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Globalization - MNEs and Institutions
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Globalization - MNEs and Institutions
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Week 1: Globalization (economics and businesstheories, critical review, presentation of the
essential multidisciplinary characteristics)
Is the world flat, curve, steep or non-flat?
Which is the effective market penetration of MNEs at the global level?
Friedman: globalization divided in 3 phases (1492-1800-2000) and these have brought the world
to become tiny sized from medium size
A) mainly European countries are globalizing, power is the primary driver and slow pace of
change
B) companies are globalizing, reduction in transportation and telecommunication costs,
mainly EU and US involved
C) individuals and small groups are globalizing, faster pace of change, emergence of new
industries à enablers of this phase =
a. Fall of the Berlin Wall (freedom and free markets)
b. Netscape Browser (individuals have access to the internet)
c. Work flow software (international communication, enabled collaboration)
d. Uploading (information sharing)
e. Outsourcing (seek most efficient providers)
f. Offshoring (companies move entire factory or operation to foreign country)
g. Supply chaining (integration of suppliers, producers, customers)
h. In-sourcing (e.g. UPS takes over customer services)
i. In-forming of individuals
j. Steroids (wireless, file sharing that enhance collaboration tools)
à FLAT means:
• 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.
è the level playing field for noncommercial player: transportation costs (along with the
homogeneous access to information through the ICT) and developed vs developing countries (?)
Ghemawat: Why does distance still matter? Generally, for any type of cross border economic
activity (FDI, international trade, JV, …)
à TED: number of minutes at the phone (2/6% of them are in the developing countries),
immigration of the first generation (is only 3%), FDI, immigration, x/GDP ratio (is around 20%)
è ¾ times higher than usually mentioned
à CAGE framework (SEE PAPER DISCUSSION THAT HAS ATTACHED THE FRAMEWORK):
Cultural distance, Administrative political distance, Geographic distance, Economic distance
+ two dimensions: unilateral = effect depends on the attributes of just one country,
bilateral/multilateral = effects depend on the country pair under consideration
Ex. +1 km distance = -1% trade; common language countries represent the 42% of trade; FDI =
colonial links more than 108% of them
è overall G. suggests that the world is not flat à home bias multiple (value of an indicator is a
multiple within a country compared to its value between countries)
McCann: the world is getting steeper
,Analysis based on transmission costs that have decreased (the ones directly related to the cost of
moving goods or information across space) and transaction costs that have increased (= quantity,
variety and complexity of information increased + required face to face interaction has increased,
variety and complexity of the logistics operations have increased, increasing preference for goods
shipments characterized by speed, reliability, timelines (JIT Toyota)
è simultaneous movement toward globalization and localization
Smick: the world is curved
Free flow of K has turned the world curved in that no one can look over the horizon and anticipate
the next financial crisis heading our way
è
• It may seem that we live in a borderless world where ideas, goods and people flow freely
from nation to nation.
• We are not even close. There is a delta between perception and reality in a world that is
maybe not so hyper-connected after all.
• Globaloney: Difference between perception and reality reflected in data.
,(1S) The development of trade blocs in an era of globalization – Kohl and
Brower
RQ: What is the driving force behind the trade blocs?
Analysis done through the evaluation of countries being in a trade bloc (= group of countries
characterized by large flows of bilateral trade à hierarchical clustering)
Main trade bloc = US, Japan, Eu (the triad)
à theoretical background: read the lecture slides è cross border trade is mainly regional and
reflected by regionally oriented trade blocs (NB of EIA): rise of interregional trade policy raises the
question of how the geography of international trade is affected
The topic is important because it leads to the understanding of trade flows for economic prosperity:
connectedness within region generates more international trade and leads to economic growth
Literature = papers mainly on determinants of the volume of cross border trade (gravity equation:
proximity and market size) BUT how the geographic of international trade can be explained? Only
volume concerned no about the blocs à need to understand what drives the clustering and how do
they evolve?
(Poon) = argument that the regionalization of international trade is a natural phenomenon mainly
driven by market forces à regionalization process based on trade differs significantly form closed
trade blocs
+ although forces of globalization have led to a decrease in the number of trade blocs there is no
evidence of triadization of the world economy
Globalization has caused à increasing number of countries have become integrated in the global
economic system (end of geography?) + growing role of trade in knowledge intensive sectors where
face to face contact is required to facilitate transferring specific sectoral knowledge in turn
increasing spatial transaction costs + most countries show an increasing amount of economic
activity in relationship with a growing number of economic partners à do these global flows of
trade increase the probability of regionalization with a larger number of countries?
à argument that distance is the most dominant determinant for generating economic regions but
underline the influence of cultural politics and history on relative distance as discontinuous or
strengthening forces è fluctuation of trade clusters is operated by centrifugal and centripetal
forces operating simultaneously (both sticky/important and fluid/flexible)
(Poon and Pandit) = importance of spatial structure in the process of regionalization à scale
economies and large efficient markets are instrumental in shaping emerging regional configuration
(Andresen) = increasing importance of distance over time due to the institutional and tech aspects
of trade costs were falling most dramatically à Christianity = provision of unifying framework
together with language and colonization
à PAPER: trade clusters emerge not only due to proximity but also on account of other geographic
economic political historical and cultural characteristics
BUT did trade blocs become more interregional oriented in the wake of globalization and
interregional EIA since 1980?
Methodology: no reliance on predefined exogenous trade blocs BUT annual bilateral trade flows è
investigation of configuration and development are associated with explanatory variables
commonly used in the international trade literature and the intramax clustering technique to
identify data driven endogenous trade clusters
- Probit empirical estimation with 211 countries analyzed: 1950-2005
- Model with independent variables = distance, economic integration agreement, GDP,
language, colonial relationship, being landlocked, share of borders à to what extent
each of them has influenced the driving force of the trade bloc?
à interactions between countries based on the indicators à countries with the highest absolute
level of interaction are merged and henceforth considered to belong to the same functional area
BUT no homogeneity between interactions
à possible limitations (1) assumed that each country ultimately belongs to a trade cluster without
considering the possibility that the marginalized countries might be also be part of them; (2) open
economies that do not trade reciprocally with large countries may be unjustly associated with the
latter’s trade cluster
, Analysis of trade blocs in the world economy
Results:
- Decrease in the number of clusters over time and that they have become more
geographically focused
- Still visible sties between France and UK à clusters are becoming more geographically
connected (ex. EU divided in north, east + Russia, south and west or BRICS)
è
1. Rise of interregional EIAs and economic globalization may have altered the scope of
interregional EIA and economic globalization may have altered the scope of the world trade
bloc to be less geographically oriented BUT trade blocs do not reflect this
2. North and Latin American clusters are much more stable over time in terms of the number
of countries and the trade bloc orientation compared to the rest of the world; problems
concern Africa and Asia à in line with idea that cost of distance = increased from 1980
3. No evidence of triadisation à although there are some clusters as mentioned of emerging
markets
Analysis drivers of development of the trade blocs
Results:
- Belonging probability = influenced by distance in both absolute and relative terms
BUT slight difference between how the effect of distance is interpreted in the standard
gravity equation and how it should be interpreted in the present studies
- Participation in EIA = increase country pair likelihood of being in a trade bloc
- Position of the countries in geographic terms = strong influence for the probability
- Common language as a proxy for cultural similarity has also a positive effect BUT not
robust
- Declining importance of distance on trade bloc formation until 1970 probably due to
forces of globalization BUT still need for personal probability of trade bloc formation
- Higher GDP level = increase probability as well à north south orientation of trade as a
market extension rather than cheap imports à same for being landlocked
Conclusion:
1. Strong evidence that the trade blocs are highly dynamic and different to those obtained by
static classification based on countries geographic or political characteristics à world
economy divided in three static regions, for which the creation has also been possible
through the central role of the BRICS even before their definition
2. Increasing distance reduces the probability that countries belong to the same trade bloc
(BUT no need to be stringent neighbor) à these results complement the gravity equation
literature by showing that distance not only affects the level of trade between nations, but
that it also influences the probability of belonging to the same trade cluster
3. Cultural similarities promote trade bloc formation, geographic position increase
probability, link between colonies also help (especially if common colonizer, mainly due to
the fact that there are some common cultural background and institutions similarities )
4. Distance and economic integration agreement (EIA) = key contributors to make the world
curved à trade starts at home = enhance economic integration with regional partners
Contribution to the globalization discussion
- Cultural distance
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