Why global commitment really matter! /
Howard Lewis, III, J. David Richardson.
Washington, DC : Institute for International Economics, 2001.
xi, 69 p. : ill.
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Washington, DC : Institute for International Economics, 2001.
general note
"October 2001."
catalogue key
Includes bibliographical references and index.
A Look Inside
First Chapter

Chapter One


Americans have a large stake in further global integration. Although on some measures ours is already the most open economy in the world, there are sizable gains to be won from becoming more open still, according to new research. Because this research is quite recent and not yet widely understood, we summarize it in this introduction and explore it in more detail in later chapters.

    New research on real plants, workers, and local communities suggests sizable gains to further global integration, even for a country as large, prosperous, and relatively open as the United States. These gains flow from deeper integration of many types: stronger export engagement and deeper import dependence, inward and outward investment and technology transfer. Plants, workers, and communities are prospering by linking to the global economy through a whole family of commitments that involve most or all of these types of engagement. In this research, the fact of commitment usually matters more than the intensity of that commitment. The biggest gains come from the choice to become globally linked; the additional gains from deepening those linkages are real, but smaller.

    The gains from globalization found by this new research suggest that global commitment is like a tonic, a therapeutic cocktail of several diverse activities. A firm, a worker, or a community that takes the tonic is likely to be healthier in numerous ways than a comparable firm, worker, or community that does not. Those that take the tonic grow faster and are less prone to fail than those that do not; as a consequence, the share of tonic-takers in the population and in the economy rises. That is good on average for the economy as a whole, but not necessarily for those that choose not to take the tonic. And that is the news in this new research.

    Global engagement may not be the only tonic available, of course. Technology and education are two other potential tonics. And global engagement is certainly not a cure for everything that ails us. But its value as a tonic is not widely appreciated, nor are the reasons why it works, nor is it clear whether it will work for everybody who tries it. This report aims to illuminate all of these questions.

    Chapter 2 describes the new research itself. It reveals previously unappreciated patterns in the lives of real Americans, their workplaces, and their neighborhoods. For example, a typical assembly-line worker in an American plant that exports or outsources abroad earns more than an otherwise comparable assembly-line worker in an American plant that does neither. A typical American plant with investment links to foreign plants has higher productivity than a typical plant without such links, and this holds true even for plants that are otherwise twins--that is, comparable in size, location, and industry. And American communities with dense links to foreign investors and active export involvement have higher standards of living and larger tax bases than otherwise similar communities with less global engagement. Figures 1.1-1.3 preview these gains, all of which are described with more precision in chapter 2. Chapter 2 also summarizes new research from other countries that reveals similar gains to firms, workers, and communities that commit to global integration.

    But the research so far is only suggestive. Although the patterns observed are ubiquitous and uncontradicted by other studies their interpretation remains controversial, as chapter 3 discusses. There are basically two interpretations. One is innocuous, in that it carries no obvious implications for changes in economic policy. The other, in contrast, carries important policy implications and is therefore more provocative. Each interpretation has its own account of what causes what:

* The innocuous version. Some new research finds that the observed patterns are due simply to the fact that good firms seek out good communities in which to locate and are able to hire good workers. This leads to success in global markets and in attracting foreign partners as suppliers, investors, and coinnovators. In other words, good workers, good firms, and good communities are good to begin with, and naturally, they are the ones that succeed, at the local, the national, and the global level. "Goodness" (perhaps with an element of luck), in this view, is the cause, and global engagement the effect, not vice versa.

* The provocative version. Other new research does not dispute the first explanation but suggests that causation also works in the other direction. A commitment to global integration stimulates improved performance and, especially, stronger and more stable growth for firms, workers, and communities. Sidebar 1.1 provides a revealing illustration.

    Why might conscious global commitment improve performance? The new research is just beginning to find the answer. For firms, diverse global integration often brings access to best-practice technologies and inducements for industrial rationalization, more efficient sourcing, and competitive discipline. These in turn enhance productivity, both among workers in the globalizing firm and among other firms in the community. More surprising, diversified sourcing and marketing by the globalized firm also enhance the stability of jobs and thus the economic stability of the community.

    Traditional calculations of the welfare benefits from trade and foreign investment fail to capture these sorts of gains. Such calculations, for example, neglect the fact that almost 70 percent of US trade is in inputs, not final consumer goods. (Inputs are goods and services either used to produce other products and services or embodied in them.) When US firms buy foreign inputs that outperform those available at home, they improve American productivity and earnings as well as expand consumer choice. One should perhaps think of the microprocessor (a component part), not the microwave oven (a consumer product), as the poster child for global linkage in America today.

    Of course, when US firms buy imports to use as inputs--and when consumers buy imported final goods directly--some American firms and workers are displaced. We discuss this issue at several junctures below. But other firms and workers earn significant productivity returns from importing components and capital goods. Their gains should be weighed against the losses of those who are displaced.

    Furthermore, a very large share of US trade is linked to international investment: much "trade" today consists of transactions within multinational enterprises, rather than between independent firms at arm's length. It is becoming increasingly meaningless, if not outright impossible, to think of trade as something separate from cross-border investment, or of exporting as something separate from importing products and innovative ideas. All are tied together in the extended family of global commitments.

    Thus a second piece of news coming out of microdata research is that global engagement is an integrated family of activities. American exporters tend to be importers, international investors, and international technology traders, too. It is increasingly rare, difficult, and unwise to be a "pure" exporter, shunning these other linkages.

    Finally, traditional assessments of globalization fail to take into account the power of global linkages to rejuvenate firms and industries. Whereas traditional calculations trace only how certain whole industries retreat under the global glare while others expand, microdata research shows how global integration refines, sifts, and sorts firms within every industry. Rejuvenation within industries, not the more efficient reallocation of resources across industries, is the dominant source of economywide gains in this new research. In the US studies at least, this rejuvenation happens in two ways. First, because globally engaged firms usually grow faster and fail less often than do other comparable firms, their market share in their industry rises, and overall industry performance measures come to reflect more and more their greater prowess. Second, globally engaged firms that are brand-new entrants to an industry usually have far more favorable performance measures than comparable firms that are dying out and exiting the industry. Thus global integration can often contribute to productivity and growth in every sector of the economy, not just in certain "advantaged" sectors.

    But global integration does not just improve the lot of American firms; it does the same for American workers. It boosts wages as well as profits. Almost any way one chooses to measure it, globally engaged workers have better jobs, with higher pay, better benefits, and greater job stability--and globally engaged firms see faster growth of these better jobs.

    This finding might not be surprising for workers in exporting plants and in foreign-owned plants in the United States. Indeed, its wide acceptance is evidenced by the fact that almost every state in the union now has an office to promote exports and inward foreign investment. But microdata research also suggests higher earnings for those workers employed by US companies that actively invest abroad and import outsourced components. And this finding applies not just for workers in large firms but for those in smaller firms as well, as demonstrated in figure 2.11. A large segment of the American workforce is enjoying the benefits of global engagement, especially in industries that are deeply integrated with the rest of the world through two-way trade and investment.

    The new research has also begun to examine what happens to communities that are globally engaged. Here, too, the finding is that communities that are hosts either to foreign investment or to American multinational companies are better off than more insular communities. One of the more intriguing findings of this research involves wage spillovers. Several studies have found that the average resident in a globally engaged community sees faster wage growth, not just those employed directly by an international firm. New investment in a community, of course, should lift all boats, but the boats seem to rise higher when part of this investment is by foreigners.

    In short, global engagement energizes, informs, motivates, insures, and renews. But it hands out penalties as well as rewards. On the one hand, global integration encourages and ratifies innovation and smart management (by both firms and unions) and it rewards best practice in production techniques, in supplier and distributor arrangements, in labor relations, and in cooperation with government. It rewards workers whose educational decisions, choice of employer, and efforts to build experience match the requirements of globally engaged firms. And it rewards communities whose governments make choices that do the same.

    On the other hand, myopia, insularity, nonchalance, and a "business as usual" attitude may be fatally unsustainable. These are not a viable set of choices in the long run for anybody, because firms, workers, and communities with those characteristics grow more slowly and erratically than their globally engaged counterparts. In the long run, perhaps, only the globally engaged survive.

    But unlike biological evolution, global engagement is not dictated by genetics. For most, it is a choice . To be sure, it may be a choice to leave behind old, comfortable habits, to take risks, and to work hard globally. But most Americans would prefer that to extinction or stagnation.

    Three important policy implications flow from this perspective. Global integration needs to be encouraged. But so do domestic policies that help typical Americans choose global engagement and, having chosen it, succeed. And so do policies that ease the burden on those who cannot or will not make that choice. Chapter 5 expands on these implications.

Excerpted from Why Global Commitment Really Matters! by Howard Lewis III J. David Richardson. Copyright © 2001 by Institute for International Economics. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Unpaid Annotation
For both soaring Silicon Valley and slumping Central New York, and for firms both large and small, global integration usually has a very positive impact. In this study, Lewis and Richardson explore new gains from deep international integration, some of which were featured in two earlier Institute studies of the under-appreciated benefits of deep export dependence.

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