Abstract
In order to conduct a comprehensive study of the impact of international trade and foreign direct investment on economic growth and technological change it is necessary to provide a framework that clarifies the essential terms and explicates the exact research focus. The link between economic integration or globalisation and economic performance of firms and nations is a vast area of research where one finds contributions from many fields of thought – within or outside the science of economics. This chapter therefore gives the essential lines of demarcation which include conceptual definitions as well as the fundamental theoretical orientation of the present contribution.
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Notes
- 1.
Abstracted from depreciation.
- 2.
Harrod-neutral technical progress that is compatible with balanced growth.
- 3.
This is not only due to legal barriers to migration, but also due to the fact that people are reluctant to move abroad only because of wage, i.e. factor price incentives.
- 4.
Without going into the further details of the model provided in every standard textbook, it is more accurate to say that conditional (productivity adjusted) factor price equalisation prevails only when the countries’ capital-labour-ratios fall into the cone of diversification.
- 5.
It should be noted here that this is of course a very simplified description of economic growth without technical progress in the Heckscher-Ohlin world. Referring to Ventura (1997), Acemoglu points to the essence of such a model: the world economy has standard neoclassical features whilst each individual country uses an AK technology but is too small to influence the terms-of-trade and thus factor prices. Factor prices are determined by world prices which entails that for each country factor prices are independent of accumulation decisions. This implies that countries with lower discount rates than the rest of the world can temporarily grow faster than the rest of the world because international trade temporarily prevents diminishing returns to capital as long as the country is small. Ventura (1997) suggests that this delivers a possible explanation for the ‘growth miracles’ experienced by the East Asian Tigers, where trade openness was paired with rapid capital accumulation. Yet, for the research focus in this dissertation, one conclusion is more important: the growth miracles are only medium-run. Eventually the individual growing country becomes too large, influences world factor prices and thus experiences diminishing returns itself (see Acemoglu 2009, Sect. 19.3).
- 6.
The question if acquisition targets are acquired because of being more productive ex ante or if they become more productive upon acquisition is called ‘selection problem’ or ‘selection bias’. Most studies controlling for the selection bias affirm that foreign affiliates become more efficient due to foreign ownership (see the review provided in Chap. 4.2).
- 7.
According to the neoclassical growth model, a non-permanent increase in technology entails only transitory growth rate effects.
- 8.
The fundamental influence of the so-called ‘second’ monopolistic competition revolution on macroeconomics, international trade theory, growth theory and economic geography is set out in Brakman and Heijdra (2004).
- 9.
Krugman […] most clearly and forcefully articulated the revolutionary nature of this new approach for the theory of international trade. (Prize Committee of the Royal Swedish Academy of Sciences (2008, p. 4).
- 10.
Of course the importance of intra-industry trade varies between countries, sectors and with trading-partners. For most developed countries, intra-industry trade dominates inter-industry trade. Especially in manufacturing sectors and their trade-relations with other developed countries (OECD 2002, Chap. 6).
- 11.
Ibid.
- 12.
The basic model rebuilds the selection effect and the scale effect even with assuming a constant elasticity of substitution of product varieties.
- 13.
These are the firms whose aggregate expected profits are positive.
- 14.
Melitz shows that even with a total decrease in the number of available varieties, an overall positive welfare effect prevails.
- 15.
A detailed description of the model is given in Hofmann (2009).
- 16.
Note the jump in per capita income in t 0.
- 17.
Romer (1994) adds that the passing of perfect competition was essential to account for the sum of five basic facts that were taken for granted but were not accounted for before the rise of New Growth Theory. These are the facts (1) that there are many firms in the market economy; (2) that innovations can be used by many people at the same time; (3) that it is possible to replicate physical activity; (4) that technological progress comes from things people do; and (5) that many individuals and firms have market power and earn monopoly rents on innovations.
- 18.
The idea of the reinterpretation of the Dixit and Stiglitz (1977) love-of-variety preferences as production function where the output of final consumption goods is an increasing function of the total number of specialised intermediate inputs used by final good producers is attributed to Ethier (1982) (Romer 1987; see also Ethier (2004) for short historical review).
- 19.
Chiefly Romer (1987), since in this contribution the essence of specialisation is most clearly developed. Particularly it ignores external effects due to spillovers of knowledge. Romer’s other seminal contributions rely on learning-by-doing with spillover effects (Romer 1986) or combine specialisation with knowledge externalities to explain endogenous growth (Romer 1990).
- 20.
One also speaks of vertical innovation in contrast to horizontal innovation.
- 21.
To make it clear, this competition effect does not refer to the efficiency level effect of firms being kicked out of the market through the selection effect of trade. That is that only the most efficient stay in the market like in Melitz (2003). It refers to the effect competition has on the innovation incentives of firms which transforms into efficiency growth rate changes.
- 22.
The reader should recall the essential differentiation between pecuniary and non-pecuniary (or technological) externalities. The free-of-charge externalities either work through the price system or not. For example the increased input variety due to trade liberalisation that is a form process innovation is mirrored in prices while copying the marketing strategy of a foreign competitor is not.
- 23.
Acemoglu and Ventura (2002) is a good example for the interplay of the two pillars. The world economy exhibits endogenous growth with the growth rate determined by the investment decisions of all countries. All countries face AK-technologies with different parameter values. When a country is richer it accumulates faster and thus has a lower rate of return on capital, worsens its own terms-of-trade and eventually converges to the world growth rate. While it is international trade that ensures a common long-run growth rate for all countries (pillar two), growth itself is explained by the underlying AK-technology endogenous growth model (pillar one).
- 24.
He names Portugal and Nigeria as examples.
- 25.
‘Technical dynamism’ is an expression for the progressiveness of a nation which comprises its inventive talent, its risk affinity and its adaptability. In Kaldor’s approach, it links the rate of change in investment with the rate of change in aggregate productivity and thus is an intuitive concept for the general environment that explains an economy’s ability to take advantage of new technologies and to translate them into economic progress (Kaldor 1957; Kaldor and Mirrlees 1962).
- 26.
- 27.
Appropriateness is discussed either depending on the compatibility of frontier technology with the needs and resource endowments of follower countries or depending on the technology gap between frontier and follower countries. While some authors stress that a certain technology gap has to exist for diffusion to take place, others find that the gap must not be too large for followers being able to absorb frontier technology. Acemoglu (2009, Sect. 18.4) provides a discussion of some complementarity prerequisites as exogenous (geographical) conditions, capital-intensity and skill endowment. The other idea that ‘distance to frontier’ matters also occurs in the new Schumpeterian models of endogenous growth: whether innovation rises with competition or not depends on the technological gap between leading and following countries, sectors or firms (Aghion and Griffith 2005).
- 28.
‘Learning-by-exporting’ roots, as will be explained below, in dynamic scale effects as learning-by-doing as well as in technological externalities due to knowledge spillovers.
- 29.
The increasing globalisation of R&D Production is mainly attributed to the spread of MNE. See Chap. 4.2.
- 30.
- 31.
Some authors also call this ‘offshoring’. This contribution sticks nonetheless to ‘offshore outsourcing’ since offshoring also comprises ‘captive offshoring’ (in-house production abroad) which is indeed FDI.
- 32.
This list is enlarged by some authors in different ways. For example strategic alliances are mentioned; others divide FDI in M&A, GI, JV and other non-M&A with the latter including plant expansion, an increase in equity stakes and the acquisition of real estate (Alba et al. 2010).
- 33.
To give a short definition: Franchising as defined by Caves and Murphy (1976) is an agreement lasting for a definite or indefinite period in which the owner of a protected trademark entitles another economic entity the right to operate under this trademark for the purpose of producing and distributing products or services. The intangibility of the rented asset and the decentralised production and distribution processes are constitutive features. Patent and know-how licensing refers to arrangements where an innovative firm grants other companies the right to use a patent or less codified technological know-how in its own production process. More concrete, license contracts contain rules for the transfer of know-how for the manufacture, assembly, test and product support of the product from the licensor to the licensee; sale and supply of components, parts and spare parts related to the product; provision of training to the personnel of the licensee as well as the provision of technical assistance with respect to manufacture, assembly, test and product support and after sales services of the product. Often it also incorporates the exclusive right of the licensee to use the transferred know-how and to distribute and product support the product within the territory. For the interested reader it is referred to the World Investment Report 2011 that focuses on non-equity modes of international production (UNCTAD 2011).
- 34.
Chapter 4.1 discusses the firm-level, sectoral and macroeconomic determinants of different forms of international engagement of firms via equity arrangements, differentiating between horizontal, vertical and other motivations.
- 35.
[…] Acquisitions involving less than 10 per cent constitute portfolio investment […] (UNCTAD 2000, p. 99)
- 36.
The forms of investment classified as FDI are equity capital, the reinvestment of earnings and the provision of long-term and short-term intra-company loans (between parent and affiliate enterprises) (IMF 2009).
- 37.
See IMF (2009) for details on the latter.
- 38.
- 39.
The term is a metaphor for building a facility on a ‘green’ field.
- 40.
To be even more precise it could be further distinguished between equity joint ventures and non-equity joint ventures governed by contractual arrangements as licensing and management contracts. Since the latter is subsumed under non-equity modes of entering the foreign market in this dissertation the term JV here refers to equity joint ventures.
- 41.
Business relationships that are rather on-going and long-term in nature are better addressed by the term ‘(business partnership)’.
- 42.
A common example is that in JVs with Chinese firms the latter provide land, labour and production facilities while the partners from Western countries deliver management, engineering, sales and distribution know-how.
- 43.
UNCTAD (2000) even reports that the ratio of total cross-border M&A to the value of global FDI was about 83 % in 1999.
- 44.
See also UNCTAD (1998), World Investment Report: Trends and Determinants.
- 45.
This is only true for developed countries and the global average. For developing countries the number is below 40 % in 1999 whereas a steady increase is observable here as well.
- 46.
This shift is a trend not limited to the crisis years. UNCTAD (2011) speak about emerging economies as the new FDI powerhouses.
- 47.
44 % is exactly the number in their Table 1 for GI.
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Hofmann, P. (2013). International Trade, FDI and Economic Growth: Terms, Interdependencies and Research Focus. In: The Impact of International Trade and FDI on Economic Growth and Technological Change. Contributions to Economics. Physica, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-34581-4_2
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