A note on Dani Rodrik, “Populism and the economics of globalization”
As far as trade as a cause of anti-globalism is concerned, Dani Rodrik’s analysis is built on the Stolper–Samuelson theorem, which shows only a wage decline through static equilibrium analysis. Although this distributional effect on labor welfare is one focal point of populist anti-globalism, other globalization-related issues – notably, obstinate joblessness and “rusted-out” towns – for which trade liberalization is partially accountable, are serious causes (as reflected in the Trump revolution). To explain these vexing issues, this commentary introduces three additional angles: the Rybczynski theorem, Schumpeterian structuralist perspective, and multinationals-driven globalization. These perspectives can help us to understand the dynamic, structural forces generated under the liberal world order, the forces that often impinge on national interests. Some new research agenda, especially a focus on MNEs’ supra-firm and supra-national ecosystems and their capacity to adapt to the currently disrupted global ecosystem, is suggested for international business scholars.
Keywordsdevelopment ladder neoclassical vs. structural economics job offshoring
Professor Dani Rodrik’s paper elucidates probingly a multitude of interconnected aspects of globalization, including financial and psychological ones. My comments center on his two trade-focused topics: the economic roots of anti-globalization populism from the perspective of neoclassical economics, and the advanced stages of globalization that “are prone to populist backlash” in advanced countries – in a “perfectly predictable” manner (p. 1). As a theoretical foundation for the analysis of trade-caused issues, he draws on a well-known theorem, the Stolper–Samuelson theorem (1941), which he calls “one of the most remarkable theorems in economics” (p. 3). The theorem says that workers’ wages in any advanced economy necessarily declines in the wake of trade liberalization. Rodrik is concerned with this adverse distributional effect of globalization (i.e., trade liberalization in his analysis) on workers, an effect that the theorem reveals.
This note is aimed to expand conceptually on Rodrik’s analysis by introducing three other angles – besides the Stolper–Samuelson theorem – that are related to the rise of anti-globalization populism in the advanced world: The first is based on the Rybczynski theorem (1955), which implies that globalization-driven economic growth produces an adverse effect on working-class labor through a secular decline in the demand for it; the second is derived from Schumpeterian structuralist perspective on the contemporary process of economic development; and the third is built on the process of multinational enterprise (MNE)-driven globalization. I expect that these extra frameworks can shed light on some dynamic, evolutionary, and structural aspects of globalization that are missing in the (static, intra-marginal-theoretic) Stolper–Samuelson model built on the assumption of full employment (i.e., perfect intersectoral labor mobility). These additional approaches are already in the standard tool boxes of neoclassical and Schumpeterian economics and international business – and can help us to grasp the nagging social issues such as obstinate joblessness and “rusted-out” towns. These issues constituted, for example, important parts of “the American carnage” mentioned in President Trump’s 2017 inaugural address.
The Stolper–Samuelson theorem is, by its nature, a “firm-less” construct (devoid of any firm-initiated strategies), in which “perfectly competitive market” is posited as the most ideal coordinator of economic activities. After all, the existence of MNEs as a business organization necessarily means that they act strategically and globally in search of profits, and that the market turns “imperfect.” We live in an MNEs-dominated world of international production and intra-firm trade rather than in a world of market-coordinated, arm’s-length trade as typically postulated in neoclassical international economics. MNEs shape and drive the contemporary process of globalization. True, Rodrik explains how MNEs weaken the bargaining power of workers: “As long as wages are determined in part by bargaining between employees and employers, the outside options of each party play an important role. Capital mobility gives employers a credible threat: accept lower wages, or else we move abroad. Indeed, … the decline in the labor share is related to the threat of relocating production abroad…” (p. 18, emphasis added), but he leaves unstressed how the actual act of relocating production abroad impacts working-class labor and its communities.
Following this introduction, the next section evaluates the nature of the neoclassical economic perspective embedded in the Stolper–Samuelson theorem Rodrik draws on, and then introduces another well-known theorem, the Rybczynski theorem. The following section defines the casually used, nebulous notion of the “ladder of economic development” in Schumpeterian terms, thereby enabling us to explain “structural unemployment”. The next section examines how MNE-driven globalization may hinder home-country (notably labor) welfare in the advanced world by way of two examples of social costs: comparative disadvantage amplification and factory relocation/job-offshoring externalities. These issues have contributed to anti-globalism in the United States, leading to the jobs growth policy (such as “we expect you to produce here if you sell here”). Finally, the last section summarizes the preceding analyses and proposes a new research focus on the suddenly disrupted global ecosystem for international business scholars.
NEOCLASSICAL ECONOMIC PERSPECTIVE EXPANDED
… the Stolper–Samuelson theorem…generates very sharp distributional implications from opening up to trade. Specifically, in a model with two goods and two factors of production, with full inter-sectoral mobility of the factors, owners of one of the two factors are made necessarily worse off with the opening of trade. The factor which is used intensively in the importable good must experience a decline in its real earnings. Note that the theorem establishes absolute losses, and not relative losses… Applied with some amount of hand-waving to the U.S. economy, the result predicts that low skilled workers are unambiguously worse off as a result of trade liberalization. (p. 3, italics added; emphasis original).
This is the theoretical core of Rodrik’s discussion, so long as trade as a cause of anti-globalism is concerned. For the capital-abundant US economy, the factor which is used intensively in the importable good is obviously labor. Therefore, workers suffer in the wake of liberalized imports. Such an import expansion reduces their wages more than a decline in the import price itself. This is the very reason why the Stolper–Samuelson theorem is known as the “theorem of factor-price magnification,” a point noted by Rodrik.
In this regard, however, it is worth stressing that factor-price magnification works in both ways: liberalized trade brings to a labor-abundant country a “magnified” increase in workers’ incomes, alleviating poverty and rapidly creating middle-income consumers (as best evidenced in China). This sharply contrasts to the adversely impacted workers in the U.S. Optimism (“animal spirits”) rises in the labor-abundant, catching-up economies, whereas globalization pessimism is spurred among the working class in the U.S., particularly when an import-triggered wage decline accompanies obstinate unemployment.
The Stolper–Samuelson theorem – with its “usual” assumptions supporting static equilibrium analysis – is derived from the Heckscher–Ohlin (H–O) factor-endowment theory of trade. The latter, in turn, is built on David Ricardo’s logic of comparative advantage. Hence, the comparatively advantaged industry expands, while the comparatively disadvantaged industry contracts after trade opening. As Rodrik stresses, the one-sided loss for labor (i.e., a wage decline) is consequently unavoidable in the capital-abundant economies. This occurs, however, in both the exportable- and importable-good industries simultaneously – with the one-sided gain for capital, worsening income inequality between workers and capital owners. Nevertheless, such a resultant maldistribution of incomes itself is considered acceptable from the whole economy’s standpoint, since comparative advantage is fully exploited, maximizing total trade gains that are larger than labor’s loss, and such a loss occurs even under the assumed condition that labor is perfectly movable to the expanding sector to remain fully employed, a conditionality that is presumed in the H–O theory – hence, likewise in the Stolper–Samuelson theorem. In neoclassical trade theory, therefore, a wage decline alone is identifiable as the igniter of anti-globalism, leaving the issue of import-triggered, obstinate unemployment (including those who opt out of the labor force) unexplored.
Hence, one wonders whether such a mere intra-marginal wage reduction can be regarded as the primary effect of trade liberalization significant enough to spark a populist uproar, as seen in the Trump revolution. In fact, Rodrik himself states that other factors such as “Changes in technology, rise of winner-take-all markets, erosion of labor-market protections, and decline of norms restricting pay differentials all have played their part” (p. 1). I believe, nonetheless, that obstinate joblessness and rusted-out communities (which are assumed away in the Stolper–Samuelson theorem, and left untouched in Rodrik’s analysis) are far more serious causes of anti-globalism than the mere wage decline envisaged in the theorem. In other words, the crucial causes lie in structural and international business activity (i.e., MNC-related, “disequilibrated market”) domain rather than in an intra-marginal, equilibrated market domain.
Furthermore, if we theoretically consider this critical issue of obstinate unemployment (which is not stressed in Rodrik’s analysis), we notice that the “sharp distributional implications” Rodrick emphasizes turn out even sharper. This sharper effect can be explained in terms of Stolper–Samuel’s 2 × 2 model itself as follows. The import-damaged, labor-intensive industry, say X, contracts, thereby releasing both labor and capital, but necessarily more labor than capital. This causes a post-trade, relative wage-rental ratio, (w/r)2, to become smaller than the pre-trade ratio, (w/r)1. Under the assumption of perfect factor mobility, however, the input-substitution of labor for capital occurs, encouraging the export industry, say Y, to hire proportionately more labor than capital (i.e., moving along an isoquant that represents the contracted level of X output). In this process, the initially lowered wage-rental ratio, (w/r)2, rises, reversing the initial decline in the ratio to some – but never full – extent and settling at a new equilibrium ratio, (w/r)3. In other words, (w/r)1 > (w/r)3 > (w/r)2. Thus, (w/r)2 with “momentary” unemployment will be smaller than (w/r)3 at full employment regained through perfect factor mobility, and this also means w1 > w3 > w2 in absolute terms. Thus, in the Stolper–Samuelson theorem, unemployment is merely an equilibrator to balance the demand and supply conditions via wage changes in the labor market, and instantly disappears, resulting only in a wage decline. Hence, obstinate unemployment and community decays are non-issues in the theorem. In addition, the above analysis implies that labor reskilling is a must for factor mobility because an intersectoral skills gap does necessarily exist in the real world of a dynamic economy like America’s. The same thing can be said of the Heckscher–Ohlin trade model.
With respect to the Heckscher–Ohlin trade theory, noteworthy is also an extreme, theoretical case in which an opening of trade makes an entire economy specialized completely in the exportable-good industry, therefore, no longer any import-competing industry (where workers are stuck at lower wages) remains. In this situation, workers are all better off. Indeed, describing the adverse distributional effect of trade liberalization on labor, Rodrik carefully specifies that “as long as the importable good(s) continue to be produced at home – that is, ruling out complete specialization” (p. 3). Nevertheless, it is worth dwelling on the case of complete specialization, since it points out that even in the Stolper–Samuelson framework, trade liberalization itself does not necessarily make labor worse.
Let us return to Rodrik’s point that free trade unambiguously makes low-skilled workers worse off in the advanced world. His interpretation is: “The particular configuration of gains and losses depend on the details of the model. In the 2 × 2 case of the Stolper–Samuelson theorem, wwll < 0 < pp < wwh, where wwll and wwh denote the returns to low- and high-skill workers, respectively” (p. 4, italics added). Simply put, in a reconfiguration of the theorem’s 2 × 2 factor model, capital is merely replaced by high-skilled workers, and labor by low-skilled workers. Then, the exactly same effect results; those low-skilled workers necessarily suffer from a wage decline (though still employed). In other words, any factor – whatever you name it – used relatively more intensively in the importable goods meets the same fate. In this regard, one naturally wonders why the skills gap introduced between the two sectors in this “reconfigured” model poses no problem for factor mobility. The answer can be that those laid-off, low-skilled workers are assumed to be made fully mobile to the high-skill sector through instant and appropriate training – i.e., the usual assumption of mutatis mutandis1 (though this is not the case with the original theorem that is built on homogeneous labor). Be that as it may, as shown earlier, why low-skilled workers are made worse off can also be explained in the context of industrial structural changes in the global economy, as well as MNEs’ labor-seeking, outsourcing activities in low-wage, emerging economies.
The Rybczynski Theorem
There exists another well-known theorem in international economics left untouched by Rodrik, the Rybczynski theorem (1955), which is closely related to the Stolper–Samuelson theorem. It retains the same set of all the Heckscher–Ohlin-based assumptions used in the Stolper–Samuelson theorem. The Rybczynski theorem (built on a 2 × 2 model) states: if one factor, say, capital alone, increases, the capital-intensive industry expands, while the labor-intensive industry contracts – both in absolute terms. This means that so long as globalization-spurred economic growth and capital accumulation continues – and the international price ratio remains the same, the capital-intensive industry keeps expanding, while the labor-intensive industry keeps contracting. This structural shift continuously deceases the demand for labor, shrinking the jobs opportunity in the labor-intensive industry and allowing an ever-rising competitive imports from low-wage countries.2 This leads to anti-global sentiments among the working class at home. This is particularly the case with the United States because labor is not so easily movable to the capital-intensive industry, and its labor protection is weak compared to Europe. In fact, Rodrik rightly stresses this point, “… the European welfare state is the flip side of the open economy” (p. 9).3
In short, the Rybczynski theorem is somewhat more “dynamic” than the Stolper–Samuelson theorem, since structural transformation due to growth and capital accumulation is introduced into analysis. However, both theorems miss the critical issue of globalization-caused obstinate unemployment and rusted-out towns, since they are built on the assumption of frictionless factor mobility.
SCHUMPETERIAN FRAMEWORK FOR STRUCTURAL TRANSFORMATION AND THE LABOR MARKET
To assess MNE-related anti-globalism among the working class, it is critical to understand the relations between evolutionary changes in industrial structure under capitalism and those in the demand-and-supply structure of employment. All these co-relational changes occur when both the leading and catching-up economies are climbing the ladder of development together to their mutual benefits from liberalized trade and investment, as has been the case particularly since the end of WWII. Yet, this notion of “the ladder,” though casually used in social sciences (including international business) and in the news media alike, is nebulous. In what follows, therefore, I will first define and specify the notion to establish a framework, within which to examine the interactive nexuses of economic development with changes in labor demand–supply conditions, MNEs’ networking operations (especially, global supply chains), and job-offshoring activities.
The Ladder of Economic Development
Modern economic development – and its description as a climb on the ladder of economic development – can be conceptualized in Schumpeterian terms (Schumpeter, 1934, 1942) as a ratcheting-up, evolutionary process of structural transformation that is driven by innovation (technological, institutional, and organizational) in the leading economies and spreads to the follower economies that are capable of emulating via imitation and learning. This view is also in accordance with structural economics (inter alia, Little, 1982, for old structural economics; Lin, 2012a, b, for new structural economics), and the “ladder” – and its “rungs” in particular – needs to be specified as a succession of structural changes. In this regard, a framework called the “ladder of economic development a la Schumpeter” (Ozawa, 2009, 2016) is helpful in shedding light on MNE-driven integration and job-offshoring – and how the advanced stages of development likely spark anti-globalization backlash in the US.
This ladder a la Schumpeter is a stages model that delineates the process of development. It is based on a history of industrialization that traces out a progression of structural changes that has occurred ever since the Industrial Revolution, a historical sequence of capitalism-driven growth that is punctuated and ratcheted up by stages/tiers/rungs – and testable as “structural breaks” in econometrics. In each stage a certain technological thrust and its accompanying leading-sector serve as the engine of structural transformation. Hence, our approach is of the genre of leading-sector growth models in economics as well.
Also, the evolution of the ladder of development is causatively related to what Rodrik calls “the advanced stages of globalization” that leads to populist backlash. When there exists a significant gap between the leading economy’s industrial structure and that of the rest, trade liberalization is usually promoted because the leader’s dominance is secure, and freer trade is mutually beneficial (i.e., positive-sum oriented). The more advanced the leader’s industrial structure, the further the process of globalization proceeds, yet with diminishing marginal benefits at each successive round of liberalization. As the structural gap narrows as a result of rapid catch-up growth in the follower world (which eventually move into those higher-value-added industries existing in the leading economy), the two blocs’ relations turn more rivalrous and conflictive (i.e., increasingly more zero-sum oriented). In addition, the followers’ emulation “via imitation and learning” often involves violation of some norms of the liberal world order (e.g., technology transfer by beguile and state support with subsidies and discrimination against imports and foreign MNEs), sparking a feeling of “unfairness” or “uneven playing fields,” a source of anti-globalism and nationalism revival. In short, the afore-outlined structural approach gives an additional perspective on why populist backlash is prone to occur as the technology gap once enjoyed in the leading economy closes fast at the advanced stages of interactive growth in the global economy.
The global economy has so far seen five tiers of the leading-sector emerge in wavelike progression, with another tier in the making. The five tiers are (I) endowment-driven industries (exemplified by textiles in labor-abundant countries and by extractive industries in resource-abundant countries), (II) resource-processing heavy and chemical industries (represented by steel, nonferrous metals, basic chemicals, and heavy machinery), (III) assembly-based industries (epitomized by automobiles and other component/parts-intensive manufactures), (IV) R&D-driven industries (e.g., microchips, computers, and pharmaceuticals), and (V) information and communications technology (ICT)-enabled industries (e.g., digital telecoms, operating platforms, the Internet, search engines, social media, artificial intelligence, and Big Data – and apps). In addition, we are witnessing the emergence of a new tier (VI); what may be called “green and health technology (GHT)-based industries” (e.g., renewable energies, energy-saving devices, pollution control, and life sciences) – all designed to create a healthier environment for sustainable growth in economies, human habitats, and the human species itself, reflecting the rise of post-material values. These inter-industry sequential advances are driven by Schumpeterian breakthrough innovations and technological supplements and derivatives.
The first two tiers (i.e., low value-added industries) were basically introduced under British hegemony before WWI, representing the age of industrialism, and are endowment-based, production-focused, and supply-sided. In contrast, the higher tiers (III through V, higher value-added industries) have been engendered largely under American leadership after WWII, epitomizing the age of mass consumerism, and are more intensively knowledge-driven, demand-sided, and consumption-oriented. The tier-I and -II phase relies mostly on “endowed” comparative advantages in factor-intensive industries, while the higher-tier phase (tier-III onwards) hinges more heavily on “created” comparative advantages in knowledge-intensive industries.4 Morphing from the former into the latter is perhaps the most pivotal structural shift/break in any growing economy’s industrial development (as is illustrated by China’s current transitional throes). The emergent tier VI is strongly molded by environmentalism and pushback against the erstwhile relentless pursuits of wasteful, pollution-prone mass production and consumerism. In other words, this emerging tier is post-materialism oriented. Thus, in the making is a long-term shift in the modality of capitalism away from industrialism and consumerism and toward post-materialism.
Britain once engaged in “kicking away the ladder” (in Friedrich List’s words5) by jealously protecting its manufacturing at home, whereas America has been providing the ladder to the emerging world – largely because the latter’s consumption-focused industries and their MNEs need larger consumer markets, especially in fast-growing emerging economies. This distinction is crucial to understand, if partially, why after WWII the advanced world began to build a liberal world order. Such an order helps emerging economies industrialize and move up to middle-income levels, facilitating, in turn, consumer-focused MNEs to capture growing markets. In their eagerness to do so, however, MNEs often end up jeopardizing their bargaining positions and their home countries’ national interests vis-à-vis host governments, especially neo-mercantilist ones in the emerging world – and shifting technology and manufacturing (hence, working-class jobs) away from their home countries (a topic to be discussed the next section). In short, when it comes to industrial structural change, MNEs, the possessors of firm-specific assets, are the major cross-border transplanters of industrial knowledge and production. They are regarded as job-offshorers, as reflected in President Trump’s rhetoric directed towards MNEs to create more jobs in the US.
Stages of structural transformation and the working class
Especially for the topic at hand, it is important to note that the demand–supply structure of jobs evolves along the Schumpeterian ladder of development. Tier-I (like apparel stitching and toy making) creates demand for large numbers of low-skilled (or unskilled but readily trainable) workers, especially female workers, which are plentiful and inexpensive in populous developing countries. Thus, tier-I growth is characterized by (both male and female) labor-driven growth and a rapid alleviation of dire poverty, as amply attested to by the East Asian catch-up experiences.6
As the economy moves farther up the ladder onto higher and higher tiers, however, demand rises for more and more skilled and specialized workers, whereas the supply of needed labor tends to fall behind in necessary education and skill development. Consequently, the labor demand–supply situation often becomes unsynchronized, culminating in an ever-deepening skills gap between job availability and worker qualifications and causing what is known as “structural (or mismatch) unemployment.”7 This type of unemployment thus stems from a skills gap or mismatch between the jobs available and the skill qualifications of job seekers in the wake of industrial structural changes brought about by technological advance and innovations. Conventional macroeconomic (fiscal and monetary) stimulatory policies to create more jobs, however, worsen the skills gap unless accompanied by adequate retraining.
This structural problem is most pronounced in America’s innovation-spurred economy (now amid Tier-V growth and increasingly into Tier-VI) and is contributing to the current dissatisfaction and angst among the working class in the US. This is because America’s economy, the world’s foremost innovator, constantly evolves, becoming more knowledge-intensive, consumption-driven, and service-oriented, a growth dynamic that transforms the structure away from the primary (agriculture) and secondary (manufacturing and construction) sectors towards the tertiary (services) sector (Clark, 1935; Kuznets, 1966), thereby shrinking the availability of factory jobs. An unavoidable loss of manufacturing jobs thus results from this tech-driven, rapid macro-structural transformation.
In an age of stepped-up integration, moreover, employment opportunities, especially for low- and medium-skilled workers, are destined to be handed over from more advanced to emerging economies – in a staggered fashion down the hierarchy of economies at different stages of development because of much higher wages and other production costs in the advanced economies.8 This process of wage-motivated, industrial transmigration is carried out most efficiently by MNEs’ labor-seeking investments through their networks of global supply chains. It weakens the bargaining position of the working class in the advanced world. Thus, the preceding structural analysis can shed additional light on Rodrik’s point that “low-skilled workers are unambiguously worse off as a result of trade liberalization.”
Intra-industry side-ladders and the “double helix” construct of the ladder
For this stages analysis, however, a caveat is in order. History repeats itself – but only in very broad terms and never exactly in the same way. The historical sequence of structural changes is necessarily linear as a trace of things that have occurred over a long stretch of time in the past. However, any aspiring emerging economy must craft its own catch-up strategy suitable to its time- and space-specific circumstances and capabilities – that is, catch-up strategies need to be customized. Moreover, business strategies are such that traditional industry boundaries have recently been rearranged and reordered.10 This view matches what Gerschenkron (1962) emphasizes: “In every instance of, imitation of the evolution in advanced countries appears in combination with different, indigenously determined elements” (p. 26).
MNE-RELATED SOURCES OF SOCIAL COSTS
Now that the broad structuralist framework has been outlined, we will examine how MNEs harm labor and some local communities in the advanced world (though their activities may be beneficial for the world as a whole), the issues that result from MNEs’ capability of amplifying comparative advantages/disadvantages and relocating factories overseas for profit-maximization.11
Comparative Advantage (and Disadvantage) Amplification
In the early phase of industrialization, comparative advantage plays a vital role in kicking off catch-up industrialization. Emerging markets exhibit “endowed” comparative advantages in their relatively abundant-factor intensive goods, i.e., labor-intensive manufactures and/or natural resources. Neoclassical trade theory assumes that emerging countries can capitalize on them both immediately and autonomously once they open up for trade. The reality is, however, that they are usually incapable of doing so because critical joint inputs are unavailable, and institutional support is inadequate – in such inputs as technology, access to export markets, trade finance, marketing skills, and trained labor.
In the past, these necessary inputs were locally sought through aspiring economies’ own efforts under the “Alexander Hamilton and Friedrich List” style infant-industry protection. However, history shows that such efforts often failed. In an age of globalization, however, expeditious help comes from MNEs, especially those from the advanced world, which can immediately provide all the joint inputs and supports. MNEs do not just supplement comparative advantages fully, but also, more importantly, amplify their strengths through superior capabilities (i.e., comparative advantage amplification).
Consequently, aspiring emerging markets can gain even more from trade than in the case of a self-reliant way of initiating trade. All in all, this makes low-wage manufactures even more competitive, boosts an export-driven catch-up, and favorably affects host countries’ trade balances even further.12 This is the major reason why an MNE-fueled catch-up model is now increasingly adopted by emerging markets, particularly in the wake of East Asia’s successful export-led growth experience.
The flipside of all this, however, is that the relatively labor-intensive manufacturing in MNEs’ home countries necessarily suffers even more job losses in comparatively disadvantaged industries, further afflicting the impacted communities (i.e., comparative disadvantage amplification) – even though home countries’ total trade gains increase due to proportionately amplified comparative advantages in export industries. Thus, so far as import-damaged industries are concerned, the home country suffers more trade adjustment costs, while the host countries’ export industries benefit more. In short, the faster the pace of MNE-fueled catch-up in aspiring emerging economies, the greater the drawback for home-country workers and their communities, even to an extent of stirring a political backlash.
Factory Relocation and Externalities
All business activities produce externalities, both negative and positive, and there are many types of them. Some are insignificant and dismissible, while others require remedies or are welcomed. Here, we can define externalities as unintentional (un-internalized if negative externalities are involved) costs and benefits (consequences) of economic activities that make up social costs/benefits together with private costs/benefits. With the rise of MNEs as possessors of advanced technology, the occurrence of externalities is expected to proliferate across borders, particularly when they relocate factories abroad.
When factory relocation occurs within a country, symmetrical externalities arise. These externalities, especially negative ones, can be remedied by the national authorities. For instance, suppose a manufacturing firm closes a plant in area A and moves it to area B. This type of production shift thus generates externalities simultaneously in two separate, intra-country locations: social costs in area A (e.g., job losses, both direct and related, and a community decline) and social benefits in areas B (job growth and community prosperity). The social costs may be mitigated somewhat by the movement of laid-off workers from area A to area B. But the adversely impacted community is obviously immovable. However, the government is theoretically in a position to extract benefits from area-B winners and give compensation to area-A losers. Thus, the “winners-compensate-losers (WCL)” principle is adoptable in maximizing the net social benefits within a country.
Now, consider a case of factory relocation by an MNE from home country A to host country B in order to escape from high wages at home and supplying products directly for country B’s local market instead of exporting from country A. Suppose, furthermore, the MNE keeps its resultant profits in overseas tax havens to avoid its higher home taxes. This cross-border type of externality now occurs across the jurisdictions of home and host countries, a situation more difficult to handle than the intra-country type. Country A suffers from job losses, left-behind communities, and no repatriation of overseas profits, whereas country B gains in job opportunities and growth stimulus. Of course, world welfare improves so long as country B’s social benefits are greater than country A’s social costs. Yet, country B is not obligated to compensate country A, and the WCL principle falls apart.
In country A, replaced capital is footloose and reusable across borders, as MNEs’ operations illustrate. But unemployed labor has no equal mobility. No wonder, a sense of “unfairness” arises. (See Rodrik’s excellent analysis of the fairness issue on pp. 11-14). For US laid-off workers and declining towns, for example, only the trade adjustment program currently exists as a social safety net. However, the US governments’ promises of full compensation have never been fulfilled, as Rodrik observes that “governments always have the incentive to promise compensation, but rarely to carry it out” (p. 10). This spurs frustration and anti-globalism sentiments even further.
Professor Rodrik nicely explains in terms of the Stolper–Samuelson theorem how trade liberalization results in an adverse distributional effect (i.e., a wage decline) on workers. This theoretical framework, however, misses some dynamic, structural forces at work in the global economy. To be fair, however, these forces are out of Rodrik’s sights, since his essay is deliberately and strictly concerned only with “the [neoclassical] economics of globalization.” By its nature, neoclassical economics is essentially static, since its most ideationally “desirable” market condition is “perfect competition” with all the necessary assumptions of ceteris paribus, mutatis mutandis, and other logical requirements to facilitate market-ruled equilibrium (marginal) analysis. In contrast, my analysis looks at the adverse structural effects on labor that are perceived from the realm of dis-equilibrating and transforming conditions in the dynamic global economy.
First, I bring in the Rybczynski theorem to show that economic growth and capital accumulation (e.g., spurred by globalization) alters the industrial structure, resulting in an absolute decline in labor-intensive industries and an absolute expansion in capital-intensive ones in the advanced world – hence, continuous decreases in the demand for labor and rising labor-intensive imports over time. Second, I employ the Schumpeterian “double-helix” development ladder to examine the structural evolution of the global economy, where the leader and follower economies climb the ladder together, both inter- and intra-industrially, for their mutual but uneven benefits under the liberal world order. This perspective helps us to understand that industrial transmigration is induced from earlier industrializers to aspiring latecomers by the logic of comparative advantage (on the latter’s side) and disadvantage (on the former’s side). Third, I illustrate MNEs’ role in promoting and facilitating catch-up growth in the emerging world by two examples: comparative advantage amplification and the asymmetrical externalities of cross-border factory relocations. These examples illustrate how MNEs may act “unwittingly” against the interest of home-country workers in search of the profit-enhancing opportunities created by differences in industrial structure between the advanced and the emerging worlds. Comparative advantage amplification by MNEs in their host economies necessarily means comparative disadvantage amplification on the part of their home economies. Thus, the faster the pace of catch-up assisted by MNEs, the greater the trade adjustment problems in the advanced world. So far as parts of the economy involved are concerned, cross-border factory relocations are accompanied by asymmetrical externalities, though depending on specific circumstances. It is the home country’s manufacturing workers and communities that are most likely incur job losses and negative externalities, whereas their host country counterparts enjoy employment gains and positive externalities.
The business of MNEs from a market-capitalist economy is to achieve shareholder value maximization. Because of their market power, however, their activities inevitably often impinge on national interests – and especially labor welfare. They are contributing to the current wave of populist anti-globalism, as best reflected in President Trump’s “America First” policy, which in turn further adds more uncertainties and instability across the world, disrupting the liberal world order even further. Although beneficial to the whole economy involved, the progressive, multilateralism-ruled global ecosystem has brought about harm to its parts unevenly, especially the working class of the advanced world in general and of the United States in particular – this is what may be called “the fallacy of decomposition”.13 In this respect, the Trade Adjustment Assistance program, the only available “winners-compensate-losers” mechanism in the US is supposed to compensate for the harm but has been failure despite its frequent tweaking over the past 60 years. This is a serious case of governance failure in the face of rapid globalization.
Indeed, the issue of governance failure is stressed by Sarianna Lundan with respect to the future research direction for international business in the inaugural issue of the JIBP (Lundan, 2018, pp. 3–4). She proposes that the problem should be considered at the three levels of analysis: institutional, market, and organizational levels. In addition to this, I would like to suggest a research focus on MNEs’ three basic ecosystems: home, host, and supranational (regional and global) ecosystems. To each of them, Lundan’s three levels apply. In other words, a 3 × 3 (or × 4) matrix can be a new frame of reference. International business research has so far centered mainly on the firm-governance level of home and host ecosystems, treating the national and supranational governance levels of MNEs’ ecosystems, especially the existent world order, mostly as givens. This research thrust has been justified because of the relative stability of supra-firm ecosystem governance. But such stability has been disrupted by a recent series of shocks such as the Brexit, the Trump revolution and nativism (exemplified by the “America First” policy), China’s challenge to the western values-based global order, and the sudden spread of anti-globalization (notably, anti-immigration) sentiments in the western world. All these disruptions lead to ecosystem governance failures at the market, institutional, and/or organizational levels – in varying degrees.
In this respect, some latest calls for papers on new or renewed topics such as “organizational/strategic ambidexterity” (Lew et al., 2018; O’Reilly III & Tushman, 2013), “local-and-global connectivity” (Mudambi, 2018), “nonmarket business strategies” (White et al., 2018), and “migrant and migration policy (M&MP)” (Deeds et al., 2018) are encouraging signs. All these calls have already started to direct international business research in the new direction. The new ambidexterity project provides an appropriate research thrust at some organizational issues on the portfolio management of products and production locations that need to be analyzed in global perspective, while the inter-ecosystem connectivity initiative similarly can direct attention to the intra- and supra-firm flows of trade, investment, and knowledge that have been suddenly jolted by nationalistic interferences. The nonmarket business strategy project squarely faces the current dramatic sea change in the global ecosystem, urging research on political factors and how MNEs should deal with the burgeoning nonmarket risks and regulatory uncertainty sparked by anti-globalization populism. The M&MP project looks at the “diasporia” of more than 250 million people, equivalent to “the fifth largest ‘country’ in the world,” and related issues on its legal, regulatory, entrepreneurial, and political issues, which bear directly on national and supranational ecosystems. Indeed, many more similar calls can be anticipated on topics like “the Brexit pact and supply chains,” “the updated North American trade deal and auto multinationals,” and “the new US – China trade agreement and MNEs’ role as an innovator/disseminator.”
In short, our research focus now needs to be pivoted from microeconomic analyses at the intra-and inter-firm levels and more toward the supra-firm and supranational levels of ecosystem, especially the global level of political economy. Ecosystem governance has recently turned into an unpredictable variable from a reliable constant for business decision making. This development calls for new research on how MNEs should readapt their business strategies and models to sudden changes at the interconnected national and supranational levels of governance. International business research is thus at a critical turning point as new governance issues arise in MNEs’ ecosystems under the fast-evolving world order – and under unexpected geopolitical and ideological shifts in the global balance of power.
Doesn’t this illustrate the inadequacy of neoclassical economics for policy purposes, as spelled out in Nicholas Kaldor’s famous article, “the irrelevance of equilibrium economics” (1972)? He criticizes theoretical involution: “without any attempt at verifying the realism of those assumptions [adopted]” (p. 1238).
Interestingly, however, the maximum potential output of labor-intensive goods expands in absolute terms, though less than proportionately than that of capital-intensive goods. A theoretical analysis of this phenomenon is made in terms of a corollary proposition in Ozawa (1970).
The interesting features of the European welfare system to protect labor are discussed by Rodrik (2018: 8–11).
As cited in Chang (2002).
This East Asian phenomenon is analyzed in Ozawa (2018a).
This feature derives from the so-called “flying-geese” theory of economic development, a theory originated in Akamatsu (1935).
For the political economy theory of supply chains, see, inter alia, Gereffi et al. (2005).
These modifications are stressed in Ozawa (2019).
Beside these two examples, there are certainly other types of MNE-related social costs (Ozawa, 2018b).
These effects represent the pro-trade type of MNEs’ operations (Kojima & Ozawa, 1984).
This fallacy is the exact opposite of the well-known “fallacy of composition” (i.e., what is good for a part may not be true for the whole).
The author is grateful to Professors Sarianna Lundan, Jeremy Clegg, and an anonymous reviewer for their constructive comments that helped improve this paper.
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