Globalization, Technology and trade
Merit course – 2006
Technological innovation in trade theory
A wider perspective on globalization
– Foreign Direct Investment
– Location decisions

Trade - Theoretical perspectives
Ricardo: comparative advantage matters
Heckscher-Ohlin-Samuelson
Neo-endowment theories
Technology gap models
New trade models

Comparative advantage
Even if you are better (in an absolute sense)
in producing everything, it pays to specialize
and trade
Ricardo: comparative advantages are related
to differences in technology

Comparative advantages, trade and
specialization
(a) The Farmer
’s Production and Consumption
(b) The Rancher
’s Production and Consumption
Meat (ounces)
Meat (ounces)
Rancher's
24
production
with trade Rancher's
consumptio
18 with trade
n
Farmer's
13 consumption
B* Rancher's with trade
Farmer's
production and 8
B
consumption
12 production and
without trade consumption
A* without trade
5
4
A Farmer's
production
with trade
0 12 24 27 48
32 Potatoes (ounces)
0
Potatoes (ounces)
16 17
Copyright © 2004 South-Western

Heckscher-Ohlin-Samuelson
Comparative advantage and absolute
advantage
The source of comparative advantage:
– differences in labour productivity or technology
(Ricardo)
– differences in endowments of capital and labour
(HOS)
restrictive assumptions
– identical technology between countries
– immobility of factors between countries
Leontief paradox

The Leontief paradox
In an empirical analysis, Leontief concluded
that the US is specialized in labour-intensive
goods, while common wisdom had it that it is
a capital abundant country
Is labour a homogenous good?

Neo-endowment theories
Divide labour into skilled and unskilled
Knowledge (R&D) as a production factor
Critique: knowledge as a static endowment
– dynamic accumulation
– disturbance of existing comparative advantage
Critique: other factors as static endowments

Technology gap models
Posner’s technology gap theory
– innovation in a country, imitation in a different
country
– specialize in innovation or imitation, continuous
displacement of products
– models by Krugman, Cimoli and Soete
Vernon’s product life cycle theory
– technology intensity of goods diminishes over
time, and this shifts the good to a different country

Technology gap models
Schumpeterian models
– diffusion of technology and cumulativeness
– cost-based adjustment and absolute advantage
empirical models estimated with R&D and
patent data
– RTA on RCA, market shares dynamics

New trade models
developed as a reaction to intra-industry
trade
product differentiation
economies of scale
monopolistic market structure
R&D
– strategic instrument to capture markets (Brander &
Spencer)
– adding to product differentiation

A model of strategic trade
Krugman’s model
X i (t ) = Ai (t ) Li (t )
xi (t ) = ai (t )li (t )
Ai (t ) = Ki (t )ε
ai (t ) = ki (t )ε
t
[ X i ( z ) + δxi ( z )]dz
K i (t ) =
−∞
t
[ xi ( z ) + δX i ( z )]dz
ki (t ) =
−∞

A model of strategic trade
ε
Ai (t ) Ki (t )
=
ai (t ) ki (t )
dKi (t )
= X i (t ) + δxi (t )
dt
dki (t )
= xi (t ) + δX i (t )
dt
X (t ) + δxi (t ) xi (t ) + δX i (t )
dKi (t ) 1 dk (t ) 1
−i =i −
dt Ki (t ) dt ki (t ) Ki (t ) ki (t )
Steady state under fixed specialization:
ε −1
l 1− δki / Ki
Ki
=i
Li 1− δK / k
ki ii

A model of strategic trade

A model of strategic trade
Determination of specialization pattern according to
wage structure:
=
Balance of payments:
W (t ) σ l (t )
=
w(t ) 1− σ L (t )

A model of strategic trade
Long run dynamics of specialization
Strategic trade

Foreign Direct Investment &
Multinational enterprises
Conventional wisdom about R&D by MNEs
– Technology: a case of non-globalization? (Pavitt &
Patel)
– R&D is less internationalized than other activities
– But, it is on the rise: LeBas & Sierra: 15.8% of
patents stems from foreign R&D in 1988-1990,
19.5% in 1994-1996 (outliers of up to 60%)

Technology and globalization
Tacit knowledge makes spillovers localized
Common resources (PRIs and labour pool)
Leads to concentration of R&D

A business view on R&D by MNEs
Home-base exploiting R&D (HBE)
– Activities supporting on-site production, drawing
on the knowledge of the home base.
– These laboratories represent an extension and
sometimes a duplication of the R&D work
undertaken at home.

A business view on R&D by MNEs
Home-base augmenting R&D (HBA)
– Absorb new knowledge from local scientific
community.
– Tend to diversify research efforts into scientific
and technological areas new to the parent
company.

Regional innovation systems &
globalization
Opportunity: to tap into local knowledge in foreign
locations
– Leads to concentration of R&D efforts (at the regional level)
Information and Communication technologies
– Increases tradability of services
– Increases codification of knowledge & information
Does ICT reduce the relevance of space?
With significant differences in technology between
locations, ICT may actually increase the relevance of
space, because firms are now better able to move
How does this work out on European regions?