An evaluation
of the consequences of globalisation of production for advanced industrial
economies.
0213144
To evaluate the consequences of the globalisation of production for advanced industrial economies it is necessary to look at the methods employed in production and the actors who govern this process. In evaluating the methods employed factors such as outsourcing and factor price equalisation are taken into account. By assessing the impact that MNCs have had on the production process an understanding of the rise in inequality of wages, among workers of the advanced industrial economies can be given. A period may also be emerging where there is a correlation of growth rates in particular amongst the G7 and it is necessary to note the possible effects of this might have.
International specialisation is based on the existence of economies of scale. This means that producing on a large scale cuts the average unit cost of production. There was a time when trade in end products dominated international commerce, when goods in their entirety were produced in a single country. However the increasing dispersion of production across national frontiers is internationalising and globalizing products. Offshore sourcing and production has expanded rapidly in recent years. This has contributed to the growth of international trade as components move among countries. While trade in components and semi-finished products have a long history its importance in overall trade has risen dramatically (Arndt, 2001 p.219). This development has been facilitated by investment liberalisation and by cost cutting innovation in transportation and communications technology.
MNCs
today penetrate a countries national consciousness and generate political
action and ultimately policy response. MNCs exemplifies the era of
transnationalism and increase the complex problems nearly all national
governments face in devising economic policies (Krudel, 1991). They can be seen
as extensions of the home country and bring a foreign influence. They can be
seen as a rival, in that its claim on resources might otherwise go to some
domestic element or they themselves might be seen as a resource that augments
the production capacity of the host countries economy. Developed countries have
experienced uneasiness with the economic outlook of MNCs, as they are
incongruent with the host state and not sufficiently subordinate to state
power. Facilitated by the increase in international trade and domestic economic
liberalisation since the mid-1980s, world wide economies of scale have
encouraged competition but also oligopolistic arrangements between and within
MNCs (Pearson and Payaslian, 1999, p.239).
Since
the 1970s more and more production has been destined for international trade.
For example in 1994 world output grew by 5% while world trade increased by over
9% (Lairson and Skidmore, 1997, p.109). An important measure of the global
activity of MNCs is foreign direct investment (FDI). In the 1960s FDI grew
twice as fast as GDP and by the 1980s it was growing four times as fast as GDP.
FDI has created the need for a new measure of international production that
captures not just goods and services crossing borders but also goods and
services produced abroad by foreign affiliates. It has been concluded that
trillions of dollars of international production are not counted by traditional
balance of payments accounting because no goods or service crosses a border.
Cross-border sourcing becomes attractive for
firms if there exists a cost saving potential in production abroad. This
disintegration of production is referred to as out-sourcing. In line with what
has been written on this it can be assumed that the cost saving potential
arises due to lower wages and tariff barriers rather than specialised effects
or technology differences (Egger and Egger, 2001, p.2). This means that factor
prices are not internationally equalised by final-goods traded. Outward
processing by European Union firms to non-EU countries has increased
dramatically since the demise of the Soviet Union. Between 1995 and 1997
outward processing in EU manufacturing grew by about 6.3% per annum, with
outward processing growing about three times faster in importing industries
than in exporting ones (Egger and Egger, 2001, p.10).
In 1998 the global production of US firms was $1,266
trillion, for the same year US firms exported only $307 billion giving a ratio
of more than 4:1 (Lairson and Skidmore, 1997, p.115). FDI allows the MNC the
ability to operate a global enterprise and derive benefits from that operation.
MNCs accept risks and undertake innovation that otherwise might not happen and
therefore gain a competitive advantage. An institutional consequence of
globalisation of production is the development of new and more complex forms
for the organisation of production. The decline in the cost of communication,
the growth of flexible manufacturing, the emergence of global networks of
production, sourcing, finance and innovation have altered MNCs they are now
global knowledge based producers. The further deepening of globalisation is a
fundamental characteristic of the international political economy. MNCs use
technological innovation to structure and restructure the process of production
to minimise costs and maximise profits; a consequence of this type of
production is that in doing so they shape the domestic and international
context of employment.
Numerous studies have documented evidence that show a
rising inequality of earnings among workers with different levels of education
in high-income countries (Miller, 2001). Some blame globalisation, particularly
trade with less-developed countries. There has been vocal opposition
particularly in the US for continued trade liberalisation; this is exemplified
by the protests in Quebec and Seattle plus political pressure for greater trade
protection. Rising inequality of earnings in the developed countries is an
impact of globalisation and as previously outlined the existence of a large non-traded
sector means that factor price equalisation may not occur. The rise of trade
with LDCs increases imports, firms that were vertically integrated have moved
their production process to cross border locations. Skill intensive remains but
labour has moved through substituting imported intermediate imputs for those
that were previously produced at home.
Outsourcing low skill imputs has meant that the relative
wages of unskilled labour has fallen in developed countries. As low skill
activities are closed down people begin to find jobs in more skilled sectors,
however those that have remained unskilled suffer a fall in wages in response
to this reduction of demand, at the same time there is a rise in skilled
relative wages in developed countries. The result of the globalisation of
production for industrial economies is rising inequality in wages and the
reduction of demand for unskilled labour, which in turn has led to
unemployment.
Another impact of the consequences of the globalisation
of production is that a period maybe emerging in which broad movement in the
economies of the industrialised countries maybe more closely linked. Early 2000
growth began to slow in the US, in months the growth rate of GDP began to
simultaneously decline in many countries including the G7 group (Doyle and
Faust, 2002, p.427). The links among the economies of the G7 has grown over the
past decade, although the correlation of growth does not appear dramatically
different now than it did in earlier years, the variability of their growth
rates over this period has generally declined. A fall in variability does imply
increased correlation of growth rates. Greater co-movement of GDP means that
governments need to take a closer account of forecast for conditions abroad in
formulating forecasts of their domestic economies.
The links among the economies of the G-7 grew steadily
over the final decades of the twentieth century. Since the 1970’s US share rose
from about 5% to about 9% and each of the European G-7 nations have now reached
shares of about 20% (Doyle and Faust, 2002, p.428). Openness to trade however
may also bring changes that could decrease correlation. One of the primary
benefits of trade according to economic theory is that it allows each country
to specialise in areas of production in which it has a comparative advantage
relative to its trading partners. With increased trade nations may come to
specialise in certain types of production rely on imports to demand for other
products. If different types of production are subject to different kinds of
shocks, then trade-related specialisation could decrease growth correlation
The
behaviour of trade, MNCs and the emergence of complex transnational production
manufacturing have influenced the production process. MNCs remain largely
ungovernable and global with no motivation for firms to return to the
integrated methods of production that they used in the past, such a policy
almost certainly would do more harm than good. There is a need for the
industrial countries to adopt new monitoring procedures for in the absence of
designing a draconian policy, industrialised countries need to implement
measures that will give them greater control of the production process as
globalisation is only set to deepen.
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