Lecture 8 - Globalization, location and innovation

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Lecture 8 - Globalization, location and innovation

  1. 1. Globalization, Technology and trade Merit course – 2006 Technological innovation in trade theory A wider perspective on globalization – Foreign Direct Investment – Location decisions
  2. 2. Trade - Theoretical perspectives Ricardo: comparative advantage matters Heckscher-Ohlin-Samuelson Neo-endowment theories Technology gap models New trade models
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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?
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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 ) = −∞
  12. 12. 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
  13. 13. A model of strategic trade
  14. 14. 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 )
  15. 15. A model of strategic trade Long run dynamics of specialization Strategic trade
  16. 16. 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%)
  17. 17. Technology and globalization Tacit knowledge makes spillovers localized Common resources (PRIs and labour pool) Leads to concentration of R&D
  18. 18. 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.
  19. 19. 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.
  20. 20. 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?

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