Chapter 2 Globalization and its implications
2.1.1 A changing world
Three centuries of globalization have changed the face of our economies. This globalization has taken place in two stages (Baldwin, 2012). The first globalization is characterized by the industrialization of northern countries.
Innovation and economies of scale give the North significant comparison advantages. Technological progress and learning-by-doing allow for a large increase in productivity in the north, while there is stagnation or even negative change in the south (Baldwin, Martin, & Ottaviano, 2001). It is a period characterized by an increase in the gaps between rich and poor countries.
During the second part of the 20th century, the new information and communication technologies (ICT) and the existing wage gaps between northern and southern regions are the triggers of the second globalization.
Indeed, ICTs allow companies to no longer be spatially limited and thus benefit from the cheap labor force of southern countries.
These relocations - initially mainly in the manufacturing sector and now also in services (OECD, 2006) - and the new international mobility of technologies reverse the trend by allowing the re-industrialization of the countries of the South.
Technology transfers and the opening of borders are enabling emerging countries to increase productivity in a number of manufacturing sectors.
All developed countries, Canada and therefore Quebec, are then facing a new environment that must be properly understood in order to remain competitive throughout the world.
When talking about emerging countries, it is customary to mention the BRICS countries: Brazil, Russia, India, China and South Africa. We can add to this list many other countries, especially Mexico.
If we add up the populations of China, India, Brazil and Mexico, these four countries now represent more than 40% of the world’s population. They are also witnessing significant growth in their GDP over a long period of time.
In summary, the globalization is:
- Economic phenomenon
- Greater economic interdependence between countries
- Demographic phenomenon
- Movements of people across countries
- Cultural phenomenon
- Diffusion of values and tastes
Globalization: “ongoing process of greater interdependence among countries and their citizens” (Fischer, 2003)
2.1.2 New reality of globalization
- Commercial integration before WWI more limited:
- Trade in good (agriculture, manufacturing, and mining) significantly higher
- Trade in services now part of trade between nations
- Intra-firm trade (multinationals) now the norm
- Developments in transportation
- Reduction of barriers of information exchange (Telecommunications)
- Reduction of trade barriers
- Financial integration before WWI more limited:
- Net flow of capital higher at the time when look at in relation to GDP
- Narrower in terms of sectors than today
- Foreign borrowing limited to railways and governments
- Why is it greater today:
- Information flows: faster and more abundant
- Contracting problems: geographic ignorance and problems of control
- Macroeconomic risks: new system in place
- Accounting standards: standardization of practices
Source: Bordo, Eichengreen and Irwin (1999)
126.96.36.199 Trade (% of GDP) in the World
Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product.
188.8.131.52 Trade (% of GDP) in Regions
184.108.40.206 Trade (% of GDP) in Canada
220.127.116.11 America’s Growing Globalization
18.104.22.168 Exports of goods and services (% of GDP)
22.214.171.124 Imports of goods and services (% of GDP)
126.96.36.199 Developments in Sea Transportation
The Container Revolution
- As of the1950s, containers have:
- Simplified transshipment of freight from one mode of transportation to another
- Increased security of shipments
- Reduced cost and time involved in moving freight over long distances
- Roughly 90 percent of total world trade moved in containers on purpose-built ships
- Cost of containers affordable
188.8.131.52 Developments in Air Transportation
The cost of an airline ticket has declined on average by 30% over the past 20 years (estimate adjusted for inflation)
184.108.40.206 Developments in Telecommunications
Transatlantic Phone System
220.127.116.11 Transportation and Communication Costs
18.104.22.168.1 The decline of transport and communication costs relative to 1930
22.214.171.124 The Internet Revolution
126.96.36.199.1 Individuals using the Internet (% of population)
188.8.131.52 International Capital Investments
2.1.3 Global Governance
Globalization in 5 steps:
- Globalization and delocalization
- Globalization, deindustrialization and reverse innovation
- Globalization and inequality
- Globalization or regionalization?
- Globalization and global governance
184.108.40.206 Free Trade Agreements and Tariff rate
Globalization also comes with:
- Bilateral and Multilateral Trade Agreements
- Institutional innovations:
- World Trade Organization
- International Monetary Fund
- World Bank
- United Nations
220.127.116.11.1 RTAs currently in force (by year of entry into force)
18.104.22.168.2 Free Trade Agreements
Source: World Trade Organization
22.214.171.124.3 Tariff rate, applied, simple mean, all products (%)
Bilateral and multilateral agreements have reduced tariff and non-tariff barriers to international trade.
2.1.4 Globalization according to Ghemawat
126.96.36.199 Exhibit 1: GDP growth rate of high income countries vs Low & middle income countries, 1980–2019
Since 2000s, the engine of economic growth has shifted from the advanced economies of Europe and North America toward the emerging and developing economies, particularly those in Asia.
As shown in Exhibit 1, growth rates in the developing world just slightly outpaced those in the developed world over the last two decades of the twentieth century. But beginning in the early 2000s, emerging and developing countries began to achieve much higher overall growth, producing dramatic effects that are already visible today.
188.8.131.52 Exhibit 2: Low & middle income countries GDP and GDP (PPP) 1990–2019
The share of low and middle-income countries in world GDP (at market exchange rates) bottomed out in 1992, at 15%.
Their share of world GDP accounted for 37% in 2019.
The figures look even more dramatic when currencies are valued at purchasing power parity rather than market exchange rates: 53% share of world GDP in 2019.
184.108.40.206 Exhibit 3: Industry-level shifts of production and consumption to emerging economies
Exhibit 3 shows how emerging economies’ shares of production (vertical axis) and consumption (horizontal axis) have evolved across a dozen industries since the millennium.
Consistent with the law of semiglobalization, most of the industries shown in the figure cluster along the diagonal line (which represents equal emerging-economy shares of production and consumption).
An exception, with large exports from emerging economies to advanced ones, is microwave ovens—well above the diagonal line. About 99% were produced in emerging economies in 2016, but only 50% were old there
Taking a dynamic perspective, emerging economies’ share of production and consumption increased in all 12 industries: there was general movement toward the top right corner of the graph.
In 2000, less than 20% of its production and consumption was in emerging economies; by 2016, that figure had increased to about 60%. In contrast, the share of meat production and consumption in emerging economies only increased by six to seven percentage points between 2000 and 2011.
220.127.116.11 Exhibit 4: Top 10 countries according to GDP at market exchange rates in 1992
Concentration of economic growth in emerging economies, and in emerging Asia in particular.
We can see in Exhibit 4 the evolving shares of GDP at market exchange rates held by each country in 1992 (when the share of emerging economies bottomed out), in 2016, and projected for 2050.
These GDP forecasts are consistent with demographic trends, which we generally can predict more confidently.
18.104.22.168 Exhibit 4: Top 10 countries according to GDP at market exchange rates in 2016
The United Nations Population Division forecasts that the emerging world will account for 97% of population growth between 2016 and 2050, although the bulk of this growth is projected to occur in Africa, where per-capita incomes are not expected to rise as much as in Asia.
When we look at demographics in the currently developed world, Japan’s population is projected to drop from 126 million to 107 million, and Europe is expected to experience a crunch from its soaring dependency ratios.
22.214.171.124 Exhibit 4: Top 10 countries according to GDP at market exchange rates in 2050
Of the large developed economies, the demographic picture looks relatively healthy only for the United States, and even that picture is subject to caveats about the effects of possible restrictions on immigration.
Of course, some large developing countries, such as Brazil, China, and Russia, will face demographic challenges as well.
126.96.36.199 Exhibit 5: Average depth of global connectedness, ratio of advanced economies to emerging economies, 2005–2015
In terms of the geographic breakdown of trade, forecasts indicate that emerging Asia will account for 34% of global trade growth between 2016 and 2025, down from 54% between 2007 and 2016. Although emerging economies have powered almost all of the trade expansion in the wake of the global financial crisis, they have already achieved the same trade intensity, on average, as advanced economies (Exhibit 5).
In fact, since the trade line in the figure is rising slightly, emerging-economy trade intensity relative to advanced-economy trade intensity has actually decreased a little bit since 2005. The major reason is China’s rebalancing away from exports, which used to be 33% of Chinese GDP and are now down to 21%.
Source: Ghemawat & Altman (2016c).
- In summary, since emerging economies do not lag on trade intensity, there is no reason to expect trade to increase as a share of their national income as they get richer, unlike the other dimensions of globalization discussed next.
Globalization is about much more than just trade, and trends on other dimensions do not support the notion that globaliza- tion has peaked. Significant increases in the intensity of cross-border information flows and smaller but steady increases in cross-border people flows have increased levels of globalization. Thus, despite weakness on the trade and capital fronts, the aggregate level of globalization, as tracked in the 2016 DHL Global Connectedness Index, reached a record high.
Particularly interesting about the nontrade metrics in Exhibit 5 is how far the emerging economies lag the advanced ones in terms of the internationalization of capital (1–4), people (1–6), and information flows (1–9). If, because of the big shift, emerging economies grow to be more like today’s advanced economies, their development should imply more rapid globalization along nontrade dimensions. Acceleration along other dimensions is so much the opposite of trade-led globalization that one might even label it alt- globalization.
The fact that sectors with more trade also have more international mergers and acqui- sitions provides another type of evidence for complementarities that could power faster growth than one would anticipate looking at each type of flow on its own.
188.8.131.52 Exhibit 6: Three-pole map of top trading partners (in terms of exports), 2019: United States, European Union, and China
- The three-pole map of trade leadership shows that the European Union, China, and the United States each have a zone where they are the largest trading partner for a set of countries (Exhibit 6).
- While China’s rising influence in Africa has been striking, the European Union remains the top trading partner for much of the African continent.
184.108.40.206 Exhibit 7: Seven pole map of top trading partners (in terms of exports), 2019: United States, European Union, and BRICS.
The seven-pole map showing China, the United States, the European Union, and the rest of the BRICS countries (Brazil, Russia, India, and South Africa) demonstrates the existence of mostly contiguous zones of leadership for this wider set of poles as well (Exhibit 7).
These varying levels of granularity illustrate how the world you see depends on what level of aggregation or resolution you decide to use.
220.127.116.11 Exibit 10: Ranks of the United States and China on betweenness centrality and PageRank, 2015
The table shows the ranks for the United States and China on betweenness centrality and PageRank for several cross-border activities.
On merchandise trade, China has overtaken the United States in terms of betweenness centrality but still lags the United States a bit on PageRank.
While the United States trades less than China, the US trade partners are evidently more central to the world trade network to an extent that more than offsets China’s lead in value of merchandise trade.
The United States, however, does receive a very large endorsement from China, the second-ranked economy in terms of PageRank.
|Cross-border activity||United States||China||United States||China|
|Portfolio equity assets||1||8||1||10|
- relatively limited centrality on measures of civil interactions
- weaknesses relative to the United States militarily (compare the US worldwide network of military bases with China’s single overseas base in Djibouti)
==> Then talking of its trading places with the United States as the global hegemon looks like an exaggeration.
In terms of the sheer aggregate size of its economy, the United States is expected to stay close to China for some time after being overtaken.
Since the United States has far fewer people than does China, US citizens are expected to continue to have much higher per-capita incomes than the Chinese.
So despite some downward pressure on the salience of the United States, a complete switch of positions seems unlikely.
The major caveat to that conclusion is that it is possible to imagine a brew of US policies that are dysfunctional enough and Chinese policies that are smart enough to lead to a switchover.
18.104.22.168 Exhibit 11: Preponderant and dominating trading partners between the United States and China, 2019.
If established security relationships were subject to the strict calculus of economic selfinterest, the narrowed focus could totally transform them and, at a fundamental level, weaken them.
The United States would become security for hire rather than a security guarantor.
Over the long term, old alliances would fade away.
As an extreme scenario—requiring persistently and perhaps implausibly poor decision making by the United States—the geopolitical map might come to look more like the economic one.
Such an outcome would play to China’s strengths and apparent strategy.
To see how this scenario might pan out, look at the two-pole trade map with countries shaded according to their larger trading partner (the United States or China).
The United States leads in a few places, particularly in the more proximate parts of the Americas, but China leads more broadly.
Extrapolations indicate that by 2025, the Chinese sphere of trade leadership will extend even further, with the United States forecast to lead only in the part of the Americas that is north of the equator.
Some might find such a projection far-fetched, but its logic was recognized by the Look South export strategy that the US Department of Commerce developed under the Obama administration.
22.214.171.124 Exhibit 12 : Infrastructure development along One Belt, One Road
Geographically, toward the south and east, China’s Regional Comprehensive Economic Partnership trade plan has emerged as a leading regional contender to replace the TPP process
The most impressive in terms of its scope is the ongoing One Belt, One Road initiative toward the north and west.
The initiative held its first summit, with leaders from 29 countries attending, in the spring of 2017.
The idea is to bring the old world together, under China’s auspices—and with a China-centric geometry.
2.1.5 Post-Covid-19 Globalization
126.96.36.199 Covid-19: an often underestimated health risk
With each crisis, societal models change.
These changes take place at different levels and with different intentions.
- A first lesson from past crises is that humans learn from shocks and integrate responses. This is somewhat the lesson of the 2008 crisis: new rules have emerged, international institutions are better organized, and financial risk management has improved.
- The Covid-19 crisis has and will have impacts at both the local and international levels. This crisis reinforces a dynamic that some people already named with the concept of demon-globalization (Berjeijk, 2019).
Will this dynamic continue?
Through this question, we understand that the complexity of analysis has greatly increased over the last 30 years.
- The fall of the Berlin Wall at the political level, China’s entry into the WTO at the economic level, the 2008 crisis at the financial level and the Covid-19 at the health/economic level are four examples of the new global realities that make the old analytical frameworks obsolete.
- The understanding of international business dynamics requires theoretical and empirical tools that are commensurate with this new complexity.
As for multinationals, they will continue to exist with value chains that will need to further integrate risk management.
As for governments, economic and industrial policies will have to give even more consideration to international risk management.
As for international institutions, their coordinating role will need to be strengthened to deal with global crises (e.g. societal, political and environmental).
In short, international risk management is a necessity in this context of growing complexity. And turning inward does not diminish this complexity.
The good news in the face of these risks, which are sometimes new and often growing, is that humanity today is the most technologically advanced.
We have access to algorithmic analysis tools thanks to artificial intelligence techniques and massive data as never before.
The international risk manager or analyst has access to this toolbox: data science for international business.
In addition to other methodologies, with this toolkit, the analyst can look for weak signals anywhere on the planet and work on better risk analysis models and solutions.
Understanding international business dynamics is therefore more necessary than ever.
2.2 Measures and Impacts
2.2.1 Measuring Globalization
- How should we measure globalization?
- Why should we care?
- Based on what we know, who are the “winners”? Who are the “losers”?
2.2.2 Dimensions of globalization (KOF)
Globalization (KOF) is a process that…
- Reduces the importance of national barriers
- Integrates national economies, cultures, technologies and governance
- Produces complex relationships of mutual interdependencies
188.8.131.52 Globalisation Index, overall (KOF)
184.108.40.206 Economic Globalisation, overall index (KOF)
220.127.116.11 Political Globalisation, overall index (KOF)
2.2.3 Measuring Globalization: A Country Perspective
KOF Index of Globalization. The KOF Index of Globalization measures the three main dimensions of globalization: Economic, social and political. In addition to three indices measuring these dimensions, we calculate an overall index of globalization and sub-indices referring to actual economic flows economic restrictions data on information flows data on personal contact and data on cultural proximity. Data are available on a yearly basis for 207 countries over the period 1970 - 2011.
A.T. Kearney/Foreign Policy Globalization Index:
- Quantifies the level of personal contact across borders
- International travel
- International phone calls
- Cross-border remittances and other transfers
- Charts the World Wide Web
- Number of users, Internet hosts and secured servers
- Economic Integration
- Movement of goods and services
- Permeability of borders through convergence of domestic and international prices
- Financial Integration and movement of money
2.2.4 Who’s In The Game and Who’s Out?
18.104.22.168 The World’s Most Globalized Countries
22.214.171.124 The World’s Least Globalized Countries
126.96.36.199 The WEF’s Travel and Tourism Competitiveness Report and the Passport Index
2.2.5 Who Won? Who Lost?
188.8.131.52 Inflation rate, average consumer prices (Annual percent change)
184.108.40.206 Real GDP growth (Annual percent change)
2.2.6 Ownership, Location and Internalisation (OLI)
Definition: An Eclectic Paradigm = a three-tiered evaluation framework that firms can follow when trying to determine whether it is advantageous to pursue foreign direct investment (FDI).
Assumption: This paradigm assumes that institutions will avoid market transactions if the cost of doing the same things internally results in a lower price. It is based on the theory of internalization and was first expounded in 1979 by John H. Dunning.
Lessons: For the FDI to be beneficial, the following benefits must be evident:
- Ownership advantages: the proprietary information and various property rights of a company (trademarks, copyrights, trademarks or patent rights, as well as the use and management of in-house expertise).
- Location advantage: is there a comparative advantage in performing specific functions in a given country. Location advantage may refer to natural or created resources, but in all cases they are generally immobile, requiring a partnership with a foreign investor in that location to be fully exploited.
- The advantages of internalization indicate when it is preferable for an organization to produce a particular product in-house, rather than contracting with a third party.
2.2.7 IR 4.0 and its impact on the global economy
220.127.116.11 Architectural revolution
- Architectural innovation for companies
- Architectural innovation for governments (Government 4.0)
18.104.22.168 Analog Economy versus Digital Economy
22.214.171.124 Digital economy versus platform economy
The Keystone Player concept (Iansiti and Levien, 2004)
Economies of scale + economies of scope + network effects + data network effects + … = the new monopoly power?
From rupture to collision:
- In purple: similar companies with decreasing returns to scale
- In gray: key players / Digital Natives with increasing returns to scale
126.96.36.199 Why Google is going to sell pizzas
Google Express, Uber Eats, Domino Pizzas, etc.
- Improvement of existing business models
- Development of new business models
- OLI Theory in all this?
188.8.131.52 The A.I. Revolution
- A.I. and data: training in new quantitative methods as a manager in the 21st century.
- OLI Theory?
- Brains: More engineers in India than babies born in the United States.
2.3 Trends and Challenges
- Intangible versus tangible goods:
- Modify the way we track data on globalization
- Modify the way states compete
- Modify the way firms compete
- Innovation creating new pressures on value chains
- Populism and nationalism
- Shifting powers
2.3.2 Intangible vs. Tangible Goods
184.108.40.206 Service exports (BoP, current US$)
220.127.116.11 Trade in Services (% of GDP)
2.3.3 Globalization of value chains
18.104.22.168 Porter (1985): Definition of a value chain
2.4 Data Challenge
2.4.1 Political Risk
What do you think of globalization ?