Globalization, Technology and trade

Merit course – 2006

� Technological innovation in trade theory� A wider perspective on globalization

– Foreign Direct Investment– Location decisions

Trade - Theoretical perspectives

� Ricardo: comparative advantage matters� Heckscher-Ohlin-Samuelson� Neo-endowment theories� Technology gap models� New trade models

Comparative advantage

� Even if you are better (in an absolute sense) in producing everything, it pays to specialize and trade

� Ricardo: comparative advantages are related to differences in technology

Comparative advantages, trade and specialization

Copyright © 2004 South-Western

Potatoes (ounces)

12

24

13

27

B

0

Meat (ounces)

(b) The Rancher’s Production and Consumption

48

24

12

18

B*

Rancher's consumption with trade

Rancher's production with trade

Rancher's production and consumption without trade

Potatoes (ounces)

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16

5

17

8

32

A

A*

0

Meat (ounces)

(a) The Farmer’s Production and Consumption

Farmer's production and consumption without trade

Farmer's consumption with trade

Farmer's production with trade

Heckscher-Ohlin-Samuelson

� Comparative advantage and absolute advantage

� The source of comparative advantage:– differences in labour productivity or technology

(Ricardo)– differences in endowments of capital and labour

(HOS)

� restrictive assumptions– identical technology between countries– immobility of factors between countries

� Leontief paradox

The Leontief paradox

� In an empirical analysis, Leontief concluded that the US is specialized in labour-intensive goods, while common wisdom had it that it is a capital abundant country

� Is labour a homogenous good?

Neo-endowment theories

� Divide labour into skilled and unskilled� Knowledge (R&D) as a production factor� Critique: knowledge as a static endowment

– dynamic accumulation– disturbance of existing comparative advantage

� Critique: other factors as static endowments

Technology gap models

� Posner’s technology gap theory– innovation in a country, imitation in a different

country– specialize in innovation or imitation, continuous

displacement of products– models by Krugman, Cimoli and Soete

� Vernon’s product life cycle theory– technology intensity of goods diminishes over

time, and this shifts the good to a different country

Technology gap models

� Schumpeterian models– diffusion of technology and cumulativeness– cost-based adjustment and absolute advantage

� empirical models estimated with R&D and patent data– RTA on RCA, market shares dynamics

New trade models

� developed as a reaction to intra-industry trade

� product differentiation� economies of scale� monopolistic market structure� R&D

– strategic instrument to capture markets (Brander & Spencer)

– adding to product differentiation

A model of strategic trade

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A model of strategic trade

� Long run dynamics of specialization

Strategic trade

Foreign Direct Investment & Multinational enterprises

� Conventional wisdom about R&D by MNEs– Technology: a case of non-globalization? (Pavitt &

Patel)– R&D is less internationalized than other activities– But, it is on the rise: LeBas & Sierra: 15.8% of

patents stems from foreign R&D in 1988-1990, 19.5% in 1994-1996 (outliers of up to 60%)

Technology and globalization

� Tacit knowledge makes spillovers localized� Common resources (PRIs and labour pool)� Leads to concentration of R&D

A business view on R&D by MNEs

� Home-base exploiting R&D (HBE)– Activities supporting on-site production, drawing

on the knowledge of the home base. – These laboratories represent an extension and

sometimes a duplication of the R&D work undertaken at home.

A business view on R&D by MNEs

� Home-base augmenting R&D (HBA)– Absorb new knowledge from local scientific

community.– Tend to diversify research efforts into scientific

and technological areas new to the parent company.

Regional innovation systems & globalization

� Opportunity: to tap into local knowledge in foreign locations– Leads to concentration of R&D efforts (at the regional level)

� Information and Communication technologies– Increases tradability of services– Increases codification of knowledge & information

� Does ICT reduce the relevance of space?� With significant differences in technology between

locations, ICT may actually increase the relevance of space, because firms are now better able to move

� How does this work out on European regions?