Globalisation, trade, FDI and growth developments

Globalisation, defined as the proliferation and deepening of world trade and investment links, has undoubtedly been an important phenomenon during the last three decades. It has been driven by a combination of factors such as technological changes, reduction of trade and communications costs but also domestic and trade reforms across the world. Innovation in the area of information and communication technology and transport broadened and deepened the interdependence between economic actors based in different countries by narrowing the divide of distance and enabling a greater unbundling of the production process across national borders (OECD, 2006). Costs of international commerce have also been driven down by a major opening to trade and investment of the OECD economies and many SEM economies achieved through a combination of multilateral, regional and unilateral trade liberalisation, as well as through domestic economic reforms (OECD, 2008a).

The scale and scope of the globalisation process are best illustrated by developments in international trade and foreign direct investment (FDI), both of which have been growing faster than GDP in recent decades. As a result economic activity is today more international in many respects. FDI flows have grown much more quickly than trade, income or domestic investment, starting in mid 1980s and culminating around 2000 (Figure 2.1). FDI in particular has played a fundamental role in recent international economic integration and was the most dynamic factor in industrial restructuring (OECD,

2010). Yet, mergers and acquisitions accounted for the bulk of this type of investment in the past 15 years suggesting the influence of FDI was mainly through transfer of ownership rather than creation of new business or expansion of the capacities of existing firms (OECD, 2010).

In the last two decades, the OECD area continued to be the major net exporter of direct investment capital while countries such as India and China have been prominent hosts of FDI. In recent years, however, some emerging market countries have become also a significant source of outward FDI. For example, China’s accumulated outward investment flows in the period 2005-2008 exceeded those of Norway, Denmark, Ireland, Australia or Korea while India’s outward flows in the same period exceeded FDI in Australia, Korea, Poland, Mexico and several other smaller OECD countries (Figure 2.2).

World trade in goods and services has grown less quickly than FDI but still faster than income (Figure 2.1). The growth was also from a relatively large base and in 2007 world exports or domestic investment (measured by value of gross fixed capital formation) still both dwarfed FDI in relative terms. Today USD 1 of value added generated in the OECD area is associated on average with approximately 28 cents worth of exports (up from 19 cents at the beginning of 1980s).

Sourcing of foreign intermediate goods has intensified with capital goods (including parts and accessories) becoming the fastest growing category of world trade (Figure 2.3).² Processed industrial supplies are currently the largest category though their share in total trade has been declining somewhat since the mid 1990s. Trade in consumption goods has recorded growth second only to capital goods with the highest growth rates within this category observed for non-durable and semi-durable consumption goods. The share in world trade of fuels and lubricants (mostly primary products such as crude oil) has fallen considerably despite the significant rise in the price of oil in recent years.

Figure 2.1. Trade, FDI and income growth in the OECD area, 1975-2007

Trade and FDI as % of GDP and Gross Fixed Capital Formation

Figure 2.2. Trends in foreign direct investment Panel A. Average assets Panel B. Average liabilities

Source: OECD (2010).

Figure 2.3. World exports by product use

1976=100

Source: COMTRADE, authors’ calculations.

In parallel to the internationalisation of economic activity the distribution of world income and production has been undergoing a major change. A number of lower middle income countries (LMC) and, more recently, upper middle income countries (UMC) have been growing significantly faster than the high income OECD members, increasing their share of the world GDP.³ Indeed, this trend seems to have intensified over the last few years; the gap in growth rates between the high income OECD and LMC (a grouping that includes such important emerging economies as China, India and Indonesia) widened rather significantly in the mid 1980s and, particularly, since 2002 (Figure 2.4).

Figure2.4. GDP growth by income group Five-year moving average

Growth of exports of goods and services Five-year moving average

Source: World Development Indicators (WDI).

The economic rise of many SEM economies coincided with, and indeed depended on, their integration with world markets (OECD, 2008a). The growth rates of exports of goods and services had been generally more in sync across countries in different income groups until the early 2000s, when trade of the low and lower middle income countries (LIC and LMC, respectively) started growing at rates three to four times higher than trade of the high income OECD countries (Figure 2.4). These remarkably higher trade growth rates in the low income and lower middle income grouping have coincided with significantly higher income growth rates of these countries.

While the last three decades have been a period of general opening up to trade and domestic economic reforms, this was much more pronounced for the SEM economies, many of which have recently transformed from centrally planned and/or inward oriented economies to relatively open, market-based ones. OECD (2008a) recently documented the remarkable domestic and trade policy reforms in the six largest SEM economies, Brazil, Russian Federation, India, Indonesia, China and South Africa (BRIICS), that were behind their emergence into the world markets.

The increasing importance of large emerging economies such as the BRIICS on the world stage has been a major factor that contributed to globalisation and adjustment concerns in the OECD countries, mostly because of the large pools of relatively cheap labour they contribute to the world labour force. The BRIICS make up around 49% of the global population, compared to about 18% for OECD countries. In 2007, China and India alone accounted for approximately 37% of the world population (over 1 billion each) and 8% of the value of world output and income at current prices and exchange rates. Hence, integration of these and other SEM economies with the world economy can be seen as a significant shock to world relative factor endowments with ratios of available labour to capital increasing at dramatic rates.

Trade and FDI are the channels through which some the factor differentials are being reduced. For instance, initially the BRIICS tended to export products that have a relatively high labour content but have since moved in to the export of capital intensive goods as well (e.g. Chapters 3 and 5). Similarly, the growth in FDI led to changing patterns of production and that is likely to continue if capital mobility increases, especially with respect to labour mobility, as has been the case in the last decades. Further large and pervasive structural changes can be anticipated for the global economy as income levels continue to increase across emerging economies and per capita production and consumption levels approach those of today’s OECD economies, as they are already doing.