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Globalization - The Great Unbundlings
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Globalization - The Great Unbundlings
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Summary Globalization - MNEs & InstitutionsWeek 1
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Friedman’s periods of globalization:
Globalization 1.0 (1492)
- Mainly European countries care globalizing
- Power is the primary driver (driven by Kings as they
wanted to gained/craved power of other territories' to
settle in new parts of the world. To increase their
power)
- The pace of change is slow (hence the turtle)
- The world is medium sized
Globalization 2.0 (1800)
- Mainly European and American companies are involved;
- Now companies were globalizing/going abroad. They produced in countries were production was most
convenient for them (trade theory, Ricardo model) where there was comparative advantage.
- Globalization takes place due to reduction in transportation (first phase/ first half of the 19th century)
and lower telecommunication costs (Second phase/ second half of the 19th century)
- (Hence) The world is small-sized.
Globalization 3.0 (2000)
- Small groups and individuals are globalizing;
- Faster pace of change;
- The world is tiny-sized.
Friedman’s enablers of globalization 3.0:
- The fall of the berlin wall (freedom and free markets);
- Outsourcing (seek most efficient providers);
- Offshoring (companies move entire production facilities abroad);
- Availability of internet (individuals have access to internet)
- Supply Chain integration (integration of suppliers, producers and customers).
Friedman (2008): The World Is Flat
- Technological innovations have reduced transportation and knowledge information transmission costs
to the point that distance has become irrelevant.
, - Flattering the world means that we are now connecting all the knowledge centers of the world together
into a single global network.
In short, the nowadays world is a level playing field due to technological improvements. Access to
information, knowledge and opportunities in different countries has become more homogenous
To sum up he basically says distance is irrelevant due to a fall in transportation & and communication -
hence the world has become a level playing field due to - so now there are more players à hence more
flat - you don’t feel the geographical distance.
What is the meaning of “flat” in Friedman’s context?
- Technological innovations have reduced transportation and information transmission costs such that the
distance between economic agents has become irrelevant to their location decision.
- Due to rapid advances in Information and Communication Technology (ICT) the world is a level
playing field for all sorts of commercial and non-commercial players.
- Access to information, knowledge and opportunities of people in different countries/regions have
become more homogenous.
- To be successful, it matters less whether you are located in a developed or developing country.
- Convergence of new players, on a new playing field, developing new processes for horizontal
collaboration
Why does distance still matter?
Arguments by students:
• Distance still matter due to institutional, cultural, geographical and economical differences between
countries
• Distance still matters because of cultural differences. In most cases the further you go the more likely you
are to find a different culture than your own. Differences in culture can create barriers to trade or to
migrate to/with another country.
• Distance creates significant information asymmetry (cost)
• Distance still matters in economic differences such as human resources, knowledge and income
• Cultural barriers. country specific legislations
• Distance matters because of inequality between countries
Ghamawat: The World Isn’t Flat
CAGE framework inclusion of bilateral (effect depends on attributes of just one country) as well
unilateral/multilateral (effects depend on the country pair under consideration) factors
CAGE Framework
- Cultural Distance
- Administrative (Political) Distance
, - Geographic Distance
- Economic Distance
Dimensions
- Unilateral: effect depends on the attributes of just one country
- Bilateral/multilateral: effects depend on the country pair under consideration
Home-bias multiple: Value of an indicator (e.g. trade) is a multiple within a country (between its provinces)
compared to its value between countries.
Example: In 1999, Brazilian states traded internally more than ten times as intensely as with other Brazilian
states but 280 times as intensely as with foreign countries.
, Trade
Distance sensitivity: a 1 percent increase in geographical distance leads to about a 1 percent decrease in trade.
US trade with Chile is only 6% of what it would be if Chile were as close to the US as Canada.
- Countries with common language trade 42% more.
- Members of a trade bloc trade 47% more.
- Common currency increases trade by 114%.
- Colonial ties increase trade by 188%.
- Countries with common land border see 125% more trade
Financial flows
- Financial flows decrease with geographic distance.
- Common language leads to 43% more bilateral FDI.
- Colonial links lead to 118% more FDI.
- Common legal origins increase FDI by 94%.
Knowledge and other types of flows are typically also reduced by different dimensions of distance.
McCann: the world is getting flatter and steeper
“Technological changes now mean that the world is becoming more similar and less differentiated.”
— McCann (2008) - paper 1B
As result of technological changes the world is becoming more similar and less differentiated.
The World is Getting Steeper (McCann)
Spatial transaction costs
Costs associated with activities across space
- Transportation costs - Costs of moving goods across geographical space
- Knowledge-information transmission costs -Transactions costs associated with moving knowledge
and information across geographical space
- Institutional costs -Transactions costs associated with moving across national borders (e.g. tariff costs).
Spatial transmission costs lower ↓
- Costs that are directly related to the costs of moving goods or information across space (subset of
spatial transaction costs)
Spatial transaction costs higher ↑
- Quantity, variety and complexity of information have increased
- Required frequency of face-to-face interaction has increased
- Variety and complexity of the logistics operations have increased I Increasing preference for goods
shipments characterized by speed, reliability and timeliness (just in time).
Spatial transmission costs lower due to technological progress (costs directly related with moving goods or
information across space).
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