In a recent book, Baldwin (2016) divided the history of globalization into three periods: the pre-globalization period (before 1820) when both trade and communication costs were high, the first unbundling period (1820–1990) when trade costs dropped but communication costs remained high, and the second unbundling period (1990–present) when both trade and communication costs became low (see Figure 1).1 He argued that each period has organized production and consumption in a different way, affecting trade and foreign investment flows.
The pre-globalized period was effectively a phase of autarky. High trade and communication costs isolated production and consumption to such a degree that the global economy was little more than a patchwork of local ecosystems that took care of themselves. While there was some international business (e.g., China’s Silk Road trade), it had only a limited impact on a country’s aggregate performance.
The arrival of steamships and railroads in the nineteenth century substantially lowered the cost of long-distance transportation. With cheaper international shipping, more consumers started buying faraway goods, allowing for the gradual separation of production and consumption. This first unbundling period led to a spurt in international business, but the high communication costs across borders confined production processes within countries.
Globalization accelerated again at the end of the twentieth century, when the ICT revolution slashed the cost of communicating codifiable information at a distance. This instigated globalization’s second unbundling period, which involved the international fragmentation of production. Improvements in communication technology now made it feasible and profitable to coordinate production activities across different countries, allowing for the emergence of global value chains.
IB scholarship has brought to the table several refinements that have enriched this depiction of globalization. First, it has highlighted the central role that MNEs have played in driving change over the two unbundling periods. As MNE managers observed shifts in the costs and risks of doing business abroad, they reassessed how to compete, where to extend their geographical footprint and which activities to conduct within firm boundaries (Buckley & Strange, 2015; Verbeke, Coeurderoy, & Matt, 2018). It is MNEs’ adoption of new forms of intra- and inter-organizational arrangements on the micro-level that instigated shifts in macro trade and investment flows.
Second, IB scholarship has emphasized that MNEs not only adapt the tangible parts of their activities – the production, trade and sale of physical goods – but also the intangibles which are at the heart of MNE operations. Intangibles are those claims to future benefits that do not have a physical or financial embodiment (Lev, 2001). Highly knowledge-intensive in nature, they include the intellectual property, brand equity and other economic competencies that provide MNEs the economic power to set product strategy, place orders, and take financial responsibility for the goods and services that their supply chains turn out (Sturgeon, 2009; Teece, 2018). The drop in communication costs during the second unbundling period has pushed MNEs to not only fragment production internationally but also to globalize the production of intangibles. A highly influential IB literature describes the complex global knowledge management strategies that MNEs adopt to transfer and exploit existing repositories of knowledge around the world and to engage in the exploration of new knowledge (Alcácer, Cantwell & Piscitello, 2016; Cantwell, 1989; Kogut & Zander, 1993).
One of the reasons these knowledge management strategies are complex is that MNEs need to consider the paradoxical geography of knowledge creation which is both concentrated in few local hotspots and increasingly global (Lorenzen, Mudambi & Schotter, 2020). The tacit nature of much of the knowledge that is embedded in intangibles implies that there are significant agglomeration economies in the production of intangibles (Glaeser & Gottlieb, 2009). One reason for this is that complex forms of knowledge are difficult to communicate over distance and require direct and repeated face-to-face contact for their exchange (Storper & Venables, 2004; D’Este, Guy, & Iammarino, 2013). For firms, co-locating with similar and related companies thus can boost collective learning processes through frequent opportunities for formal and informal knowledge exchanges. Several recent studies provide strong evidence that the production of intangibles concentrates disproportionately in a few urban hotspots (Crescenzi et al., 2019; Moretti, 2019; Balland et al., 2020).
A complementary feature is that lead firms have developed sophisticated strategies to allow teams of people in different global cities to collaborate in the production of intangibles. Many lead firms nowadays deliberately establish linkages to other global knowledge hotspots to tap into pockets of complementary knowledge and resources that are unavailable or more expensive locally (Bathelt, Malmberg, & Maskell, 2004). They do so by setting up intra-firm linkages to competence-creating subsidiaries or by developing inter-firm partnerships (Bathelt, Cantwell, & Mudambi, 2018). Once new knowledge combinations are created, these can then be transferred to the home country or other locations to enhance the parent firm’s innovation performance (Cano-Kollmann et al., 2016). Regardless of the governance structure adopted, and the knowledge exchanges facilitated by ICT, the mobility of key personnel is a key factor that keeps these “pipelines” open.