International Economics

Introduction

Globalization and
internationalization:
measurements and effects

Lucia Tajoli
Politecnico di Milano
March 2011
lucia.tajoli@polimi.it

Introduction to the course

• Syllabus and readings
• Class participation
• Class material (http://corsi.metid.polimi.it/)
• Exam and evaluation
• Others

2
 What is globalization?
“Economic globalization constitutes
integration of national economies into the
international economy through trade,
direct foreign investment (by corporations
and multinationals), short-term capital
flows, international flows of workers, and
flows of technology.” (J. Bhagwati, 2004)

An overview
• Globalization: definitions
• Globalization: why should
we care?
Global markets
• Measuring globalization
with economic indicators
• Reasons for the increase
Multinational or
in globalization transnational firms
• Opportunities and
problems related to
globalization
Internationational
• Governance of the or sovranational
globalization phenomena institutions

Main reference for this topic: H 4

Ch. 1
 Globalization
• Different definitions
• In an economic perspective, it is more
appropriate to talk about economic integration
between countries, or in other words
removal of barriers to the international
movement of goods and services, and of
factors of production (capital and people)
Main implication: increase in the
interdipendence of all domestic markets,
because market boundaries are not well-
defined.
5

Globalization and internationalization of

business activities

• International business is used to describe all

those business activities which involves cross
border transactions of goods, services, resources
between two or more nations.
• As integration increases, borders matter less,
and cross-border transactions increase.
• Transaction of economic resources include
capital, skills, people etc. for international
production of physical goods and services such
as finance, banking, insurance, construction etc.
6
 Globalization and internationalization of
business activities
Areas of study within this topic include
differences in legal systems, political
systems, economic policy, language,
accounting standards, labor standards, living
standards, environmental standards, local
culture, corporate culture, foreign exchange
market, tariffs, import and export regulations,
trade agreements, climate, education and
many more topics.
• Each of these factors requires significant
changes in how individual business units
operate from one country to the next. 7

Economic integration has increased

because trade increased much faster than
production
PRODUZIONE E SCAMBI MONDIALI DI MERCI
(1950 = 100)

2500

2000

1500

1000

500

0
50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

Scambi di merci Produzione di merci

8
 Trade increased rapidly in all sectors
RAPPORTO TRA IL VOLUME DEGLI SCAMBI E DELLA PRODUZIONE MONDIALI
(1950 = 100)

450

400

350

300

250

200

150

100

50
0

0
5

0
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Fonte: OMC Agricoltura Industria estrattiva Manufatti Merci

Trade growth by product groups

A v e ra ge a nnua l pe rc e nta ge c ha nge

12

Agricultural pro ducts

10
Fuels and mining pro ducts
8
M anufactures

0
1950-1973 1973-1990 1990-2008

10
 Trade increased also in services, once
believed to be non-tradables

Value of world exports of merchandises __ and services __

1.6E+13
1.4E+13
1.2E+13
1E+13
$

8E+12
6E+12
4E+12
2E+12
0
48
51
54
57
60
63
66
69
72
75
78
81
84
87
90
93
96
99
02
05
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
year

11

Globalization of production through

foreign direct investments
SCAMBI E INVESTIMENTI INTERNAZIONALI
(valori in dollari USA - 1970 = 100)

12000

10000

8000

6000

4000

2000

0
70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

Fonte: FMI e UNCTAD Investimenti diretti esteri (afflussi + deflussi) Scambi di beni e servizi (esportazioni + importazioni)

12
 Openness of national economies
Ratio of export and import of merchandise and service over GDP in 2008
(darker=> higher ratio)

Openness of national economies

Exports of goods and commercial services per capita, 2007

(Current dollars)

0 - 250

250 - 1000
1000 - 5000

? 5000

Data not available

Note : Colours and boundaries do not imply any judgement on the part of WTO as to the legal st at us or frontier of any t erritory.

14
 Trade by geographical areas
Regional shares in world merchandise exports
45
40
35
30
25
20

15
10
5
0
North America South and Europe Commonwealth Africa Middle East Asia
Central of Independent
America States (CIS)

2000 2009

Leading exporters and importers

Leading exporters and importers in world merchandise trade, 2008
(Billion dollars and percentage)

Annual % Annual %
Rank Exporters Va lue Share change Rank Impor ters Va lue Share change
1 Germany 146 1.9 9.1 11 1 Un ited State s 216 9.5 13.2 7
2 C hina 142 8.3 8.9 17 2 Germany 120 3.8 7.3 14
3 U nited State s 128 7.4 8.0 12 3 Ch ina 113 2.5 6.9 18
4 Jap an 78 2.0 4.9 9 4 Jap an 76 2.6 4.6 23
5 N etherlands 63 3.0 3.9 15 5 France 70 5.6 4.3 14
6 France 60 5.4 3.8 10 6 Un ited Kin gdom 63 2.0 3.8 1
7 Italy 53 8.0 3.3 8 7 Ne therlands 57 3.2 3.5 16
8 Belgium 47 5.6 3.0 10 8 Italy 55 4.9 3.4 8
9 R ussian Federation 47 1.6 2.9 33 9 Belgium 46 9.5 2.9 14
10 U nited Kin gdom 45 8.6 2.9 4 10 Korea , Republic of 43 5.3 2.7 22
11 C anada 45 6.5 2.8 9 11 Ca nada 41 8.3 2.5 7
12 Korea , Republic of 42 2.0 2.6 14 12 Spa in 40 1.4 2.4 3
13 H ong Kon g, China 37 0.2 2.3 6 13 Ho ng Kon g, China 39 3.0 2.4 6
domesti c exports 1 7.0 0.1 -6 reta ined imports 9 7.6 0.6 4
re-exports 35 3.3 2.2 7
14 Singapore 33 8.2 2.1 13 14 Mexico a 32 3.2 2.0 9
domesti c exports 17 5.7 1.1 13
re-exports 16 2.5 1.0 13
15 Sau di Arab ia 31 3.4 2.0 33 15 Singapore 319 .78 1.947 22
reta ined imports 157.306 0.958 31
16 Mexico 29 1.7 1.8 7 16 India 29 3.4 1.8 35
16
 Who Trades the Most?
($ b. & % share, 2007)
Exporters Importers
Value Share Value Share
EU-27* 1697.8 16.4 US 2020.4 19.0
China 1217.8 11.8 EU-27* 1952.0 18.4
US 1162.5 11.3 China 956.0 9.0
Japan 712.8 6.9 Japan 621.1 5.8
Canada 419.0 4.1 Canada 389.6 3.7
World 10328.0 100.0 World 10622.0 100.0
*EU external only
Source: WTO, International Trade Statistics, 2008, Table I.9

17

Who Trades with Whom?

($ b., 2007, Intra- and inter-regional merchandise trade)
Destination:
Origin: North Latin Eur. Asia Africa Other
Amer. Amer.
North Amer. 951 131 329 352 27 62
Latin Amer. 151 122 106 80 14 16
Europe 459 80 4244 434 148 342
Asia 756 92 715 1890 91 230
Africa 92 15 168 81 41 11
Other 108 11 396 457 34 218
World 2517 451 5956 3294 355 879

Source: WTO, International Trade Statistics, 2008, Table I.4

Lecture 1: Intro 18 18
 What Does the World Trade?
($ b. 2007 & annual % growth 2000-07,
merchandise exports)

Value Growth
All Products 13,286 14
Manufactures 9500 12
Iron and steel 474 22
Chemicals 1483 17
Office & telecom equip. 1514 8
Automotive products 1183 13
Textiles & clothing 583 9

Lecture 1: Intro 19 19

Main exporters and importers

(goods only)
Leading exporters and importers in world merchandise trade, 2008
(Billion dollars and percentage)

Annual % Annual %
Rank Exporters Va lue Share change Rank Impor ters Va lue Share change
1 Germany 146 1.9 9.1 11 1 Un ited State s 216 9.5 13.2 7
2 C hina 142 8.3 8.9 17 2 Germany 120 3.8 7.3 14
3 U nited State s 128 7.4 8.0 12 3 Ch ina 113 2.5 6.9 18
4 Jap an 78 2.0 4.9 9 4 Jap an 76 2.6 4.6 23
5 N etherlands 63 3.0 3.9 15 5 France 70 5.6 4.3 14
6 France 60 5.4 3.8 10 6 Un ited Kin gdom 63 2.0 3.8 1
7 Italy 53 8.0 3.3 8 7 Ne therlands 57 3.2 3.5 16
8 Belgium 47 5.6 3.0 10 8 Italy 55 4.9 3.4 8
9 R ussian Federation 47 1.6 2.9 33 9 Belgium 46 9.5 2.9 14
10 U nited Kin gdom 45 8.6 2.9 4 10 Korea , Republic of 43 5.3 2.7 22
11 C anada 45 6.5 2.8 9 11 Ca nada 41 8.3 2.5 7
12 Korea , Republic of 42 2.0 2.6 14 12 Spa in 40 1.4 2.4 3
13 H ong Kon g, China 37 0.2 2.3 6 13 Ho ng Kon g, China 39 3.0 2.4 6
domesti c exports 1 7.0 0.1 -6 reta ined imports 9 7.6 0.6 4
re-exports 35 3.3 2.2 7
14 Singapore 33 8.2 2.1 13 14 Mexico a 32 3.2 2.0 9
domesti c exports 17 5.7 1.1 13
re-exports 16 2.5 1.0 13
15 Sau di Arab ia 31 3.4 2.0 33 15 Singapore 319 .78 1.947 22
reta ined imports 157.306 0.958 31
16 Mexico 29 1.7 1.8 7 16 India 29 3.4 1.8 35
20
 Leading exporters and importers
(goods and services)
Leading exporters and importers in world trade in commercial services, 2007
(Billion dollars and percentage)
Rank Exporters Value Share Annual perc. change
Rank Importers Value Share Annual perc. change

1 United States 456.4 13.9 15 1 United States 335.9 10.9 9

2 United Kingdom 273 8.3 18 2 Germany 250.5 8.1 15
3 Germany 205.8 6.3 15 3 United Kingdom 194.1 6.3 13
4 France 136.7 4.2 16 4 Japan 148.7 4.8 11
5 Spain 128.3 3.9 21 5 China 129.3 4.2 29
6 J apan 127.1 3.9 10 6 France 124.1 4 16
7 China 121.7 3.7 33 7 Italy 118.3 3.8 21
8 Italy 110.5 3.4 13 8 Spain 98.4 3.2 26
9 India 89.7 2.7 20 9 Ireland 94.5 3.1 20
10 Ireland 89 2.7 30 10 Netherlands 86.8 2.8 10
11 Netherlands 87.5 2.7 9 11 Korea, Republic of 82.5 2.7 21
12 Hong Kong, China 82.7 2.5 14 12 Canada 80.3 2.6 12
13 Belgium 75.5 2.3 ... 13 India 77.2 2.5 22
14 Singapore 67.3 2 14 14 Belgium 70.6 2.3 ...
15 Sweden 63.8 1.9 28 15 Singapore 70.1 2.3 14

21

Economic integration through

factors movements
Capital Flows
• Financial (holdings of financial assets abroad)
» Currency
» Bank deposits
» Bonds – private and government
» Stocks
» Bank loans
• Real (international ownership)
» Real estate
» Capital assets (plant and equipment)
» Stocks if ownership share is large
» Other
(these are also called foreign direct investments,22
FDI)
 Destinations of FDI
(FDI flows, billion $)
Source: UNCTAD

23

Economic integration through

factors’ movements

– Migration
• Temporary
– Guest workers
– Day workers
• Permanent
• In practice, most (all?) countries limit migration
severely

Lecture 1: Intro 24 24
 Migration trends
Inflows of foreign population (thousands)
Source: OECD

3 500.0

3 000.0
EU-25 + Norway and
2 500.0 Switzerland
2 000.0 North America
(permanent)
1 500.0

1 000.0

500.0

0.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

25

Globalization is not entirely new

• The world experienced more than one
phase of globalization
• A first wave of globalization occurred in
the early 20th century
• A second wave started after World War II

26
 The waves of globalization

27

1st phase: 1870-1914

• Starting in 1870, strong increase in international
capital flows, in migration, and doubling of
international trade
• Fostered by lower transportation costs,
improvements in communications and colonial
ties
• A large share of trade is export of commodities
from LDC (mainly colonies) in exchange for
manufactured goods from indistrialized countries

28
 Globalization does not always
increase:
the first wave eventually stopped
• After the big depression in 1929, globalization
declines
• In spite of the technological improvements that
could still increase exchanges, countries
become more inward oriented (nationalism and
protectionism).
• The three flows related to globalization (trade,
capital flows and migrations) are back to the
level of 1870
• Poverty and inequality keep increasing
29

2nd phase: 1950-1980

• International trade is back to the level of
the early 1900s
• The other flows are still lagging behind

30
 3rd phase: 1980 - 2007
• Trade/GDP ratio higher than ever
• International trade in all sectors (including
services) is growing fast and pulling
globalization
• Many changes in the organization of
international trade (growing role of emerging
countries, more FDI)
• New forms of internationalization of production
(offshoring)
• Stop in 2008 ?
31

Changes in trade flows

Annual % change in world GDP and merchandise exports
(volume)
10

-2

-4

-6

-8

-10

-12

-14
1950-60 1960-70 1970-80 1980-90 1990-00 2000-09 2001 2002 2003 2004 2005 2006 2007 2008 2009

Exports GDP
 Today ???
• Big fall in trade with the economic crisis
• Are we at the end of another wave of
globalization?
• Preliminary data on 2010 show a (partial)
recovery

33

The causes of globalization

• Technical progress, reducing natural barriers
among markets (transportation and
communication costs)
• Social progress, reducing cultural barriers (e.g.
language barriers)
• Integration policies, reducing institutional
barriers (at the regional or multilateral level)
between markets:
– Barriers at the border (e.g. tariffs)
– Domestic barriers (e.g. discriminatory rules)
• Competition policies, reducing artificial barriers
created by firms to segnment markets.
34
 Technical progress: lower
transportation and communication
costs
• Lower transportation and
communication costs (through the
recent innovations such as telecom,
computer, internet) favored not only
trade, but many new forms of
international organization of production
• Some sectors became tradable thanks
to these innovations
35

Lower transportation and

communication costs
• 70% reduction in transport costs between
1920 and 1990
• 84% reduction in air transport costs
between 1930 and 1990
• $60.42 cost of a 3 minutes phone call
between NY and London in 1960 and
$0.40 cost of the same call in 1990
• But geography and distance still matter

36
 Integration policies: average
reduction in tariffs on manufactures
MFN tariff reduction of industrial countries for industrial products,
excluding petroleum
Implementation Round Weighted tariff Average
period reduction tariff
•1948–63 First five GATT rounds (1947–62) –36 15.4
•1968–72 Kennedy Round (1964–67) –37 11.3
•1980–87 Tokyo Round (1973–1979) –33 8.3
•1995–99 Uruguay Round (1986–94) –38 6.2
NOTE: Tariff reductions for the first five trade rounds refer to US only
Source: WTO

37

Effects of globalization:
more opportunities, more costs
• Gains from trade

• Does globalization increase inequalities?

• The distribution of the benefits of

globalization

38
 Digital Divide

39

Distribution of world GDP

La dimensione indica la dimensione del PIL

40
 GDP per capita
(dollar 1990 in PPP)

0 1000 1500 1820 1995

Year
$425 $420 $545 $675 $5,188
World
- Industrial $439 $406 $624 $1,149 $19,990
Europe 450 400 670 1,269 17,456
US 400 400 400 1,233 22,933
Japan 400 425 525 675 19,720
- Rest of the world $423 $424 $532 $594 $2,971
Other Europe 400 400 597 803 5,147
Latin America 400 415 415 671 5,031
China 450 450 600 600 2,653
Other Asia 425 425 525 560 2,768
Africa 400 400 400 400 1,221

Source: A. Maddison, "Monitoring the World Economy" (1995) 41

World production and population

Product $30 trillions Population 6.2 mm.

Developed
Emerging Economies
Economies 15%
21%

Developed Emerging
Economies Economies
79% 85%

42
 Changing global markets:
shares on world GDP

Quote sul PIL mondiale

30

25

20
United States
15 China
%

EU27
10

0
1995
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Changes in the share on world GDP

Suddivisione del PIL mondiale nel 1995

G7
China
India
Brazil
Russia
RoW

Suddivisione del PIL mondiale nel 2009

G7
China
India
Brazil
Russia
RoW
 Effects of globalization:
firms’ competition
• Does globalization increase the
competitive pressures?

• Do national boundaries still matter for

firms?
• New forms of internationalization for firms

45

Effects of globalization:
on policies and governments

• Need for more policy coordination

between countries. What happens
in a country affects also others.
• Need for policy measures within
countries to control the adjustment
costs and the distribution effects, which
are becoming stronger together with
higher benefits.
46
 Review of basics of economics
• How does a market reach equlibrium?
• Role of demand and supply
• Segmented and integrated markets
• How is economic integration affecting
these equilibria?

(more on this in the next class)

47