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Chapter 6

Chapter 6 . Globalisation. Globalisation. “Involves declines in the importance of national political boundaries and geographical distance and increasingly complex interdependencies among countries” EBRD 2001

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Chapter 6

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  1. Chapter 6 Globalisation

  2. Globalisation “Involves declines in the importance of national political boundaries and geographical distance and increasingly complex interdependencies among countries” EBRD 2001 Movement of people, goods and services, raw materials, financial capital and enterprises, technology as well as brand names, knowledge, ideas, culture, values...

  3. Globalisation • New surge after WWII • Related to: • technological advances making distances shorter and costs lower • political decisions : • e.g. EU, WTO, UN

  4. Advantages increase in opportunities, choice, freedom specialisation, division of labour, and risk diversification dissemination of knowledge (e.g. health care), culture and educational exchange workers moving from few opportunities spaces to countries with ageing and decreasing working population Disadvantages pathological globalisation global crime and terrorism diseases environmental spillovers (acid rain, greenhouse gases, overfishing…) global financial threats and panics unfair distribution of gains winners and losers: incomes of people in certain sectors no safety net or compensation Globalisation

  5. Globalisation • To ensure wide and fair distribution of gains →Global action (governments, international institutions, pressure groups…) and cooperation • institutions and international legal and regulatory measures • rule of law • environmental, labour, and safety standards • pensions systems, health insurance • companies taxation, financial regulation and supervision • need to strike a balance

  6. Globalisation and transition • Stunning in terms of scope and speed in transition • out of long period of planned and self-sufficiency • trade was defined according to the CMEA • excessive specialisation and division of work not related to comparative advantages • no labour mobility and financial integration outside CMEA • but educated and skilled labour force • Transition process • outward focus: free trade and inflow of capital • democracy (rule of law, welfare), increased choice • but difficult, slow and costly process for some countries

  7. Theoretical Background • Transition → Opening of markets in CEECs. Integration between Eastern and Western Europe will involve • labour mobility = CEE workers into EU • mobility of goods and services = growing international trade in goods and services • mobility of capital = mobility of companies in search off expanding markets and/or lower costs • EU members: Fear of flow of employees and firms moving away

  8. Lower labour costs Growth potential CEEC markets High value added EU Company EU markets Routine activities Technology skills High income and Growth potential

  9. Labour mobility • CEECs: large source of employment at low wages • EU: high income country paying higher wages than CEECs and needing workers • Expectations = huge flow of workers: • low skilled workers will move from CEECs to EU in search of better payment to do routine work and for EU firms this means lower costs due to lower wages. • Reality different: • EU imposed stronger restrictions on movement; different languages and cultures plus rigid markets = barriers

  10. Mobility of goods and services • If labour mobility is hardly possible (and perhaps hinders development) then: • International trade = mobility of goods: • for CEECs exports = increase production and employment • for EU the CEECS are new expanding market = also growing exports and employment • Outcome depends on comparative advantages • CEECS doing low skilled routine works • EU high skilled high technology so that low skilled in EU are worse off potentially in unemployment in the long run • Reality: Education levels are high in CEECs so also skilled work there → intra industry trade and less disruption

  11. Mobility of goods and services • Evidence: • Pre-transition in 1988 • all sectors of manufacturing were exporting to the EU. • The exports clustered into narrow product groups • Clustering persisted • Transition: • Reduction of trade restriction (tariffs and non-tariffs) • Free movement of capital • boom in trade with EU • most CEECs more than 50% of trade with EU • Positive investment shocks for EU-oriented products

  12. Mobility of goods and services • Negative demand shocks for CMEA-oriented products, supply rigidities  hard for firms exporting to CMEA and need to redirect product and trade • no evidence of “tragic consequences” • increase in employment in exporting sectors in EU • a small risk of unemployment for unskilled workers In EU

  13. Share of CMEA and EU trade 1990-1996*annual average percentage growth; ** percentsource: Hoekman and Djankov (97)

  14. Share of EU oriented Products within sectors in 1988

  15. Share of new EU oriented Products within sectors in 1996

  16. Exports and Imports to EU-15 (%)

  17. Capital mobility • Relocation of firms and Foreign Direct Investment • Reasons for EU: • Cost-reduction approach: • lower labour costs in CEECs so that EU firms can do routine works cheaper and then sell back the goods to EU markets • Expansionary approach: • potential growing demand and expanding market, want to ensure local presence in CEECs so also move there • For CEECs: • FDI creates production and employment • EU members fear unemployment of unskilled but if expansion is reason then less disruption in EU

  18. Capital mobility • Relocation of firms has been an ongoing process for the reasons above but: • a lot to other OECD countries and only a small share of EUFDI goes to CEECs • Belgian operations in CEECs = 10.7% of all foreign operations • German FDI in 1995: only 2% to CEECs • has been growing but below initial expectations • in specific sectors: construction, foods and beverages, leather and footwear, textiles and clothing  EU job losses in these sectors • lack of opportunities at home

  19. Applications 1. Effects of globalisation on the labour market 2. FDI and spillovers

  20. Globalisation & Jobs • Postal survey of Belgian firms: 1580 questionnaires. 312 firms replied (20%) in • manufacturing: food, tobacco, chemical • services and retail • matching with company accounts 260; average employment 420; median employment 45 • Questions on domestic and foreign competition, sources, and actions taken in face of it • Estimate home labour demand in face of foreign competition

  21. Changes in competition

  22. Source of foreign competition(*) Western Europe, USA, Canada, Australia (**) e.g. Latin-America, Turkey, Middle-East, Africa. Rank 1 refers to the highest rank.

  23. Reasons for increased competitionRank 1 is the most important, Rank 5 is the least important. Columns do not sum to a 100% since the same rank to multiple options was allowed.

  24. The response to increased competition

  25. Reasons to invest abroad

  26. Productivity of CEE production facility compared to its Belgian counterpart

  27. Risk factors for investing in CEECs

  28. Most important risk factors in FDI in Central and Eastern Europe • Internal constraints • human resources constraints (appropriate local staff,…) • Budgetary constraints • Lack of information/knowledge • External constraints • economic climate, market considerations • political climate • cultural considerations

  29. Home labour demand equation dependent variable: ln(L)

  30. Labour Demand dependent variable: ln(L)(GLS Results), standard errors between brackets, * means statistical significant on the 5% level.

  31. Globalisation & Jobs • Both domestic and foreign competition increased • foreign competition stronger • Sources (countries) • only 6% of firms in 86-89 and 17% in 90-95 say CEECs is main source of competition • 66% say it comes from West • main source of competition: • lower foreign wages but only for 50% of firms. • Other sources: innovation and exchange rate

  32. Globalisation & Jobs • Reasons for relocation • market opportunity and strategic position not costs  so expansionary approach rather than cost reduction • Actions taken in face of competition: • restructuring • reduction but also increase in employment • only 12% say relocation • Labour demand I: • wages(-), production(+), size or capital(+), • foreign competition (+) for large firms but (-) for small firms

  33. Globalisation & Jobs • Labour demand II: • wages(-), production(+), • foreign competition (+) for large firms but (-) for small firms and CEECs has largest effect, • technology (+) when in the presence of graduates • foreign competition from CEECs twice as (-) for unskilled (blue collar workers) as compared to skilled (white collar workers - as expected

  34. Globalisation & Jobs II • Paper (2001, Konings, Murphy]: Do multinational enterprises substitute parent Jobs for foreign ones? Evidence from firm level panel data

  35. Distribution of parent firms across the EU in the sample

  36. Distribution of subsidiaries across countries

  37. Summary statistics

  38. Correlations between employment growth in parent firms and their affiliates

  39. Conditional demand for parent employment

  40. Main results: • Increased globalisations did occur, especially after 1990 • only a few firms relocated their production facilities, main reason for FDI is to explore new markets • Employment adjustment in response to increased foreign competition did happen and is not always negative, also positive adjustment occurred.

  41. 1. FDI and spillovers • Paper: The effects of FDI on domestic firms evidence from firm level panel data in emerging economies (Konings, Oct. 2000)

  42. FDI and SpilloversTe: Technology effectCe: Competition effect AC(q) AC TE CE q

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