The Review of Economics and Statistics Vol. 36 No. 2 1954
Investment Criteria for Manufacturing Industries in Underdeveloped Countries
Abstract
THE very fact that an economy is underdeveloped implies that there are special limitations to the establishment of manufacturing industry. In the typical case the small size of the local market, the shortages of financial capital and skilled labor, and the availability of relatively inexpensive industrial products from abroad are among the factors that combine to severely restrict the types of industry that can be economically justified. Various criteria have been suggested by economists to assist in selecting industries under such conditions. They range from simple rules of thumb, such as those based on capital intensity and balance of payments effects,' to elaborate applications of the principles of marginal productivity 2 on the one hand and comparative costs on the other.3 This paper follows the latter approach in attempting to indicate by an analysis of industrial characteristics the extent to which various industries may be adapted to the conditions usually found in underdeveloped economies. This approach is particularly appropriate for a broad treatment of the subject. It does not require the detailed local economic data necessary for the successful evaluation of projects on the basis of the marginal product of capital, and yet it may provide a first approximation of the suitability of investments and so indicate the areas requiring more detailed analysis. The method used assumes a certain degree of constancy of industrial characteristics from country to country. This seems justified on technical grounds. The physical processes of production do impose certain characteristics upon each industry. The amount of capital required, the skills needed, and the presence or lack of significant economies of scale are all inherent in the processes themselves I as are also, for all practical purposes, the relationships between the location of the industry, its market, and its source of materials. The characteristics selected for study were the requirements of capital and skilled labor, plant size, and locational pattern. The importance of the first three is obvious. The lower they are, the more easily will an industry fit the conditions typical of underdeveloped areas. In the case of location, industries which are widely dispersed in developed countries or those oriented to sources of materials will tend to be in a strong position to compete with imports when established in underdeveloped countries. Material-oriented industries may also be successful in export trade.
- DOI
- 10.2307/1924666
- Volume
- 36
- Issue
- 2
- Pages
- 157
- Sources
- openalex crossref