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0:00
Hello, I'm Peter McGregor, I'm Professor of Economics and Head of the Department of Economics at the University of Strathclyde. And today I'm going to talk about internationalisation, globalisation, and localisation.
0:15
Here's an outline of what I'm going to talk about. Firstly, internationalisation; what it is, what its causes are, and what the consequences are. Then I'm going to talk about globalisation; a similar kind of thing; define what it is and then talk about the causes and consequences of globalisation.
0:34
And then I'm going to consider one possible view of the future; where next, this is entitled, the inexorable decline of the West. And this is a set of provocative views about where globalisation is likely to take us next. And I'm going to present those views first, and then I'm going to raise some doubts about that. These views are influential and a central part of the current policy debate, and I thought it was worth exploring that. And finally I'm going to come to some conclusions.
1:10
So firstly then internationalisation. The precise definition of internationalisation can vary across areas. But it's a term used to describe the increasing importance of international linkages for businesses in particular, and I'll probably focus on that primarily. But also for countries and for households. For businesses the focus is often on whether and why they might choose to export a part of what they produce to other countries. But it also focuses on their decision as to whether
1:47
to establish a plant in another country as well. Both of these are examples of the internationalisation of businesses.
1:58
Modern economic theory tends to emphasise heterogeneous firms that produce differentiated products. And the emphasis tends to be on those more productive firms as being more likely to engage in the internationalisation process. And this is backed up by empirical evidence. Although the extent of the likelihood of the exporting activity is going to depend on the scale of transport costs for the particular goods that they produce.
2:33
Typically in economic theories and indeed in theories in the business literature this is viewed as being a fairly gradual process, and normally a fairly logical step-by-step process, which involves firstly firms producing solely for the domestic market, but then gradually as their profits increase they increase in scale slightly, they experiment with selling on international markets, and then perhaps extend into a portfolio of sales across a range of international markets.
3:10
The evidence supports that gradualist view for quite a number of firms. But it doesn't seem to apply to a small group of firms that are sometimes called "Born Globals." These tends to be very high-tech setup companies, seeking to exploit a technological advantage before others catch up. And so the idea is it's a high-tech product, high value added, limited domestic market, we need to get out there and compete in international markets very rapidly,
3:42
to take advantage of the technological advantages that they are seen to possess.
3:51
Well, why do firms do this? Well, the most important factors that firms themselves identify, and this is from the Business and Innovation Skills department of the UK Government. Firstly, that they want to expand; they want to get bigger. And perhaps there are limitations in the domestic market and so they look to the overseas markets to expand their sales. Secondly, and probably linked to this, they want to enhance their profitability as well.
4:22
So they believe that they can enhance their profitability by selling overseas. And also very importantly and a factor that's emphasised frequently is they regard exporting as a learning opportunity. And that might be linked to the desire for increased profitability longer term. So they learn from the experience and become more efficient, and enhance their profits in the longer term. Well, what benefits do they get from this? Well, there's a lot of evidence to suggest
4:56
that they learn from exporting. So by the very process of exporting they learn how to do things better their productivity is enhanced as a consequence.
5:08
And it's often asserted and there's plenty of evidence to suggest again that it's true that there are spillovers from these companies to other companies in the same sector, possibly in other sectors, with whom these companies trade. So they become more efficient through the exporting process, and because they interact with other companies, these other companies also learn from their experience, and emulate that experience and themselves become more efficient at what they do.
5:36
And this is an example of a spillover from one company to another, a positive spillover, and generally this stimulates growth in the economy as a whole. And the evidence also suggests that such firms who do exporting and engage in exporting are more likely to survive longer term. So it's the better firms that do the exporting, and also the better firms that do the investing overseas. Are there any costs to the process? Well, the BIS survey doesn't identify these,
6:06
but there are costs associated with internationalisation, and one is additional risk. So there's a risk of exchange rate changes, that may move against you during the period of the contract. Although you can take measures to mitigate those risks. You may have information about customers, so you know rather less when you begin anyway about your customers overseas than you do about your customers in the domestic market. And so there's a learning process there as well.
6:36
But there is a risk. There's also an implied sensitivity to development in export markets obviously. If you're exporting to the US then you really care about the state of the US economy, because that impacts on the demand for your exports. But also overseas firms export to the UK. So the UK does import goods and to some degree those imports may displace some domestic activity.
7:07
But overall there's a belief and there's a reasonable amount of evidence to suggest that it's so, partly based on theory, partly based on evidence, that there's a net benefit to firms themselves who the exporting, and there's a net benefit to the economy as a whole as a consequence. Now, I haven't discussed the other dimension of internationalisation here which is the idea that firms might establish a plant overseas, this is called foreign direct investment.
7:37
Many of the motivations are similar, the desire to increase profits, but it can be that on occasion foreign direct investment could be a substitute for export activity. So for example, if our exports into the US are subject to some kind of tariff, then one way of surmounting that tariff might be instead to establish a plant in the US to produce and sell to the domestic market. Thereby you avoid the tariff barrier. But many of the same factors are a concern
8:15
governing foreign direct investment decisions, as do govern the decision to internationalise in terms of exporting part of your output. But what about globalisation then? Well, globalisation refers to an increasing trend for the worldwide integration of markets. And an increasing openness of economies; that is economies are very open to influence from other markets. Now, this has been a feature of virtually all markets. Those for goods and services,
8:51
those for financial assets and liabilities, and those for factors of production. I'll say a wee bit about each of these briefly.
9:00
So in terms of markets for goods and services, so this is where firms produce actual physical goods, or in the case of Scotland for example, malt whiskey; that's an example of a good that is exported intensively. And you've got increasing importance of trade flows as a consequence of globalisation, as a consequence of closer integration of economies. You get an increase in both exports and imports, and the prices of exports and imports tend to be more tightly tied together as well.
9:33
So markets are becoming increasingly integrated across space.
9:39
Probably the most extreme example of this is financial markets, which most people regard as completely integrated across geographic boundaries. To the point where there is effectively a law of one price for a particular asset category. That is to say it doesn't matter where you buy the asset, in London, New Orleans, wherever in the world; you would pay the same price for the same asset, in the same risk class, of course adjusting for exchange rates when doing so.
10:12
So we've got a set of highly integrated financial markets, indeed in the case of financial markets almost perfectly integrated for most assets and liabilities. You've got highly integrated goods and services, and you've got less highly integrated markets and factors of production. What are factors of production? These are capital and labour services essentially that companies bring together in order to produce the output that they produce; the value added that they produce.
10:41
So the malt whiskey producers have to have some capital in place, and they have to employ labour, and they combine these to produce their output, which in that case is whiskey. So there's also international markets for factors of production, though these are rather less developed for labour than perhaps for other factors. So physical capital flows across borders. And we had an example earlier on of companies thinking about establishing a subsidiary overseas.
11:14
And that would be an example of foreign direct investment. Where you're investing in another country, but the ownership resides with the home country. But these flows go in both directions. So there is physical capital mobility, there is also labour mobility. But that has tended to be rather less than the degree of mobility in other markets, partly because of simply restrictions. So there are legal restrictions on the extent of immigration migration.
11:48
So some of the consequences or indicators of globalisation, and the OECD, I'm not presenting graphs on this, but the OECD publishes regular indicators of the extent of globalisation, and you can dig these out for yourselves. But one is that the substantial increase in growth, in trade and in the openness of economies, as reflected for example in the ratio of exports and imports to GDP. So in Scotland these are both over 60% for example. So you've got a highly open economy.
12:21
But these ratios have been increasing substantially through time. So in the beginning of the 1990s, in the States, I think the import ratio was of the order of 5% of GDP, and now it's of the order of 15% of GDP. And so economies that traditionally might have been regarded as fairly closed have become much more open in that sense to international trade. But also you've got many more examples of companies operating across international boundaries.
12:50
You've got a big spread of multinational companies, that a parent company may own a number of plants in a number of different areas around the world. Companies establish international supply chains so they're buying various aspects of the inputs they require to produce their outputs from across the world. Companies are outsourcing some of their activities, and this has been a fairly controversial area of globalisation.
13:21
So the power of motivation here is to minimise costs, increase profits, and so you ship a part of the production process abroad. And we know call centres are a classic example of this kind of activity, and we know some of the problems associated with that. And we've also had a growth in the numbers and geographic spread of international joint ventures. But it should be noted that globalisation is not a new phenomenon. World trade for example grew rapidly in the period
13:53
up to the First World War, but then dropped substantially between the wars. Partly the Great Depression, partly reactions to that, and in particular movement towards protectionism by individual countries, by which I mean the raising of tariff barriers against exports, against the imports from other countries and other country's exports. And this led to a general contraction in international trade, and in economic activities. So there was bad news associated with that.
14:26
Which brings us I think to... Well, the causes of globalisation first.
14:32
The most recent and dramatic episode of globalisation was the period from the 1990s.
14:41
And two factors are typically identified as the main source of this, and certainly Paul Krugman, a Nobel Prize winning economist, and we're going to refer to one of his recordings on the subject, identified these two factors as crucial. But I think there's pretty widespread agreement on it anyway, I don't think it's controversial. First, there was a huge change in the policy stance towards free air trade, even if not free trade across the world in fact.
15:11
But where it was particularly important was in those countries in which we'll crudely call the East,
15:19
developing countries, countries that had been socialist countries and pursued what they perceived to be socialist policies, typically a set of very inward looking policies. And these were reversed. At the beginning of the 1990s there was a shift in the policy stance across the world, the most obvious example being China, but by no means the only example. And indeed, even in the developing countries, there was quite a bit of liberalisation towards trade
15:49
and trade and financial assets as well. And so in those countries that were previously inward looking they became much more outward looking and became export focused, and they wanted to share in what they regarded as some of the benefits of that export led growth, that they were observing elsewhere in the world. Secondly, there was a major technological innovation, well, there are a number that assisted globalisation. But probably the single biggest technological innovation
16:20
was containerisation of trade. This dramatically reduced the cost of trade across a whole range of goods. And you can see the effect of the technological change. If you look at pictures of ports, prior to containerisation the amount of labour required to shift and mix and sort out the goods being delivered by sea, and you compare them now, they're deserted. You need very few people to operate containerised ports. And the costs dropped dramatically
16:55
and this hugely stimulated growth in trade. Indeed, the interaction of the political forces on the one hand, the relaxation, the change in the policy stance towards a more open, friendly position, and on the other this huge reduction in transport costs, combined to generate an enormous stimulus to economic growth and to trade generally.
17:27
What are the benefits of globalisation then? Well, firstly the world economy's definitely richer, countries can specialise in the things that they do relatively best anyway. So efficiencies improve, costs and prices fall, consumers benefit. Bigger markets imply economies of scale,; it's cheaper per unit or production to produce larger numbers of units than it is to produce smaller units. And with a bigger market you can take advantage of those economies of scale, and again,
17:57
this makes consumers better off. A good variety of goods and services available to consumers. But, and there are buts, not everybody gains equally, and indeed some lose and I'll come to that in a moment.
18:10
But many of the consequences were very positive. I mean the BRIC countries, this is Brazil, Russia, India, China, experienced very rapid per capita growth. So that growth in GDP per head of population, extremely rapid growth. And these countries were very poor countries. So they start from a very low base, but have experienced huge and rapid growth. And this undoubtedly has improved the living standards of the people in those countries very substantially,
18:41
at least major groups of them. And although their living standards are still very low relative to ours in the West, they are nonetheless hugely better than they were before. So this is a major benefit of globalisation. And another benefit is the more rapid diffusion and adoption of new technologies. This happens much more rapidly as a consequence of globalisation than it did before. What about the costs? Well, some losers through distributional changes,
19:09
and questionably high skilled labour benefited, both in terms of real wages and employment, at least until recently. Low skilled labour lost out. So the wages of those in very low skilled jobs actually fell in real terms, as we'll see shortly. So the unskilled suffered, but the skilled and the more skilled you were, the more you benefited. It's not the only issue; there are skill intensive technical changes as well. But globalisation encouraged this.
19:39
Also there's increasing interdependence of countries, if you get an adverse shock in one country, given that all the markets are now much more tightly tied together this transmits itself to other economies much more rapidly than it did before, and to a greater degree than it did before. Also openness limits the ability of individual countries to influence their own economy through conventional macro policies. Partly because many of the prices of assets and goods and services
20:10
are determined out with the domestic economy. So this imposes a constraint on the authorities. Outsourcing problems. Well, when you outsource, this has been the source of some criticism, because there's a loss of jobs to the domestic economy, a loss of skills and maybe there are dynamic effects associated with that as well, and we'll come to that later. And finally, there's a more rapid spread of infectious diseases. So because of the movement of people and goods that happens.
20:37
Globalisation, the crisis; the final part of globalisation. Globalisation then is certainly not all good news. And I wouldn't pretend that it was. There's some bad news, but it's not all bad news either. So a very one-sided view of globalisation, it does neglect real things that happen, that are either negative or positive. But was globalisation responsible for the most recent recession; the most recent crisis? And not directly according to Krugman anyway.
21:07
It was undoubtedly an element on the financial side of the crisis. Why? Because globalisation allowed China, well, and other things, allowed China to accumulate huge surpluses, which it then reinvested in international asset markets. It facilitated the easy money policies that were pursued and that were responsible for the poor loans that were made and which gave rise to the housing bubble in the States, and ultimately the financial crisis.
21:40
So it was part of the explanation of the bubble in house prices, and that was a part of the story. Also there's no doubt that globalisation played a role in the propagation of the crisis. The greater integration of markets as we've seen makes it easier for shocks to be transmitted from one economy to another, and that increasingly interdependence can have a cost, and did during the recent crisis.
22:08
Krugman's response here is not however to rollback globalisation, which might be one response, but to improve global institutions in an effort better to manage the globalisation process. And in his case he had a case revisiting bank regulation as well.
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