Atti e Trascrizioni

Interventi Convegno 23 maggio 2001

The Globalization of the Economy and the International Competitiveness of Nations

Dominick Salvatore

Fordham University

The past decade has witnessed an increasingly rapid tendency toward globalization in the world economy. Rapid globalization has occurred in national tastes, in production, and in labor markets, and this has sharply increased international competitiveness of nations.

The first section of this paper examines the rapid process of globalization that has taken place during the past decade in the world economy and the reasons for its occurrence. The second section provides some data on the international competitive position of nations and the reasons for the U.S. being in first place. Section three examines the differential effect of globalization and international competition on labor markets in the United States and in other leading industrial countries. The last part discusses the crucial importance of international competitiveness in the world today.

1. Globalization of the Economy

The tremendous improvement in telecommunications and transportation during the past decade has lead to a strong cross-fertilization of cultures and convergence of tastes around the world. Tastes in the United States affect tastes around the world and tastes abroad strongly influence tastes in the United States. Coca-Cola has 40 percent of the U.S. market and an incredible 33 percent of the world’s soft drink market, and today you can buy a McDonald’s hamburger in most major cities of the world. As tastes become global, firms are responding more and more with truly global products. For example, in 1990, Gillette introduced its new Sensor Razor at the same time in most nations of the world and used the same advertisement (except for language) in 19 countries in Europe and North-America. By 1999, Gillette had sold over 400 million of its razors and more than 7 billion cartridges. In 1994, Ford spent more than $6 billion to create its “global car” conceived and produced in the United States and Europe and sold under the name of Ford Contour and Mercury Mystique in the United States and Mondeo in the rest of the world. The list of global products is likely to grow rapidly in the future and we ore likely to move closer and closer to a truly global supermarket.

In his 1983 article “The Globalization of Markets” in the Harvard Business Review, Theodore Levitt asserted that consumers from New York to Frankfurt to Tokyo want similar products and that success for producers in the future would require more and more standardized products and pricing around the world. In fact, in country after country, we are seeing the emergence of a middle-class consumer life-style based on a taste for comfort convenience, and speed. In the food business, this means packaged, fast-to-prepare, and ready-to-eat products. Market researchers have discovered that similarities in living styles among middle-class people all over the world are much greater than we once thought and are growing with rising incomes and educational levels. Many small national differences in taste do, of course, remain; for example, Nestle’ markets more than 200 blends of Nescafé to cater to differences in tastes in different markets. But the converging trend in tastes around the world is unmistakable and is likely to lead to more and more global products.

This is true not only for foods and inexpensive consumer products but also for automobiles, portable computers, phones, and many other durable products.

Globalization has also occurred in the production of goods and services with the rapid rise of global corporations. These are companies that are run by an international team of managers, have research and production facilities in many countries, use parts and components from the cheapest source around the world, and sell their products, finance their operation, and are owned by stockholders throughout the world. In fact, more and more corporations operate today on the belief that their very survival requires that they become one of a handful of global corporations in their sector. This is true in automobiles, steel, aircrafts, computers, telecommunications, consumer electronics, chemicals, drugs, and many other products. Nestle’, the largest Swiss Company and the world’s second largest food company has production facilities in 59 countries, and America’s Gillette in 22. Ford has component factories in 26 different industrial sites around the world, assembly plants in six countries, and employs more people abroad (201,000) than in the United States (188,000).

One important form that globalization in production often takes in today’s corporation is in foreign «sourcing” of inputs. There is practically no major product today that does not have some foreign inputs. Foreign sourcing is often not a matter of choice for corporations to earn higher profits, but simply a requirement for them to remain competitive. Firms that do not look abroad for cheaper inputs face loss of competitiveness in world markets and even in the domestic market. This is the reason that $625 of the $860 total cost of producing an IBM PC was incurred for parts and components manufactured by IBM outside the United States or purchased from foreign producers during the mid-1980s. Such low-cost offshore purchase of inputs is likely to continue to expand rapidly in the future and id being fostered by joint ventures, licensing arrangements and other non-equity collaborative arrangements. Indeed, this represents one of the most dynamic aspects of the global business environment of today.

Foreign sourcing can be regarded as manufacturing’s new international economies of scale in today’s global economy. Just as companies were forced to rationalize operations within each country in the 1980s, they now face the challenge of integrating their operations for their entire system of manufacturing around the world to take advantage of the new international economies of scale. What is important is for the firm to focus on those components that are indispensable to the company’s competitive position over subsequent product generations and “outsource” other components for which outside suppliers have a distinctive production advantage. Indeed, globalization in production has proceeded so far that it is now difficult to determine the nationality of many products. For example, should a Honda Accord produced in Ohio be considered American? What about a Chrysler minivan produced in Canada? What about now that Chrysler has been acquired by Daimler-Benz (Mercedes)? Is a Kentucky Toyota or Mazda that uses nearly 50 percent of imported Japanese parts American? It is clearly becoming more and more difficult to define what is American and opinions differ widely. One could legitimately even ask if this question is relevant in a world growing more and more interdependent and globalized. Today, the ideal corporation is strongly decentralized to allow local units to develop products that fit into local cultures, and yet at its very core is very centralized to coordinate activities around the globe.

Even more dramatic has been the globalization of labor markets around the world. Work which was previously done in the United States and other industrial countries is now often done much more cheaply in developing countries. And this is the case not only for low-skilled assembly-line jobs but also for job requiring high computer and engineering skills. Most Americans have only now come to fully realized that there is a tru1y competitive labor force in the world today willing and able to do their job at a much lower cost. If anything, this trend is likely to accelerate in the future.

Even service industries are not immune to global job competition. For example, more than 3,500 workers on the island of Jamaica, connected to the United States by satellite dishes, make airline reservations, process tickets, answer calls to toll-free numbers, and do data entry for U.S. airlines at a much lower cost than could be done in the United States. Nor are highly skilled and professional people spared from global competition. A few years ago, Texas Instruments set up an impressive software programming operation in Bangalore, a city of four million people in southern India. Other American multinationals soon followed. Motorola, IBM, AT&T and many other high-tech firms are now doing even a great deal of basic research abroad. American workers are beginning to raise strong objections to the transfer of skilled jobs abroad. Of course, many European and Japanese firms are setting up production and research facilities in the United States and employing many American professionals. In the future, more and more work will simply be done in places best equipped to do the job most economically. Try to restrict the flow of work abroad to protect jobs in the United States, and the company risks loosing international competitiveness or end up moving all of its operations abroad.

2. Globalization and International Competitiveness of Nations

During the 1970s and 1980s, the United States lost relative competitiveness in one industry after another with respect to Japan and, in some industries, even with respect to Europe and the Newly Industrializing Economies (NIEs) of Asia. Since the late 1980s and early 1990s, however, the United States has recaptured most of the lost competitiveness ground and in 1994 it was ranked once again as the most competitive economy in the world, displacing Japan, which had occupied that position since 1985. The United States was judged the most competitive economy in the world in each subsequent year up to the present (the year 2000). Indeed, during the past year it has increased its lead over the other G-7 (most important) industrial nations.

The Institute for Management Development in Lousanne (2000) assigned a competitive index of 100 to the United States, 64.4 to Germany (this means that Germany was about 35 percent less efficient on an overall level with respect to the United States), 63.4 to Canada, 59.3 to the United Kingdom, 57.3 to Japan, 54.3 to France, and 34.7 to Italy. To be sure, in the ranking, between the United States and Germany there were six other nations (Singapore, Finland, Netherlands, Switzerland, Luxembourg, and Ireland), but these were very small nations and cannot ho compared to large industrial nations (the G-7 countries). In any event, most of the competition that the United States faces as a country comes from the other G-7 countries rather than from these small countries. Out of the 46 countries that were ranked, Japan came in seventeenth in the year 2000.

Competitiveness was defined as the ability of a country or company to generate more wealth for its people than its competitors in world markets. Eight factors were used in measuring the relative productivity of each nation. These are (1) domestic economic strength (measured by the degree of competition in the economy); (2) internationalization (measured by the degree of by which the nation participates in international trade and investments); (3) government (given by the degree by which government policies are conducive to competitiveness); (4) finance (given by the performance of capital markets and the quality of financial services); (5) infrastructure (extent to which resources and systems are adequate to serve the basic needs of business); (6) management (extent to which enterprises are managed in an innovative and profitable manner); (7) science and technology (scientific and technological capacity); and (8) people (availability and qualifications of human resources). The United States ranked first among the G-7 countries in 7 out of the 8 factors. It ranked second only in factor 3 (government) after Canada.

Measuring international competitiveness, however, is an ambitious and difficult undertaking and there are only a handful of such comprehensive studies. Although useful, the competitiveness study discussed above faces a number of serious shortcomings. One is the grouping and measuring of international competitiveness of developed and developing countries and of large and small countries together. It is well known, however, that developed and developing countries, on the one hand, and large and small countries, on the other, have very different industrial structures and face different competitiveness problems. Using the same method of measuring the international competitiveness for all types of countries, thus, may not be appropriate and the results may not be very informative or, at least, may be difficult to interpret.

Another serious shortcoming with the above competitiveness measure is tat the correlation between real per capita income and standard of living of the various nations may not be very high. For example, the United Kingdom has a higher competitiveness index much higher than Japan’s even though its real per capita income is more than a quarter lower than Japan’s. Similarly, the United Kingdom has a competitiveness index much higher than Italy even though their real per capita income is practically the same. The question that naturally arises is: If Italy is so much less competitive than the United Kingdom, how can it have in equal real per capita income? Where is Italy’s high per capita income and standard of living coming from? In economics, we like to think that productivity determines per capita income and the standard of living and it disconcerting to see such a blatant variance between expectations and reality. As a result, these overall international competitiveness figures must be taken with a grain of salt. Furthermore, a nation may score low on its overall competitiveness and still have some sectors in which it is very productive and efficient. Nevertheless, and to the extent that entrepreneurs and managers rely on these overall competitiveness measures in deciding whether to invest in a nation or in another, these over all competitiveness measures are important.

3. Relative Labor ad Capital Productivity in the United States, Japan, and Germany

Table 1 shows labor productivity in terms of value added per hour worked in various industries in Japan and Germany relative to the United States in 1990. Taking the labor productivity in the United States as 100, we can see from the table that Japan’s labor was more productive than U.S. labor by 47 percent in steel, 24 percent in auto parts, 19 percent in metal working, 16 percent in automobiles, and 15 percent in consumer electronics. On the other hand, U.S. labor was more productive than Japanese labor in computers, beer, soaps and detergents, and especially food. For all industries together, Japanese labor was, on the average, only 83 percent as productive as U.S. labor. Table 1 also shows that German labor was as productive as U.S. labor only in metal working and steel and less productive in all other industries, especially in beer production. Overall, German labor was only 79 percent as productive as U.S. labor

In a more recent study of productivity of German and French industry relative the U.S. industry, the McKinsey Global Institute (1997) found that German and French productivity increased over the past decade but at a slower rate than U.S. productivity and so it is now further behind U.S. industry today that it was a decade ago. Overall, McKinsey found that German Industry is 30 percent less efficient and French industry is 40 percent less efficient than U.S. industry. In general, the higher U.S. labor productivity is not due to bigger firms, more automation, or better managers (although these factors might be determinant in some specific industries) but is the result of greater competition and much more flexible labor practices in the United States than abroad. Specifically, the higher U.S. productivity depends on the ability of US. managers to introduce new and improved products much faster than abroad and the ability of US. engineers to invent new and more efficient ways of making product and designing products that easy to make.

Furthermore, despite the fact that the United States has in recent years been saving and investing less than Japan, Germany, and France (and, for that matter, less than most other nations, it seems to have gotten more mileage out of its investments. In fact, the McKinsey Global Institute (1996) found that Germany and Japan use their physical capital only about two-thirds as efficiently as the United States. The Institute looked at the entire economy as and in depth at five industries: telecommunication, utilities, auto manufacturing, and food processing, and retailing. It found that Germany uses excessive capital for the job at hand. For example, the phone cables for Deutsche Telecom are built to withstand being run over by a tank, even though the cables are underground. Such “gold-plating” of equipment is expensive and wasteful. Japan keeps massive electrical generating capacity idle most of the time in order to meet peak demand in hot summer days, while the United States avoids this great capital waste by creative time-of-day and summer electricity pricing schemes that discourage usage at peak times. Such higher capital productivity translates into higher financial returns for U.S. savers - 9.1 percent compared with 7.4 percent in Germany and 7.1 percent in Japan. This higher U.S. capital productivity more than makes up for its lower savings rate than Germany and Japan.

Since the 1970s, the United States has moved faster than Japan, Germany, and France and other nations in deregulating (i.e. in removing government regulations and controls of economic activities on) airlines, telecommunications, trucking, banking, and many other sectors of the economy. For example, cutthroat competition makes American airlines about a third more productive than the larger regulated or government-run foreign airlines. General merchandise retailing is twice as efficient in the United States than in Japan, and so is American telecommunications in relation to German telecommunications. Most American firms today face much stiffer competition from domestic and foreign firms than their European and Japanese counterparts. Stiff competition makes most American firms lean and mean - and generally more efficient than foreign firms.

A second reason for higher productivity of U.S. than Japanese and European labor is the much higher degree of computerization in the United States than Japan or Europe. The United States has 63 computers per 100 employed workers to Japan’s 17 and even fewer in Europe. Labor flexibility is still another reason for the larger productivity of U.S. labor. While labor practices abroad are often constrained by unions, social policies and regulation, U.S. firms are much freer to hire. fire, reorganize, and use labor and other resources where they are most productive. This makes life difficult for U.S. workers who can lose their jobs when caught in a competitive squeeze, but it also enhances firm efficiency and labor productivity. Coupled with adequate job creation, this higher labor productivity is responsible for the higher GDP per capita and standard of living in the United States than abroad.

4. The Importance of International Competitiveness for a Nation

In a 1994 article, Paul Krugman stated that international competitiveness is an irrelevant and dangerous concept because nations simply do not compete with each other the way corporations do, and that increases in productivity rather than international competitiveness are all that matter for increasing the standard of living of a nation. In trying to prove his point, Krugman points out that U.S. trade represents only about 10-15 percent of U.S. GDP (and so international trade cannot significantly effect the standard of living, at least in the United States), international trade is not a zero-sum game (so that all nations can gain from international trade), and that concern with international competitiveness and lead governments to the wrong policies (such as trade restrictions and industrial policies).

All of these statements are true, but Krugman’s conclusion that since international trade is only 10 to 15 percent of US. GDP, it cannot significantly affect the U.S. standard of living, simply does not follow. The reason is that if a nation’s corporations innovate and increase productivity at a lower rate than foreign corporations, the nation may be relegated to exporting products which are technologically less advanced and this may compromise its future growth. For example, the U.S. superiority in software makes possible faster productivity growth in the United States both directly (because productivity growth is faster in the software industry than in many other industries) and indirectly (by increasing the productivity of many other sectors, such as automobiles, which make great use of computer software in design and production). Thus, international competitiveness is crucial to the nation’s standard or living.

Pointing out, as Krugman does, that some high-tech sectors artificially protected by trade policies and/or encouraged by industrial policies have grown less rapidly that some low-tech sectors, such as cigarettes and beer production, misses the point. This only proves that wrong policies can be costly. Productivity growth and international competitiveness must be encouraged not by protectionist or industrial policies by improving the factors affecting international competitiveness discussed in section III of this paper. A country’s future prosperity depends on its growth in productivity and this can certainly be influenced by government policies. Nation’s compete in the sense that they choose policies that promote productivity. As pointed out by Dunning (1995) and Porter (1990), international competitiveness does matter.

That industrial policies and protectionism only provide temporary benefits to the targeted or protected industries but slows down the growth of productivity and standards of living in the long run is clearly evidenced by the competitiveness situation in Europe vis - a - ­vis the United States and Japan today. Aside from banking and the space industry (and, maybe, the chemical industry), there is practically no other industry in which Europe that can stand up to U.S. and Japanese competition. This is the case for the steel industry, the automobile industry, the commercial aircraft industry, the airline industry, the computer industry, and many others. Without the billions of dollars that some of these industries receive in subsidies or for repeated restructuring and trade protection, and without alliances with U.S. or Japanese firms, most European firms in these industries would be unable to compete with U.S. and Japanese firms. Seven of the top 10 computers firms (including the top 5) in Europe and American, one is Japanese and only two are European. In software, America has an undisputed lead. In telecommunications, online services, biotech, and aircraft also the United States has a big lead over Europe. In automobiles, Japan has an undisputed lead and even U.S. automakers are much more efficient than Europeans. To be sure, European automobiles are of high quality, but command a much higher price than Japanese and a higher price than even American automobiles.

Although Europe has been able to keep wages and standards of living relatively high and rising during the past two decades, the rate of unemployment is now more than double the U.S. rate and three times higher than the unemployment rate in Japan. And while the United States, with a smaller population than Europe has created more than 30 million jobs during the past thirty years, employment has stagnated in Europe. The United States has also been much more successful than European countries in meeting the growing competition from NIEs and other emerging economies in Asia (see, Rausch, 1995).

The restructuring and downsizing that rapid technological change and increasing international competition made necessary resulted in average wages and salaries not rising very much in real terms in the United States during the past decade, but millions of new jobs were created. In Europe, on the other hand, real wages and salaries grew but very few new jobs were created, and this left Europe much less able to compete cm the world market than the United States and Japan. It is true that Japan has also been very protectionistic and made extensive use of industrial policies in the past, but Japan fostered intensive competition at home, while Europe did not. The result has been that Japanese firms have become highly competitive while European firms have not. Being unable to fire workers when not needed, firms have tended to increase output by increasing capital per worker rather than by hiring more labor and this made the return to capital lower and the wage of labor higher in Europe than in the United States.

References

Dunning, John H, “Think Again Professor Krugman: Competitiveness Does Matter,” The International Executive , Vol. 37, No. 4, 1995, pp. 315-324.

Institute for Management Development, The World Competitiveness Yearbook, IMD, Lousanne, 2000.

Levitt, Theodore, “The Globalization of Markets”, Harvard Business Review, May-June 1983, pp. 92-102.

Krugman, Paul, “Competitiveness: A Dangerous Obsession,” Foreign Affairs, March-April 1994, pp. 28-44.

McKinsey Global Institute, Manufacturing Productivity, Washington D.C., McKinsey Global Institute, 1993.

McKinsey Global Institute, Capital Produttctivity,

Washington DC., McKinsey Global Institute, 1996.

McKinsey Global Institute, Removing Barriers to Growth and Employment in France and Germany, Washington D.C., McKinsey Global Institute, 1997.

Porter, Michael, The Comparative Advantage of Nations, New York, Free Press, 1990.

Rausch, Lawrence M., Asia’s New High-Tech Competitors, Washington D.C.: National Science Foundation, 1995.

Salvatore, Dominick, International Economics, 7th ed., New York, Wiley & Sons, 2000.

Salvatore, Dominick, Protectionism ad World Welfare, New York, Cambridge University Press, 1993

Salvatore, Dominick, The Japanese Trade Challenge and the U.S. Response, Washington, D.C., Economic Policy Institute, 1990.

Table 1

Productivity of Japanese and German Labor Relative to U.S. Labor

with US Index = 100

Japanese

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