Edited by John H. Dunning and Khalil A. Hamdani
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The New Globalism and Developing Countries Edited by John H. Dunning and Khalil A. Hamdani |
Introduction
A United Nations University Public Forum was held on 9 May 1997, at United Nations Headquarters on The New Globalism and Developing Countries. The primary purpose of the Forum was to discuss the outcome of a study undertaken by the United Nations Conference on Trade and Development (UNCTAD) which focused on the expansion of foreign direct investment, the internationalization of production, and the implications for developing countries. A volume emanating from the study and edited by John H. Dunning and Khalil A. Hamdani was recently published by the United Nations University Press.
The guest speakers were as follows: John H. Dunning, Professor of International Business, University of Reading and Rutgers University; Louka T. Katseli, Professor of Economics, University of Athens; Linda Y.C. Lim, Associate Professor of International Business and Director of the Southeast Asia Business Program at the University of Michigan Business School; and Khalil A. Hamdani, Senior Economist and Chief of Investment Policy Reviews, Division on Investment, Technology and Enterprise Development, United Nations Conference on Trade and Development (UNCTAD).
New Trends in the Global Economy
Professor Dunning began the discussion by noting that some of the changes that have taken place within the global economy in recent years indicate that the process of globalization is moving towards a stage of enormous advances in technology and into an era of knowledge-based capitalism. There are further indications of movement towards a stage of capitalism known as "alliance capitalism" to distinguish it from hierarchical capitalism. A notable characteristic of alliance capitalism is that firms, governments, and various other actors in the world economy are cooperating with one another to a greater extent than in the past. Indeed, the Japanese pointed the way to this new idea of cooperation alongside the idea of competition years ago.
Globalization is essentially a concept of economic interdependence among actors across national boundaries. It is distinguished from internationalization by its greater depth in interdependence. The key feature of globalization is related to the modality of transactions between economic actors. Some years ago international transactions were almost exclusively thought of as trade between independent buyers and sellers, which has been described by some economists as shallow integration. On the other hand, deep integration is characterized by the huge growth in foreign direct investment and the activities of multinational companies (MNCs) around the globe. The sales of transnational corporations now considerably exceed that of worldwide trade, and a great proportion of trade undertaken by MNCs occurs within MNCs themselves. Approximately one-third of manufacturing and service-based trade is intra-firm rather than inter-firm. This is what is meant by deep integration -- the linking of various stages of the value chain of firms across national boundaries.
There is a need to study the impact of globalization on developing countries from the viewpoint of inward foreign direct investment. Attention should also be focused on the role which some developing countries, particularly from parts of Asia and Latin America, are playing as initiators of globalization through their own MNCs. Twenty years ago foreign direct investment by developing nations and firms throughout the world amounted to one per cent. Today it is still relatively small -- approximately between five to seven per cent -- but it is rising quite rapidly. Any attempt to explain globalization must look at the ingredients of economic growth, particularly knowledge capital of the developing countries. Moreover, the fact that developing countries are exporting their competitive advantages and becoming important global players in their own right is also significant.
The main engine of globalization is the private sector, while the main facilitators of globalization are the public sector and/or governments. Globalization today would not have been possible without the liberalization of markets which has occurred throughout the world during the past decade. Governments of both developed and developing countries are increasingly turning their efforts towards measures to upgrade their indigenous resources and capabilities and to promote the competitiveness of their own firms in global markets. Therefore, the orientation of governments the world over has shifted from being focused predominantly on domestic markets to being focused on global markets. As a result, governments can no longer be treated as autonomous decisionmaking units; the actions of one government affects other governments. This is due to the fact that capital -- the wealth-creating agent of the world -- has become increasingly mobile.
The competition for the resources necessary for growth is fierce throughout the world. Therefore, countries must make themselves attractive to foreign direct investors and foreign companies that are looking to form strategic alliances. One of the key challenges facing developing countries is to combine the ingredients of growth with indigenous resources to promote economic welfare. In order to accomplish this task, it is necessary to formulate multi-pronged policies aimed at upgrading the competitiveness of indigenous resources. Another challenge is to find ways to promote the development of a country's own firms in international markets through exports and foreign direct investment.
Policy in a Globalized Environment
Professor Katseli observed that in recent years we have been witnessing a policy convergence towards the open economy model. This convergence derives in part from the demonstrated or perceived successes of the open model, and from pressures that global market actors and international financial and trade institutions are exerting through policies which set forth conditions for access to global resources. Despite this policy convergence, options related to selecting the right mix of policies and the sequencing and timing of policies still exist.
Policies can be classified according to following goals: (1) policies to sustain long-term growth; (2) policies to safeguard political and economic stability; (3) policies to alleviate poverty and promote social cohesion; and (4) policies to upgrade the natural and cultural environment. Professor Katseli described five general points related to these goals. First, liberalization is an important determinant of growth, but the sequencing of liberalization is becoming increasingly important. Second, economic, social and political stability is a major factor in encouraging domestic savings and investment and attracting capital flows in developing countries. Third, keeping the rules of the game clear and constant may be more important than adopting first-best policies. Fourth, infrastructure and human resource development are priorities for almost all countries and governments, especially as knowledge advances rapidly. Lastly, networking policies, both across companies within particular countries as well as between entities across countries, are becoming an integral component of policy. Some of the key challenges facing developing countries include gaining access to channels of distribution, enhancing networks, and linking their domestic companies to international networks.
It should be emphasized that in today's globalized world capital in-flows, especially in the area of finance, may be extremely volatile. Countries therefore should avoid overly depending on them, and instead seek to build a domestic savings base to complement foreign resources in an effort to sustain growth. The role of capital controls or some kind of taxation system (such as a Tobin tax) could perhaps mitigate the volatility. However, in a globalized world the reality is that volatility is apt to increase.
The excessive reliance on capital in-flows or transfers in the absence of appropriate policies might actually lower growth and aggravate trade balances in the long-run. Specifically, if capital in-flows are not properly sterilized, domestic liquidity usually increases, at least in the short-run, and the real exchange rate tends to appreciate, thus hurting the profitability of the economy's tradable sector. Thus, in many countries, the liberalization of capital movements and the attraction of capital flows, at least in the short-run, might be associated with de-industrialization and negative effects on growth, even through income and consumption is increasing. In the long-run, the real exchange rate appreciation may prove to be viable if governments ensure that capital flows, either domestic or foreign, are used to expand domestic production capacity and lead to increased productivity.
The sequencing of policies is becoming more important in the process of liberalization. There is not yet a consensus on the appropriate ordering of policies. However, it is possible to draw some conclusions which could prove useful in the sequencing process. It would be helpful, for example, to put in place regulatory frameworks prior to capital liberalization. It could also prove beneficial to reform the domestic banking system prior to liberalization. In addition, past experiences have shown that it is advantageous to first liberalize long-term capital movements, followed by trade, and then short-term capital movements.
Countries should aim to integrate their networking strategies into regional arrangements. Regional arrangements can have positive or negative effects, depending on their degree of openness to outsiders, especially in terms of trade relations. It is partly the responsibility of the international community to ensure that regional arrangements are open and that they remain open as time passes. There is a growing consensus that regional arrangements can play an important role in enlarging the markets of developing countries, building economies of scale and scope, and assisting in the development of networks.
Globalization has been a deepening process. Foreign direct investment, which used to be generated primarily for labor-seeking or resource-extracting purposes, is increasingly moving towards the formation of strategic alliances between firms. Increased flows of foreign direct investment cannot be assumed to take place simply on grounds of traditional comparative advantage, such as cheap labor and resources. To attract and sustain foreign direct investment presupposes that a continuous upgrading of the domestic productive base is necessary. Therefore, policies of reinvestment which work towards the development of an evolutionary strategy of stage-based sequential growth by ensuring that there are spin-offs from initial foreign direct investment are becoming increasingly important. Foreign direct investment which in the past targeted unskilled labor-intensive or resource-extracting industries are moving towards more complex manufacturing and services, as the experiences of many East Asian countries have demonstrated.
A new partnership between governments, the public sector, the private sector, and civil society is needed to maintain development in this globalized world. The private market and governments cannot do it alone. It is therefore essential to forge new partnerships, especially for developing countries, in order to build the legitimacy of national policymakers and to improve governance.
Investment Dynamism in Asian Developing Countries
Professor Lim noted that in the Asian region, with the exception of India, the last decade has brought a diversification in foreign direct investment source countries with the appearance of large flows from neighboring newly industrialized and developing economies. For example, for several years in the early 1990s, Taiwan surpassed Japan as the largest foreign investor in Southeast Asia. Taiwan is still ranked first or second in China and Vietnam, and is among the top five foreign investors in Indonesia, Malaysia, Thailand, the Philippines, Myanmar, and Cambodia. Hong Kong, Singapore and Korea are also major players in trade and investment, and even such second-tier newly industrialized economies (NIEs) like Malaysia and Thailand are coming up very fast. The largest foreign investors in China -- the largest host recipient country in the developing world -- are reported to be the CP (Charoen Pokphand) Group of Thailand and the Robert Kuok Group of Malaysia and Hong Kong. Approximately three-quarters of the foreign investment in China is derived from other developing countries.
Developed countries account for most of the foreign direct investment flows in the world, and their companies tend to prefer to invest in other developed countries. Foreign investors from developing countries, however, have a strong preference for other developing countries. In Asia many of the investors are large conglomerates, but the bulk of the flows are actually from small- and medium-sized enterprises often venturing abroad for the first time and investing in labor-intensive activities which employ many people.
These new actors have not confined themselves to the Asian area. Koreans, for example, have been extremely active in Eastern and Central Europe, and are also venturing into Western Europe. The United Kingdom is a desirable location for the Koreans because wages are lower in the U.K. than in Korea. In addition, it allows the Korean market access to the European Union. Koreans are also active in Africa and Latin America. The CP Group of Thailand is a big investor in Turkey and is making inroads by acquisitions in the agri-business sector in Europe. Hong Kong and Singapore have also invested widely outside of Asia.
According to Professor Lim, recent trends demonstrate the need to stop focusing exclusively on North-South linkages, and underscore the importance of looking at growing South-South flows even though they are still relatively small, particularly given regional trade and investment liberalization. These South-South connections are enthusiastically promoted by governments whose trade and investment visions spill over to their neighboring Asian governments, as well as to Africa and Latin America.
MNCs from advanced industrial countries are also engaging in new trends. With respect to developing countries, the major new trend is the increased willingness of MNCs from advanced countries to commit large amounts of long-term capital to developing countries, which either promise large future markets (China, India, Indonesia), or access to large regional markets (Latin America, Southeast Asia), or simply provide a good investment environment. New actors from advanced industrial countries include small- and medium-sized enterprises which tend to be relatively unknown supplier companies for the global MNCs.
In the last few years, we have witnessed a high degree of optimism and enthusiasm by MNCs in emerging markets which may not always be warranted. Recent surveys in the United States show that senior managers of MNCs believe that emerging markets are the key to growth for developed countries. As a result, they have become less risk-averse, with longer investment time horizons and a willingness to consider other objectives, such as long-run market share above short-run shareholder profits.
What are the policy implications for host countries? The advent of new actors from developing countries and the growth of smaller companies from developed countries means that host countries (developing countries) have potential access to newer and wider sources of capital. It can also bring greater bargaining power for better terms of investment among these competing sources of capital. This enhanced ability to bargain is due to the fact that the new investors are smaller and often more dependent on the assistance and services provided by the host state. Trade and investment liberalization are more important to these small enterprises because they lack the resources and expertise to break through the protective barriers that bigger MNCs overcome more easily. The new actors are also less risk-averse and may have more appropriate technology and be better accustomed with dealing in underdeveloped environments with poor infrastructure and skills. By the same token, they can be undercapitalized and highly sensitive to competitive cost advantages due to thin profit margins. The small- and medium-sized enterprise investors are more apt to resort to unorthodox business practices to solve information and transaction costs problems in markets with poorly developed market institutions. In other words, they are more accustomed to operating in an environment without rules since it mirrors their own recent experiences.
Local and regional business associations in the private sector play an increasingly important role in influencing government policy and fostering linkages among themselves, and with foreign investors, partners, and suppliers. The goal is often to match up small- and medium-sized enterprises in developed and developing countries that face huge information and transaction costs, and engage in joint training and technology transfers.
Globalization and Technology
A fundamental theme of globalization is that investment can contribute to upgrading the national technological base and production system. Mr. Hamdani noted that many developing countries, particularly in Africa, fear that globalization may further marginalize them from global economic activity. What little international investment that they have attracted up to now has been on the basis of abundant resources and cheap labor. But these factors are increasingly less important in attracting international production of the kind that is driving globalization. Skilled labor, not cheap labor, and infrastructure, not resources, are more important locational advantages which few developing countries have but which all can create. Mr. Hamdani elaborated on four main points relevant to this theme:
(1) Technology is an endogenous factor in development. Until recently, technology was viewed to be an autonomous entity that was acquired in an embodied form. The new thinking here is that technology needs to be assimilated and adapted to ultimately serve as a basis for innovation. The practical implication is that technology policy is not just a matter of encouraging technology transfer, but of technological capacity-building. Indeed, the deeper the indigenous technological base, the more likely it is to attract technology transfers of higher quality. Instead of offering lucrative financial incentives to attract "turn-key" high-tech investment to science parks and export processing zones, countries would be better advised to focus on the development of human resources, the build-up of infrastructure, and efforts to support their own firms to internationalize.
(2) The trade-off between foreign direct investment and technology is often exaggerated. Ten years ago it seemed to be necessary to unbundle foreign investment and allow those parts of technology that can be endogenously produced to be encouraged. This trade-off, in fact, is not evident particularly in the low-technology area of the production process. For example, foreign companies tend to be secretive of their R&D activities and the proprietary stages of their production processes, but not of activities involving low or generic technologies. Hence, there can be considerable spillovers in low technology segments, not only within the firm in terms of learning skills, but also through the diffusion of technical and production know-how within the wider economy.
(3) The third point relates to the outward orientation of the economy. From the viewpoint of technology, in the past there was a tendency to regard a certain amount of closure as an impetus for learning. The more recent findings suggest that the learning process can be limited within a closed system. In other words, a degree of competition can benefit domestic firms by inducing them to adapt and keep abreast of new technology. Thus, the focus of innovation policies should be away from shielding firms, and towards the provision of business support services.
(4) The final point is the need to access networks. Information technology flows through networks, not goods; it must be accessed and not simply acquired. Networks also include marketing and distribution channels, subcontracting relationships and real-time corporate link-ups. These invisible networks can split firms into insiders and outsiders in the same way as regional integration agreements create blocs. Thus, developing country enterprises that may otherwise have comparative advantage on their side, may still not be able to translate that into a competitive advantage unless they are also able to access key transnational company networks. One implication is that the traditional demands of developing countries to seek greater market access through trade liberalization and preferential treatment, will not necessarily bring about greater participation in globalization unless these demands are rethought in terms of networking strategies.
Questions and Comments
The presentations were followed by a question-and-answer segment which was open to all audience members. The following section briefly summarizes some of the main points of discussion.
The definition of globalization seems to be given an exclusively economic content. The fact that civil society, for example, is engaged across the globe in an unprecedented form of exchange and interaction in areas such as environment, gender equality, health, etc., reflects the need to bring other elements into the discussion on globalization. How can this concern be addressed?
Professor Dunning agreed that in addition to economics there are many other important dimensions of globalization, such as social disbenefits, including crime, drug trafficking, terrorism, etc. Most studies on the economic aspects of globalization have tended to point to the benefits arising from freer trade and investment, advances in technology, and alliance capitalism. Questions related to the downsides of globalization will require us to re-focus our thoughts in different directions. We can compare what is going on today with what occurred during the period of the first industrial revolution in the early nineteenth century. During this period, the benefits of industrialization initially were viewed in terms of the United Kingdom's rapidly growing gross national product. Attention then shifted to the social costs of the factory system, child labor, etc. Today in some of the developing parts of the world the distribution of income is becoming more uneven. Of the approximately 180 countries in the world, perhaps as many as 150 of them are slipping further behind. Given this reality, attention must be focused on the social costs associated with globalization.
How is the spread of capital affecting labor? What impact is it having on the "class struggle"?
According to Professor Lim, the spread of capital inevitably leads to the spread of labor, the growth of labor organization, and the rise of an industrial proletariat in areas where it has not occurred before. With increased foreign investment in countries like Indonesia, Viet Nam and throughout the Asian region, we are witnessing more attempts to organize labor unrest. One of the developments that has taken place in Korea is the establishment of independent unions. At the same time, the Korean government is introducing policies aimed at increasing the flexibility of employers to lay-off workers, which is resulting in greater unrest. The class struggle is very much alive whether it is independent of, a consequence of, or a cause of globalization in the Asian region.
Professor Katseli noted that labor flexibility is part of the open economy model. Labor is an important asset, and the challenge for policy is to upgrade this asset. If labor flexibility is translating into labor uncertainty, it can threaten the security of the worker, which can lead to a drop in productivity. A debate is currently taking place, particularly in Europe, about the limits of labor flexibility and the importance of maintaining and raising labor productivity. It is extremely important to maintain the capacity-expanding properties in the design of labor policies.
Is globalization reducing the capacity of governments to act?
Professor Lim called attention to the case of Singapore, which represents one of the most globalized economies in the world. Even with its globalized economy, the government of Singapore has maintained the power to influence domestic affairs. There is an interesting contrast between Hong Kong and Singapore. Hong Kong is usually favored by the laissez faire economists, while Singapore is generally criticized by them. Over the last decade, Singapore has achieved higher growth and a more diversified economy than Hong Kong. Globalization does not mean that governments should surrender their responsibility to act. In fact, in some cases it increases the need for government action.
Professor Katseli added that as the global governance of resources grows, the need to deepen legislation and rules of conduct also increases. There already are many problematic issues that require immediate attention. Two examples are the ethics of corporations in a global setting and the problem of accountability.
According to Mr. Hamdani globalization is not reducing the capacity of governments to act, but it is forcing them to act differently. There are new actors and governments need to act in ways that enable these actors to interact in synergy. Traditional public interventions can crowd out actors, or cause markets to anticipate government actions rather than respond to them; the consequences can be different from those desired. On the other hand, more recent interventions, such as the innovation policies pursued in Europe, have served to strengthen the overall national system of innovation.
Some say there is too little transfer of technology from North to South, while others say there is too much? Who is right?
Mr. Hamdani pointed out that the recent data suggests that the gap between North and South is increasing, so one could not conclude that there is an over-abundance of technology transfers. But perhaps those who would like to see a slowdown are reacting to the overall speed of technological change which has greatly increased in recent years. There has been more new knowledge over the last thirty years than there had been in the previous 5,000 years. This means that a worker must learn new ways of doing things within his or her working career. This is particularly true for workers in the industrial sector, where new ways of working and retooling are rapidly evolving and are at times leading to disruptive effects. There is an obligation for governments to facilitate this process. The emphasis should not be focused on restricting the transfer of technology globally, but on assisting workers in the process of adapting to higher value-added jobs which will bring far greater remuneration.