PART I EUROPEAN STUDIES: WEALTH
MICHAELMAS 2001
LECTURE: EUROPE, THE US & GLOBALISATION
Dr Robert Read, Economics
European Studies: Globalisation
EUROPE, THE US & GLOBALISATION
I. WHAT IS GLOBALISATION?
II. THE RISE OF US BUSINESS
III. THE US CHALLENGE
IV. THE GLOBALISATION OF BUSINESS
V. THE GLOBAL CHALLENGE
European Studies: Globalisation
THE WORLD’S LEADING ECONOMIES
Table 1: GDP, Population & Income 1999
GDP ($bn)
Pop (m)Income
($)
High Income
22,921
891
25,730
Middle Income – high
2,811
573
4,900
Middle Income – low
2,513
2,667
1,200
988
2,417
410
Low Income
Table 2: World’s Top 10 Economies 1960, 1999
1960
1.
1999
United States
506.7
United States
8,351
EU-15
331.0
EU-15
8,213
2.
West Germany
72.1
Japan
4,079
3.
UK
71.4
Germany
2,079
4.
France
60.1
France
1,427
5.
Japan
43.1
UK
1,338
6.
Italy
37.2
Italy
1,136
7.
India
29.6
China
980
8.
Brazil
24.1
Brazil
743
9.
Sweden
14.0
Canada
591
10.
Mexico
12.0
Spain
552
European Studies: Globalisation
WHAT IS GLOBALISATION?
The increasing level of international integration and
interdependence in the world economy. It comprises
several separate but inter-linked components.
 Increasing international trade liberalisation and the
emergence of regional economic blocs (EU, NAFTA).
 The liberalisation of international capital movements
and exchange rates, increasing capital mobility.
 The emergence of multinational enterprises (MNEs)
as key agents of international economic co-ordination.
 The rise of the dynamic newly industrialising countries
(NICs) based upon export-led growth (eg Korea).
 The
intensification
of
International
Competition,
between countries and between firms, driven by
technological advances and the internationalisation of
production based upon the division of labour.
European Studies: Globalisation
GLOBALISATION PRE-1914
Commentators argue that globalisation today does
not yet match that of the world economy before 1914.
Supporting Arguments
 Greater international trade relative to total economic
activity (trade/GDP).
 Greater FDI relative to total investment.
 Greater economic (relative) interdependence.
Counter Arguments
 Substantially greater volume of international trade and
economic activity now but lower (trade/GDP) – more
countries have larger home markets.
 Substantially greater volume of FDI now while total
investment has also risen. The nature of FDI has
changed.
A
greater
absolute degree of economic inter-
dependence (much higher incomes).
European Studies: Globalisation
THE GROWTH OF SCIENTIFIC
MANAGEMENT
Communications
Significant improvements in communications and
economic co-ordination – trains, telegraph, telephone,
shipping - in the mid- to late 19th Century.
Separation of Firm Ownership & Control
To grow, firms needed to be larger – achieved by
issuing shares. Family owners could no longer control
how firms were run; decisions were answerable to share
holders.
Specialisation & Professionalisation
Larger firms needed specialists to process and coordinate increasing volumes of information. This led to
the emergence of the management professions –
employees with specific managerial skills (accountants).
Management Structures
The emergence from 1919 (Du Pont and General
Motors) of scientific management structures to improve
managerial co-ordination and decision-making. M-form.
European Studies: Globalisation
THE POST-WAR AMERICAN CHALLENGE
Servan-Schreiber described the massive inflow of US
foreign direct investment (FDI) into Europe in the two
decades after the War as Le Défi Americain. The flow
was one-way, explained by:
 The search for new markets.
 Strength of the $.
 New and better products.
 More efficient management systems.
 Large US firms up against inefficient European firms
in fragmented markets.
European Studies: Globalisation
THE EUROPEAN RESPONSE
By the mid-1960s, the wave of US FDI in Europe
started to slow-down. Gradual growth of European FDI,
both in the US but also elsewhere in Europe – intra-EU –
and some in what became the NICs. The UK again
emerged as a major source of FDI. Much of the
European FDI was smaller scale than that of the US.
Explanations for the growth of European FDI:
 Economic growth (effects of EU integration) and
greater wealth – more investment.
 Some relaxation of foreign exchange controls.
 Increasing competitiveness of European firms –
improved management techniques, larger size, less
fragmented markets (EU).
 Significant reduction of global trade barriers in
manufactured goods through the GATT Rounds Kennedy (1963-67) and Tokyo (1973-79)
European Studies: Globalisation
THE CHANGING NATURE OF TRADE & FDI
Trade
and
FDI
were
originally
regarded
as
substitutes: that is that FDI was a response to
protectionism.
This
phenomenon
was
particularly
noticeable in the 1920s and 1930s with cross investment
by the US and Europe in an environment of increasing
protectionism. Foreign subsidiaries can be viewed as
clones of the parent company – replicating structures
and activities.
Since the 1960s, international trade has grown at
double the rate of economic growth (5% compared with
2.5%) and FDI has grown at twice this rate (around
10%).
Trade
liberalisation
has led to
increasing
(complementary) FDI.
Switch away from ‘clone’ foreign operations to
networks of subsidiaries undertaking different activities –
based upon the International Division of Labour. This is
the spatial location of economic activity according to
different labour costs – labour-intensive activities in the
NICs and LDCs and capital- and technology-intensive
activities in the industrialised countries.
European Studies: Globalisation
TRADE & FDI IN THE GLOBAL ECONOMY
The great proportion of global trade and FDI is
undertaken between the industrialised economy. Much
of this trade is in similar products - Intra-Industry Trade
(branded manufactures) while trade with developing
countries is Inter-Industry (manufactures and services
traded for commodities)
The bulk of global FDI is also between industrialised
economies, especially between the US and EU.
Table 3: Inward & Outward Stock of Global FDI, 1999
Inward
(%)
Outward
(%)
World
6,314
100.0
5,976
100.0
Developed Countries
4,210
66.8
5,249
87.8
US
1,239
19.6
1,245
20.8
54
7.9
282
4.7
EU
2,376
37.6
3,111
52.1
UK
483
7.6
902
15.1
Germany
461
7.3
442
7.4
France
266
4.2
497
8.3
Japan
European Studies: Globalisation
GLOBALISATION & TECHNOLOGY
Firms, and particularly MNEs, from the industrialised
countries are the principal creators of innovations and
new technologies. They are at the ‘leading edge’ – other
countries can grow fast without innovating.
Technological progress made possible by:
 High levels of investment in R&D.
 Availability of skilled researchers (human capital).
 Pressures of competition, the need for competitive
advantages over other firms.
In the last two decades, globalisation has created new
challenges:
 The rate of technological change is accelerating –
greater risks, costs and (potentially) profits. More firms
collaborate in R&D – EU SEM and Competition Law.
 Increased R&D and innovation being undertaken in
the NICs – Korea, Brazil, China etc. New challenge to
the US and EU.
European Studies: Globalisation
GLOBALISATION: THE KEY CHALLENGES
 Growing global interdependence between countries is
leading to the declining role of the nation state,
notably in the EU but also elsewhere. Increasing role
of regional trade blocs, EU, NAFTA, FTAA.
 Greater interdependence means greater possibility of
contagion – economic and financial instability affecting
many countries rapidly. Mutual benefits of growth.
 Growing wealth gap between countries and within
countries – increasing international inequality, caused
primarily by differences in education and opportunity.
 The growing need for supra-national institutions to
enforce the ‘rules’ to stop cheating and enable all to
benefit – eg the WTO.