Economics: Globalization and International Production

Michał Brzozowski

INTERNATIONAL ECONOMICS
Part I [e-mail] A Tour of the Course

International Economics

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INTERNATIONAL TRADE:
Absolute and comparative advantage
Intra-industry trade and the New Trade Theory
The Political economy of trade
Trade policy, international trade organizations, international trade integration
INTERNATIONAL PRODUCTION:
Foreign market entry
Foreign direct investment
Migration

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Grading

International Economics

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The grade will be based on:
Midterm exam (December, 3rd): 10 multiple-choice questions
(5 answer alternatives) = 30 points.
Final exam: 25 multiple-choice questions (4 answer alternatives) = 50 points.
In-class presentation in groups (up to 15 minutes in groups of
3 and up to 10 minutes in groups of 2) = 20 points OR written solution of selected review exercises indicated by the lecturer (3 review exercises, answers have to be submitted by
January 14, 2014) = 20 points.
The retake exam: 32 multiple-choice questions (5 answer alternatives) = 80 points (+ points earned for presentation/solutions) Grading

International Economics

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Details on presentation:
Choose any topic related to international trade or multinational corporations (examples: Comparative and absolute advantage in US-China trade; Is international trade a substitute for migration?; Trade and innovation; Trade disputes).
Refer (if possible) to the theories discussed in class.
Specify the question you are trying to answer.
Processing of data would be appreciated.
If your work is based on the existing literature, it should be a critical review.
Presenting DOES NOT MEAN READING.

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Lecture 1

International Economics

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Windows on the World Economy

Structure of this lecture
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International Economics

1.

Globalization
1.1 Definition
1.2 Measurement

2.

Trends in Globalization
2.1 Episodes of Globalization
2.2 Globalization, International Trade and International
Production

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1.1 Definition
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1. Globalization

"Globalization can be thought of as a process (or set of processes) which embodies a transformation of the spatial organization of social relations and transactions."
David Held et al. 1999
"Globalization refers to all those processes by which the peoples of the world are incorporated into a single world society, global society." Martin Albrow, 1990
"Globalization can [...] be defined as the intensification of worldwide social relations which link distant localities in such a way that local happenings are shaped by events occurring many miles away and vice versa."
Anthony Giddens, 1990

1.1 Definition

1. Globalization

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"The characteristics of the globalization trend include the internationalizing of production, the new international division of labor, new migratory movements from South to North, the new competitive environment that accelerates these processes, and the internationalizing of the state [...] making states into agencies of the globalizing world."
Robert Cox, 1994
" The term globalization is generally used to describe an increasing internationalization of markets for goods and services, the means of production, financial systems, competition, corporations, technology and industries.
Amongst other things this gives rise to increased mobility of capital, faster propagation of technological innovations and an increasing interdependency and uniformity of national markets",
Manual on Statistics of International Trade in Services, Eurostat,
IMF, OECD, UN, UNCTAD, WTO, 2002

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1.2 Measurement

1. Globalization

1 http://globalization.kof.ethz.ch/ KOF Index of globalization (Konjunktur-forschungsstelle Swiss
Economic Institute) measures the three main dimensions of globalization: economic, characterized as long distance flows of goods, capital and services as well as information and perceptions that accompany market exchanges; social, expressed as the spread of ideas, information, images and people. and political, characterized by a diffusion of government policies. 1.2 Measurement

1. Globalization

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A. Economic Globalization
i) Data on actual Flows
Trade (percent of GDP)
Foreign Direct Investment, stocks (percent of GDP)
Portfolio Investment (percent of GDP)
Income Payments to Foreign Nationals (percent of GDP) ii) Data on restrictions
Hidden Import Barriers
Mean Tariff Rate
Capital Account Restrictions

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1.2 Measurement
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1. Globalization

B. Social Globalization
i) Data on Personal Contact

Telephone Traffic
Transfers (percent of GDP)
International Tourism
Foreign Population (percent of total population)
International letters (per capita) ii) Data on Information Flows
Internet Users (per 1000 people)
Television (per 1000 people)
Trade in Newspapers (percent of GDP) iii) Data on Cultural Proximity
Number of McDonald's Restaurants (per capita)
Number of Ikea (per capita)
Trade in books (percent of GDP)

1.2 Measurement

1. Globalization

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C. Political Globalization
Embassies in Country
Membership in International Organizations
Participation in U.N. Security Council Missions
International Treaties

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1.2 Measurement
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1. Globalization

Economic Globalization, Europe

1.2 Measurement
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1. Globalization

Economic Globalization, Asia

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1.2 Measurement
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1. Globalization

Economic Globalization, Africa

2.1 Episodes of Globalization

2. Trends in Globalization

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Globalization is not a new phenomenon. Since the mid-19th century, there have been at least two episodes of globalization:
The first episode began around the mid-19th century and ended with the commencement of World War I
The second episode began in the aftermath of World War II and continues today.
Globalization has not been a smooth process. It has often been marked by periods of accelerated integration and by periods of dramatic reversals (as in the inter-war period)

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2.1 Episodes of Globalization
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The two most recent episodes of globalization were characterized by increased integration in trade, capital flows and movement of labor (percent change unless indicated otherwise)

2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

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International trade refers to the exchange of goods and services among the countries of the world.
International trade after WWII entered a long period of record expansion with world merchandise exports rising by more than 8 per cent per annum in real terms over the 1950-73 period.
Trade growth slowed thereafter under the impact of two oil price shocks, a burst of inflation caused by monetary expansion and inadequate macroeconomic adjustment policies.

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2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

1

In the 1990s, trade expanded again more rapidly, partly driven by innovations in the information technology (IT) sector.
Despite the small contraction of trade caused by the dotcom crisis in 2001, the average expansion of world merchandise exports continued to be high – averaging 6 per cent for the 200007 period.
For the entire 1950-2007 period, trade expanded on average by
6.2 per cent, which is much stronger than in the first wave of globalization from 1850 to 1913.

2.2 Globalization, International Trade and
International Production

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Trade openness (exports+imports as percent of GDP)
2000

2007

180
160

OECD
Accession
Countries

OECD
Enhanced
Engagement
Countries

140
120
100
80
60
40
20
0
Lu xe mb ou Sl o va Bel g rg k R iu m ep ub
Cz
e c Hung lic h R ar ep y ub Ne Irela li c the n d rla n
Au ds
D s tr ia
Sw enm i tz a rk erl OE
CD Sw and
30 ed e av n e G e rage rm a
Fin ny la Po nd l an
Ko d r Ic e ea lan No rw d
Po ay rtu Ca g a l na da
Ne
w Z Spa ea in la n
Me d x ic o I
Un
G r tal y i te ee dK ce i ng d Fra om n Tu ce
Au rkey s tr ali a
Un
i te J apa dS n ta Es te s
Sl o toni a ve nia
Ru
Is r s si ae an l Fe Chi le de
Ch ratio i na n
So
u th
(1
A )
Ind fr ic a on es ia Ind
Br i a az il

2. Trends in Globalization

Luxembourg:
327% (2007)

% %(2000)
279
200

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2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

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2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

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2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

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International production can take place through two modes: contracts (international licensing and franchising) and foreign direct investment (FDI) undertaken by multinational enterprises (MNEs).
Contracting is an arm’s length relationship across national boundaries that can be described as a low-commitment–lowcontrol option.
FDI involves firms based in one country, owning at least 10 percent of a firm producing in another country and thereby exerting management influence. It can be described as a highcommitment–high-control option.

2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

1

Partial liberalization of capital markets, and a more welcoming attitude to FDI contributed greatly to the surge in FDI flows from the mid-1980s onwards.
FDI flows increased in the 1980s by 14 per cent annually and by more than 20 per cent annually in the 1990s, reaching a peak level of US$1.4 trillion in 2000.
The dotcom crisis in 2001 sharply reduced FDI flows.
These flows started to recover in 2004 and reached their previous peak again in 2007.

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2.2 Globalization, International Trade and
International Production

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2. Trends in Globalization

FDI inflows in US dollars (billions)

2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

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The flow of people across regions was a major feature of the globalization process in the 19th century.
Between 1850 and 1913, more than 20 million people moved from Europe to new settlements, mainly in North and South
America, Australia and New Zealand.
The inter-war period saw severely limited migration flows to these areas of European settlement, but the situation started to change again in the second half of the 20th century.

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2.2 Globalization, International Trade and
International Production

2. Trends in Globalization

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