A smartphone may leave a factory in Vietnam bearing a label indicating that it was made there, but that does not necessarily mean the country hosting the factory received the largest share of its economic value.

Product design, technology development, component manufacturing, assembly, and marketing are spread across companies and countries. A country may host thousands of workers and huge factories, while other countries retain activities related to research and development and advanced technologies.

This raises an important economic question: Is attracting global factories enough to build an advanced industrial economy, or does the real value lie in the kinds of activities a country carries out within those factories?

From Hosting Factories to Owning Knowledge

One concept covered in the International Business course taught by Dr. @Stephen Rosenbaum at Al Yamamah University is upgrading in global value chains (Global Value Chain Upgrading). This means developing the capabilities of companies and countries to move into more advanced production activities, or to carry out existing activities more efficiently and with higher economic value.

Vietnam’s experience helps illustrate this idea. It has become an important manufacturing destination for global companies, including South Korean electronics company Samsung and American sportswear and footwear company Nike.

The country has benefited from its ability to attract foreign investment and integrate into international production networks, particularly in electronics and consumer goods.

But hosting factories is only one stage of industrial development. A country may be able to assemble products efficiently without necessarily owning the technologies used to manufacture their components or the knowledge needed to develop them.

That is why rising industrial exports alone do not reveal how much economic value the domestic economy retains.

How Do Countries Move into Higher-Value Activities?

Industrial upgrading is not limited to moving from product assembly to design. It can also involve improving production processes, raising quality, developing more complex products, or gaining the ability to carry out new activities.

When a country attracts a global factory, the initial benefits may include job creation and increased exports. But the greater opportunity emerges when local companies are able to join the supply network, workers acquire technical and managerial skills, and some engineering and technical activities move into the domestic economy.

This does not happen automatically. Global companies may keep their more advanced activities in other countries, especially when the necessary skills or industrial infrastructure are not available in the host country.

Moving into higher-value activities therefore requires investment in education, training, and technology, as well as the development of local companies capable of meeting the demands of global production.

What Does This Mean for Saudi Industry?

This idea is particularly relevant amid Saudi Arabia’s industrial expansion. Attracting global companies and establishing factories can create investment and employment opportunities, but the deeper economic impact depends on the ability of domestic businesses to participate in production, acquire knowledge, and develop their products.

If the Kingdom hosts a global factory, the number of jobs and the volume of production represent one part of the economic return. Another part is the extent to which local suppliers benefit, workers’ skills advance, and Saudi companies become capable of carrying out more advanced activities over time.

This changes how industrial success is measured. The question is not only how many factories a country manages to attract, but also how much value, knowledge, and productive capacity remains within its economy.

Reference:

https://www.worldbank.org/en/publication/wdr2020