Globalization and Competitiveness

Business.

An introduction to the process of globalization. There is no single

definition of the term – but globalization is affecting the daily lives and
work of everyone and will bring about fundamental changes in many
major industries and markets.
This revision presentation considers how globalization may affect the
pattern of trade between Britain and other countries in the years ahead.
It also focuses on the need for the British economy to improve its
competitiveness in the face of the increasing challenges brought about by
globalization

Tutor2u Economics
Autumn 2002

Globalization and the British Economy

 What is Globalization?

It is the increasing integration of the international economy

The Economist described it as the “The Death of Distance”
Deregulation of world product, capital and labour markets designed to increase
financial and factor mobility and movement of goods and services
Expansion of multinational activity – there are more than 60,000 transnational
Business.

companies with an estimated 800,000 affiliates

A trend toward looking at economic and financial issues, and policy instruments
from a worldwide rather than a single-country viewpoint
Globalisation involves fundamental changes in economic geography – including
the spatial division of different stages of production
 The geographical separation of manufacturing from research and development
 The expansion of “global sourcing”
Increased specialisation in particular goods and services and faster shifts in the
balance of comparative economic advantage
A reduction in the economic power of governments – e.g. to raise taxes?
Greater global economic interdependence

Globalization and the British Economy

 Factors Behind The Rapid Expansion of Global Trade

Decline in tariff
and non-tariff
restrictions Rising Real Living
Standards
Business.

Fall in Sea
Transport Costs

Liberalisation of
Domestic
Fall in Markets
communications
costs Declining Air
Freight Costs

Globalization and the British Economy

 Development of Global Production Networks

Multinational Enterprises (MNEs) Local Enterprises

Ownership of Proprietary Technology Low Labour Costs
Management Know-How Local Market Knowledge
Business.

Global Brands Domestic Distribution Network

Global Distribution
Economies of Scale

Opportunities for MNEs

Direct Ownership of Local Businesses
Joint Ventures
Licensing Systems
Franchising Options
Supplier Agreements

Globalization and the British Economy

 The Expansion of World Trade

WORLD TRADE GROWTH MULTIPLES 1950-2000

40
36 World trade now accounts for 25% of global GDP
35 There are now 142 members of the World Trade
Organization with 30 other nations applying to join
Business.

30
Growth Multiple

25

19
20

15

10
6 6
5
2.3

0
Exports of Total exports of Agricultural exports World Production World Population
Manufactured Goods visible goods
Source: IMF, OECD, United Nations

Globalization and the British Economy

 Countries with Highest Share of FDI Flows as % of GDP

FOREIGN INVESTMENT AS A SHARE OF GDP

Norway 8.70%
United Kingdom 9.20%

Czech Republic 9.25%

Chile 9.37%
Business.

Portugal 9.46%
FDI inflows + FDI outflows in 2000

Slovak Republic 10.50%

Germany 12.33%
Canada 14.59%
Spain 15.86%
Denmark 16.05%

Singapore 16.14%
France 16.42%
Sweden 19.23%

Switzerland 21.60%
Ireland 24.22%
Finland 25.46%

Netherlands 32.45%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

Per Cent of GDP

Globalization and the British Economy

Business.

GLOBALISATION AND CHANGES IN

BRITAIN’S PATTERN OF TRADE

The long term impact of the globalization process is likely to cause further
changes to our patterns of trade in goods and services. Where will Britain’s
comparative advantage lie in an increasingly competitive, global economy?

Globalization and the British Economy

 The Impact of Globalization on UK Trade

Increased use of global outsourcing (e.g. Dyson moving to Malaysia,

Zurich Financial Services opening a call centre in India, Marks and
Spencer sourcing its garments from Asia)
Rising import penetration from relatively cheaper manufactured
Business.

products produced overseas (e.g. textiles, steel, semi-conductors)

Rapid expansion of trade flows between developed industrialised
countries – particularly those within regional trading blocs
UK transnational companies will seek to establish a global trading
platform in markets where they have a significant position
Fast growth of exports of high and medium-high technology goods
Rapid growth of trade in high-valued knowledge-based services
International technological alliances between firms

Globalization and the British Economy

 UK Comparative Advantage?

Long term (structural) trade deficit in goods – widening to over

£33 billion in 2001
UK remains a net oil exporter but this may finish by the middle
of the current decade
Business.

UK retains a comparative advantage in chemicals

High trade deficits in semi finished and finished manufacturing
(particularly low valued added products)
Relatively stronger position in international trade in services –
particularly financial services
But weakness in travel & tourism and aviation
Trade is well balanced with the European Union and the United
States but heavy deficits with the Asian economy

Globalization and the British Economy

 Distribution of UK Trade By Global Region (2000)

UK Geographical Distribution of Trade in Goods in 2000

Value Per Cent Per Cent

£ million

Exports Imports Balance Exports Imports

Business.

European Union 107,142 108,976 –1,834 57.3 50.5

Other Western Europe 7,475 13,172 –5,697 4 6.1
North America 33,823 33,637 186 18.1 15.6
Other OECD countries 10,926 18,093 –7,167 5.8 8.4
Oil-exporting countries 6,048 4,289 1,759 3.2 2
Rest of the world 21,717 37,775 –16,058 11.6 17.5

Total 187,131 215,942 –28,811 100 100

Globalization and the British Economy

 SHIFTING THE GROUND
Business.

“We should no longer be trying to compete in

international markets on the basis of low cost, low
value-added manufacturing, but rather through
innovative, high technology products and processes”

CBI Policy Statement on Manufacturing and

Globalization, March 2002

Globalization and the British Economy

 LABOUR MARKET
UNIT LABOUR COSTS PRODUCTIVITY PERFORMANCE
Business.

ENTRE-PRENEURSHIP

INTERNATIONAL COMPETITIVENESS
COMPARATIVE ADVANTAGE

EXCHANGE RATE
RELATIVE INFLATION

INNOVATION TECHNOLOGICAL PROGRESS CAPITAL INVESTMENT

Globalization and the British Economy

 How Big is the Productivity Gap?

GDP per worker and per hour worked

G5 comparison, 2000
Index, UK=100
Business.

160
GDP per w orker
GDP per hour w orked
140

120

100

80

60

40

20

0
US Fr ance* Ger many J apan*

Source: National Statistics (*GDP per hour for 1999)

Globalization and the British Economy

 Factors Behind The Gap

Deficit in Physical Capital

 UK is “under-invested”

Deficit in Human Capital

Business.

 “Skills deficit”
 Labour market failure? Government failure?

Other Factors
 Limited exploitation of economies of scale
 The Pace of Innovation
 Success at applying knowledge and turning it into higher
productivity
 Competitiveness (contestability) of markets? – perhaps a relatively
minor factor

Globalization and the British Economy

 UK Competitiveness Summary

Since 1995, the standard measure of competitiveness (relative

unit labour costs) has worsened by 40%
 3/5 of this is due to the continued strength of the exchange rate
 2/5 due to the slower productivity growth and faster growth of
Business.

wages and earnings (leading to rising unit wage costs)

Some aspects of our competitiveness have improved

 Low inflation
 Rising level of business investment

But – it takes a tremendous amount of time for supply-side

improvements to fully work their way through
Globalisation will intensify the need for the British economy to
become more competitive in price and non-price terms

Globalization and the British Economy

 A Shift Towards Knowledge Based Services

Exports of knowledge based services

G7 comparison, 1991 - 1999
Per cent of total services exports
60
UK
Business.

Japan
50
Canada

Germany
40
US

30
France
Italy

20

10

0
1991 1992 1993 1994 1995 1996 1997 1998 1999

Source: IMF

Globalization and the British Economy

 And Towards High Technology Manufactured Goods

Exports of High and Medium-High Technology Goods

G7 comparison, 1981-2000
Per cent of total goods exports

25
Business.

UK
Japan
20
US

15
France
Germany
10
Canada

Italy
5

0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
Source: UN

Globalization and the British Economy

 Surf the Web: Globalisation Special Reports
Business.

The World Bank

Globalization and the British Economy

 Guardian: Globalisation Special News Reports
Business.

Globalization and the British Economy

 Surf the Web: The Jubilee Plus Foundation
Business.

Globalization and the British Economy