global business environmentdocentes.fe.unl.pt/~frafra/site/gbe/class3gbe2013.pdf · global business...

Global Business Environment

Francesco Franco

Nova SBE

September 18, 2013

Francesco Franco Global Business Environment 1/32

Globalization

First wave

What an extraordinary episode in the economic progress

of man that age was which came to an end in August,

1914! ... The inhabitant of London could order by

telephone, sipping his morning tea in bed, the various

products of the whole earth, ... he could at the same

moment and by the same means adventure his wealth in

the natural resources and new enterprises of any quarter

of the world,... he could secure forthwith, if he wished it,

cheap and comfortable means of transit to any country or

climate without passport or other formality...

Keynes 1916


The Industrial Revolution

Revolution from evolution

• Fergusson: textiles demand, high labor costs and cheap coal• Cipolla: outcome of hundreds of years of technological, social

and institutional progress• 1776: The Wealth of Nations (A. Smith), break in British

Industrial Production• key textiles inventions: 1730-1780• key iron inventions: 1760-1780• steam engine: 1780



Transportation and comunication

• internal market improvement: canals and later rail-raods(1820-1850)

• external markets: steam ships (1830-1870)• 1871, le Frigorifique, chilled beaf from Argentina to France• 1880, frozen butter from New Zealand• Financial intermediation helped development and financed

first transatlantic telegraph cable (1866)



UK

• share of workers in industry: 19% (1700), 24% (1760), 30%(1800), 47% (1840), 50% (1870).

• In the same periods population shifted to cities, 2/3 in urbanareas

• UK became food importer and exporter of industrial goods



In the World

Figure : Industrial take o�...


De-industrialisation

Third World

• Contrary to Fergusson, Kuznets and Braudel believed that theEast was more developed before th 19th century

• Indian cotton textile industry, China silk and porcelain, in the18th century

• By end of 19th century the East becomes a net importer oftextiles, iron and manufactured goods

• De-industrialisation: 73% of world manufacturing (1750),7.5% (1913)


De-industrialisation

Third World

Figure : Industrial divergenceFrancesco Franco Global Business Environment 8/32

Globalisation

Second wave: gains from de-industrialisation

4

“There seems little doubt that de-industrialisation in the South was the result of a massive inflow ofEuropean manufactured imports. This was particularly true of textile and clothing industries, where freetrade exposed the local artisanal and craft producers to the destructive competitive gale of more capitalintensive, high productivity Northern producers” (Kozul-Wright and Bairoch 1996:16).

Table 2 shows the evolution of per capita industrialisation and de-industrialisation. Note that all nationsand regions started at similar levels. In 1750, all European nations were at a level between 6 and 10 (with

UK’s level in 1900 being 100); all non-European nations were at 7 or 8, except the US, which was at 4.China and India are the chief nations represented in the Third World and they follow very similar pathsdropping from something like 8 to about 3. We also see the UK’s spectacular performance and thesubsequent catch up of the US. Japan’s industrialisation path mimics that of the world average.

Of course, the basic equality of the per capita levelcombined with Europe’s small population meant that the ThirdWorld ‘industry’ dominated world production in the 18th

century (Bairoch 1982 Table 10). For instance, in 1750 theThird World accounted for 73% of world manufacturingoutput and it continued to account for over half even as late as1830. By 1913, however, the Third World share had droppedto a mere 7.5%.

This colonial-era de-industrialisation helps explain whymany Third World countries were distrustful of unfetteredinternational trade until very recently.

2.1.3 20th Century Industrialisation/De-Industrialisation

While the income gains of frontrunners in the 1st

globalisation wave were clearly based on industrialisation, theopposite seems to hold for the 2nd wave. Indeed, apart from thehandful of newly industrialised nations (NICs), convergence

Table 2: Per Capita Industrialisation Levels, 1750-1913.(UK in 1900 = 100) 1750 1800 1830 1860 1880 1900 1913Developed Countries 8 8 11 16 24 35 55Europe 8 8 11 17 23 33 45Europe (ex-UK) 7 8 9 14 21 36 57Austria-Hungary 7 7 8 11 15 23 32Belgium 9 10 14 28 43 56 88France 9 9 12 20 28 39 59Germany 8 8 9 15 25 52 85Italy 8 8 8 10 12 17 26Russia 6 6 7 8 10 15 20Spain 7 7 8 11 14 19 22Sweden 7 8 9 15 24 41 67Switzerland 7 10 16 26 39 67 87UK 10 16 25 64 87 100 115Outside Europe 7 7 11 17 33 63 116Canada 5 6 7 10 24 46USA 4 9 14 21 38 69 126Japan 7 7 8 7 9 12 20Third World 7 6 6 4 3 2 2China 8 6 6 4 4 3 3India-Pakistan 7 6 6 3 2 1 2Brazil 4 4 5 7Mexico 5 4 5 7World 7 6 7 7 9 14 21Source: Table 9, Bairoch (1982).

Table 3: Industry’s EmploymentShare, OECD nations, 1950-1990.% of workforce 1950 1980 1990Australia 36 32 26US 36 31 28Canada 33 33 25Austria 35 41 37Belgium 47 35 28Denmark 33 31 28Finland 28 35 31France 35 35 29Germany 43 45 38Italy 29 38 32Netherlands 40 31 26Norway 33 29 25Sweden 41 32 naSwitzerland 46 39 35UK 47 38 29Japan 23 35 34Sources: Maddison (1989) Table C-10, World Bank (1997) Table 4.

Figure : Tertiarisation


Globalisation

Second wave: World income Distribution

Figure : Twin peak


Globalisation

Second wave: World income Distribution

Figure : China and India are equalisingFrancesco Franco Global Business Environment 11/32

Globalisation

First wave: World income Distribution

Figure : Convergence


Globalisation

Capital Mobility

Figure : Current account in 12 countries


Globalisation

Capital Mobility

Figure : Industrial take o�...


Globalisation

Capital Mobility

Figure : and more recently


Globalisation

An analytical framework for international capital movements

• di�erences in rate of return• long-term versus short term: FDI versus portfolio• but financial crises:

• 22 crisis and Panics between 1870-1914, Great Depression 1929• ERM 1992, Mexico 1994, Asia 1997, World 2009


Globalisation

An analytical framework for trade

• transport costs (Demand, Supply, t, shifters)• when transports costs have su�ciently decreased, Ricardian,

Hecsher-Olihn, Agglomeration forces• North-South divergence apperas naturally• the di�usion of technology: South industralises, North invests

in tertiary


Globalisation

Trade Barriers: transportation costs

Figure : Declining costs


Globalisation

Trade Barriers: transportation costs

Figure : t decreased


Globalisation

Trade Barriers: Tari�s

15

open; about as open as the most liberal European nations were in the 1870s. The table also shows that theworld’s remaining protection (at least the easily quantified forms of protection) is limited to two basic twocategories, industrial goods in developing nationsand agricultural goods in developed nations.

Table 10 provide a long-term view of the US’stariff policies. These plainly show how the UnitedStates’ free trade stance is a very recent event byhistorical standards (apart from short-lived burstsof liberalism in the 1850s and the 1920s. Thefigures also clearly show the inter-war rise inprotection in the US.

4.1.2 Trade Flows Trade-to-GDP Ratios

Table 11 shows the ratios of total trade(imports plus exports) to GDP for 11 developednations in 1870, 1910, 1950 and 1995 (actualdates for the first three columns vary slightlyamong nations according to data availability). Thefirst two columns show that most nations experienced increased openness during the first wave ofglobalisation. The increases for Japan, Sweden and Denmark were quite spectacular, while those of othernations were more mild. The UK and Germany, for instance, had already done most of their opening up by1860. Shares for the US, Australia and Canada actually fell during this period. A part of this stems fromrelative price changes between their exports (mainly primary goods, especially wheat) and domesticproduction but a large part is dueto the fact that they neversubstantially liberalised theirtariffs. These nations wereprofoundly changed by the firstwave of globalisation but forthem, international flows ofpeople, capital and technologywere far more important thantrade (more on this below).

All countries apart fromCanada saw their openness ratiosdrop significantly between 1910and 1950. Moreover, all of them,except Japan, have regained orsurpassed their earlier levels oftrade. Thus at this level ofaggregation there is very littlenew about the 2nd wave of globalisation at a superficial level. However, as Lindbeck (1973) noted, thedenominators in the 19th century consisted primarily of private economic activity. In modern times,however, governments account for between 30% and 50% of GDP, so the fraction of private economicactivity exposed to international competition is now much greater than it was in the Victorian-eraglobalisation wave.

Figure 5 presents a more detailed time series for the US and the UK. The figure shows that the US isstill no more open than the UK was in 1850. It also shows that the UK’s burst of openness preceded thefirst wave of globalisation and that the US bucked the openness trend, becoming progressively more closedduring the 1870-1910 period. Since WWII, however, the US has opened up remarkably. This may helpexplain why the ‘globalisation is unprecedented’ school-of-thought is so strong in the US.

Figure 5: US and UK Openness Ratios, 1797-Present.Total Trade to GNP ratio, 1797 to 1995, US and UK,%

0

10

20

30

40

50

60

1797

1810

1821

1833

1843

1854

1866

1877

1888

1899

1910

1920

1931

1941

1951

1962

1975

1988

UKUS

Source: Bairoch (1989).

Table 11: Total Trade to GDP, 1870, 1910, 1950and 1995, Various Developed Nations. (%)

c.1870 c.1910 c.1950 1995UK 41 44 30 57France 33 35 23 43Germany 37 38 27 46Italy 21 28 21 49Denmark 52 69 53 64Norway 56 69 77 71Sweden 28 40 30 77USA 14 11 9 24Canada 30 30 37 71Australia 40 39 37 40Japan 10 30 19 17Notes: Exact dates vary, see Kuznets (1967).

Figure : Volumes


Globalisation

Trade Barriers: Tari�s

• 1815-1846 UK embraces Free-Trade, 1846 Corn Laws• Regional free trade withi new nations, Zoolverein but

protectionisnm vis-a-vis outside• Cobden-Chevalier 1860’s, Most Favourite Nation clauses

pushed toward multilateral free trade


Globalisation

Trade Barriers: Tari�s not a smooth process

14

protectionism.9 Bairoch (1989) and Harley (1996) distinguish four periods: the rise of British liberalism(1815-1846), the spread of European free trade (1846-1860), the liberal period (1860-1879), and theContinent’s return to protection while Britain remained open (1879-1914). Apart from brief flirtations withfree trade, non-European advanced nations, especially the US, remained protectionist until after WWII.Colonial nations that were not self-ruling had liberal policies (at least with their ‘mother’ countries)throughout much of this period (Bairoch 1989).

The period from 1815 and 1846 saw the establishment of Great Britain’s economic supremacy and itsembrace of free trade; the liberalisation of wheat imports (repeal of the Corn Laws) was the climatic eventin 1846. Other European powers also moved towards freer trade during this period. This, however,essentially entailed a shiftfrom strict mercantilism andfragmented internal marketsto modern protectionism.Germany established andfreed internal trade in itsZollverein but raisedexternal tariffs. Austria-Hungary, France, Russia andothers generally loweredinternal customs and exporttaxes, and shifted fromprohibitions onmanufactured imports tovery high tariffs.

Free trade policiesdiffused slowly andsporadically to theContinental economies from1846 to 1860. After 1860,liberal trade policies inEurope spread rapidly via a system of bilateral treaties (the so-called Cobden-Chevalier treaties). Sincethese generally included most favoured nations (MFN) clauses, they established multilateral free trade inEurope. These liberal policies, which lasted up to the end of the 1870s, were distinctly amplified by‘natural’ liberalisation, i.e. sharply lower transport cost (as discussed above).

Protectionism returned to Continental Europe after 1878 (more on this in Section 5.2). For farmers, therenewed protection just offset the sharp drop in wheat prices due to transport costs reductions (Bairoch1989:57). For industrial goods, by contrast, the new tariffs sharply reduced or prevented increases in

industrial imports, especially from Great Britain.Table 8 shows puts some numbers to these trends, showing that although trade barriers of the late 19th

century were lower than those of the early part of the century, the 1875-1914 period was marked by high orrising barriers everywhere except the UK and the Benelux countries.

The more recent globalisation wave is also marked by tariff liberalisation. Since the signing of theGATT in the late 1940s, all developed nations have progressively liberalised tariffs and other bordermeasures on industrial goods. Table 9 shows that except for clothing and a few sectors where specialprotection is important (mainly anti-dumping duties on chemicals and steel), the rich nations are quite 9 This section draws heavily on the masterful account of global trade policy in Bairoch (1989).

Table 9: Post-Uruguay Round Protection Levels.(Tariff equivalentsby commodity,%) Nafta EU Jpn

Med&ME

SubSAfrica

S.Amer Asia

Grains 2 71 184 18 20 2 17Other ag. 38 52 39 6 6 3 20Processed food 5 13 73 6 5 2 17Forestry 1 0 0 17 10 7 5Fishery 1 5 3 42 8 19 11Mining 1 0 0 17 10 4 4Textiles 8 7 5 35 16 15 29Clothing 19 10 9 39 20 23 21Lumber, pulp, paper 1 0 1 24 12 9 9Processed petro. Gds 1 1 1 17 5 12 12Chemicals, plastics, 7 12 2 20 8 13 12Primary steel 7 3 1 17 12 11 9Nonferrous metals 3 1 1 24 14 7 9Metal products 6 2 1 30 13 16 19Transport equipment 3 5 0 25 10 19 23Other machinery 13 7 0 24 6 19 11Other manufactures 5 3 6 28 14 18 17Source: Global Trade Analysis Project dataset, version 3, 1996.

Table 10: US Tariffs, 1823-1988.1823 1829 1842 1857 1867 1891 1908 1914 1923 1931 1935

% total imports 43.4 50.8 25.3 16.3 44.3 22.9 20.1 14.9 14.1 19% dutiable imports 45.8 54.4 31.9 20.6 46.7 48.9 41.3 37.6 37.7 55.3Source: Bairoch (1993) Tab. 3.1.

Figure : US Tari�s


Globalisation

Trade Barriers: Gatt Rounds

Figure : Uruguay round


Globalisation

Trade Flows

15

open; about as open as the most liberal European nations were in the 1870s. The table also shows that theworld’s remaining protection (at least the easily quantified forms of protection) is limited to two basic twocategories, industrial goods in developing nationsand agricultural goods in developed nations.

Table 10 provide a long-term view of the US’stariff policies. These plainly show how the UnitedStates’ free trade stance is a very recent event byhistorical standards (apart from short-lived burstsof liberalism in the 1850s and the 1920s. Thefigures also clearly show the inter-war rise inprotection in the US.

4.1.2 Trade Flows Trade-to-GDP Ratios

Table 11 shows the ratios of total trade(imports plus exports) to GDP for 11 developednations in 1870, 1910, 1950 and 1995 (actualdates for the first three columns vary slightlyamong nations according to data availability). Thefirst two columns show that most nations experienced increased openness during the first wave ofglobalisation. The increases for Japan, Sweden and Denmark were quite spectacular, while those of othernations were more mild. The UK and Germany, for instance, had already done most of their opening up by1860. Shares for the US, Australia and Canada actually fell during this period. A part of this stems fromrelative price changes between their exports (mainly primary goods, especially wheat) and domesticproduction but a large part is dueto the fact that they neversubstantially liberalised theirtariffs. These nations wereprofoundly changed by the firstwave of globalisation but forthem, international flows ofpeople, capital and technologywere far more important thantrade (more on this below).

All countries apart fromCanada saw their openness ratiosdrop significantly between 1910and 1950. Moreover, all of them,except Japan, have regained orsurpassed their earlier levels oftrade. Thus at this level ofaggregation there is very littlenew about the 2nd wave of globalisation at a superficial level. However, as Lindbeck (1973) noted, thedenominators in the 19th century consisted primarily of private economic activity. In modern times,however, governments account for between 30% and 50% of GDP, so the fraction of private economicactivity exposed to international competition is now much greater than it was in the Victorian-eraglobalisation wave.

Figure 5 presents a more detailed time series for the US and the UK. The figure shows that the US isstill no more open than the UK was in 1850. It also shows that the UK’s burst of openness preceded thefirst wave of globalisation and that the US bucked the openness trend, becoming progressively more closedduring the 1870-1910 period. Since WWII, however, the US has opened up remarkably. This may helpexplain why the ‘globalisation is unprecedented’ school-of-thought is so strong in the US.

Figure 5: US and UK Openness Ratios, 1797-Present.Total Trade to GNP ratio, 1797 to 1995, US and UK,%

0

10

20

30

40

50

60

1797

1810

1821

1833

1843

1854

1866

1877

1888

1899

1910

1920

1931

1941

1951

1962

1975

1988

UKUS

Source: Bairoch (1989).

Table 11: Total Trade to GDP, 1870, 1910, 1950and 1995, Various Developed Nations. (%)

c.1870 c.1910 c.1950 1995UK 41 44 30 57France 33 35 23 43Germany 37 38 27 46Italy 21 28 21 49Denmark 52 69 53 64Norway 56 69 77 71Sweden 28 40 30 77USA 14 11 9 24Canada 30 30 37 71Australia 40 39 37 40Japan 10 30 19 17Notes: Exact dates vary, see Kuznets (1967).

Figure : Volumes


Globalisation

Composition of trade

Composition of merchandise tradehttp://www.wto.org/english/res_e/statis_e/world_commodity_profiles10_e.pdfComposition of trade in merchandisehttp://www.wto.org/english/res_e/statis_e/its2011_e/its11_world_maps_merchandise_e.pdf


http://www.wto.org/english/res_e/statis_e/world_commodity_profiles10_e.pdf

http://www.wto.org/english/res_e/statis_e/its2011_e/its11_world_maps_merchandise_e.pdf

Globalisation

Services

Composition of trade in serviceshttp://www.wto.org/english/res_e/statis_e/its2011_e/its11_world_maps_serv_e.pdf


http://www.wto.org/english/res_e/statis_e/its2011_e/its11_world_maps_serv_e.pdf

Globalisation

2010

Snapshot 2010 of tradehttp://www.wto.org/english/res_e/statis_e/its2011_e/its11_highlights1_e.pdf


http://www.wto.org/english/res_e/statis_e/its2011_e/its11_highlights1_e.pdf

Globalisation

FDI

Figure : FDI, outward and Inward


Globalisation

Migration

Figure : Mifration during first waveFrancesco Franco Global Business Environment 29/32

Globalisation

Factor prices: wages

• First wave: convergence (Williamson)• Second wave: divergence starting in 1980’s


Globalisation

Ideas

• macroeconomics and finance: flexible vs fixed exchange rate,gold standard

• trilemma of international monetary policy• wage flexibility• self-fulfilling currency crises• mercantilism, free-trade


Readings

*Richard E. Baldwin, Philippe Martin. Two Waves ofGlobalisation: Superficial Similarities, Fundamental Di�erencesNBER Working Paper No. 6904 Issued in January 1999


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