Globalization and Competitiveness

A First Look Over the last several decades, a host of technological developments has reduced the cost of moving both physical things and intangible information around the world. The lettuce on a sandwich sold in London may well have been flown in from Kenya. A banker in Zurich can transfer funds to a bank in Pretoria with a click of a mouse. People routinely travel to foreign countries for vacation or work. A lawyer in New York can provide advice to a client in Beijing without leaving her office. These are examples of globalization—the increasing ability of goods, capital, labor, and information to flow among countries. One consequence of globalization is that firms in different countries compete with each other to a much greater degree than in the past. In the 1920s and 1930s, the automobiles produced by Ford Motor Company were almost exclusively sold in the United States, while those produced by Daimler-Benz were sold in Europe. Today, Ford and DaimlerChrysler (formed after the merger of Chrysler and Daimler-Benz in 1998) compete directly for customers in both Europe and the United States—and, of course, they also compete with Japanese manufacturers, Korean manufacturers, and others. Competition between firms is a familiar idea. Key to this idea of competition is that one firm typically gains at the expense of another. If you buy a hamburger from Burger King instead of McDonald’s, then Burger King is gaining at McDonald’s expense: it is getting the dollars that would instead have gone to McDonald’s. The more successful firm will typically see its production, revenues, and profits all growing. It is tempting to think that, in a globalized world, nations compete in much the same way that firms compete—to think that one nation’s success must come at another’s expense. Such a view is superficially appealing but incorrect. Suppose, for example, that South Korea becomes better at producing computers. What does this imply for the United States? It does make life harder for US computer manufacturers like Dell Inc. But, at the same time, it means that there is more real income being generated in South Korea, some of which will be spent on US goods. It also means that the cheaper and/or better computers produced in South Korea will be available for US consumers and producers. In fact, we expect growth in South Korea to be beneficial for the United States. We should welcome the success of other countries, not worry about it. What is the difference between our McDonald’s-Burger King example and our computer example? If lots of people switched to McDonald’s from Burger King, then McDonald’s would become less profitable. It would, in the end, become a smaller company: it would lay off workers, close restaurants, and so on. A company that is unable to compete at all will eventually go bankrupt. But if South Korea becomes better at making computers, the United States doesn’t go bankrupt or even become a significantly smaller economy. It has the same resources (labor, capital, human capital, and technology) as before. Even if Dell closes factories and lays off workers, those workers will then be available for other firms in the economy to hire instead. Other areas of the economy will expand even as Dell contracts. In that case, do countries compete at all? And if so, then how? The Dubai government’s website that we showed at the beginning of this chapter provides a clue. The website sings the praises of the Emirate as a place for international firms to establish businesses.