID-19 vaccine developed by BioNTech and Pfizer involves 280 components from 86 suppliers sourced from 19 countries around the world. Furthermore, vaccine manufacturers follow very different production strategies with numerous international partnerships. AstraZeneca has formed manufacturing partnerships with 16 contract manufacturers in 25 sites in 15 countries, and transferred technology to the Serum Institute of India, the largest vaccine producer in the world. Without such partnerships, which are utilized in most industries, governments could not handle the diversification, speed and scale required by global crises.

• Human capital is critical for resilient supply chains. The US Government Accountability Office concluded that the most significant long-term strategy to address supply-chain shortages in semiconductors and other industries was workforce development. In the new semiconductor fabs being built in the US, including those likely to be supported by the CHIPS and Science Act, skills shortages are critical chokepoints.[2] The good news is that government policies to improve supply-chain resilience, such as training people to avoid skills shortages (e.g., cyber-security) as well as building skills to fill available jobs, can boost earnings and productivity. Intel’s two new semiconductor factories in Ohio are expected to employ 3,000 workers with an average salary of $135,000 per year.

• Reshoring or making supply chains more domestic does not guarantee resilience. While the breakdown of GSCs has spurred calls to bring the production of critical goods back to domestic shores, often this is not feasible technologically, and it would decrease the benefits of geographical diversification (e.g., for agricultural goods, energy grids or complex manufactures). Selective reshoring is possible and domestic stockpiles can be utilized, but they must be managed very carefully.