World 3.0

by Pankaj Ghemawat

  51. Joshua Lewer and Hendrik Van den Berg, “A Gravity Model of Immigration,” Economics Letters 99, no. 1 (2008): 164–167.

  52. World Bank, World Development Report 2009 (Washington, DC: World Bank, 2009), 149–152.

  53. Yao Li, “Borders and Distance in Knowledge Spillovers: Dying over Time or Dying with Age? Evidence from Patent Citations,” CESifo working paper series 2625, 2009.

  54. To calibrate the effects of such variations in distance sensitivity, consider two focal distances, 1,000 kilometers (corresponding, roughly, to interactions within continental regions) and 10,000 kilometers (the interregional level). A distance sensitivity of –1 means, as noted above, that interactions over distances ten times as long will be only one-tenth as intense. A distance sensitivity of –0.25, in contrast, implies an intensity multiple of over one-half; one of –0.5 a multiple of about a third; and one of –0.75 a multiple of about a sixth. And increasing distance sensitivity farther, to –1.25, would reduce the intensity multiple to about one-twentieth.

  55. It also found that common membership in a trading bloc no longer had a significant effect. Daude and Fratzscher, “The Pecking Order of Cross-Border Investment.”

  56. Based on data for 2006 from the U.S. Bureau of Economic Analysis processed by Bill Mataloni at the request of the author.

  57. Paul Krugman, “The New Economic Geography: Where Are We?” discussion paper presented at International Symposium “Globalization and Regional Integration from the viewpoint of Spatial Economics,” IDEJETRO, 2004, http://www.ide.go.jp/English/Inter/Sympo/pdf/krug_summary.pdf.

  58. Céline Carrere and Maurice Schiff, “On the Geography of Trade: Distance Is Alive and Well,” Etudes et documents, CERDI, May 2004.

  59. Anne-Célia Disdier and Keith Head, “The Puzzling Persistence of the Distance Effect on Bilateral Trade,” Review of Economics and Statistics 90, no. 1 (2008): 37–48, figure 3.

  Chapter Four

  1. Recent estimates of the gains from the proposals on the table in the Doha Round include Antoine Bouët and David Laborde Debucquet, “The Potential Cost of a Failed Doha Round,” IFPRI discussion paper 00886, July 2009; and Gary C. Hufbauer, Jeffrey J. Schott and Woan F. Wong, Figuring Out the Doha Round (Washington D.C.: Institute for International Economics, 2010). For a critique that suggests that such estimates are too high and have been shrinking over time, see Frank Ackerman, “The Shrinking Gains from Trade: A Critical Assessment of Doha Round Projections,” Global Development and Environment Institute, working paper 05-01, October 2005.

  2. John B. Shoven and John Whalley, Applying General Equilibrium, (Cambridge, UK: Cambridge University Press, 1992), 3.

  3. Dominique van der Mensbrugghe, “LINKAGE Technical Reference Document,” World Bank, January 2005, http://siteresources.worldbank.org/INTPROSPECTS/ Resources/ 334934-1100792545130/LinkageTechNote.pdf.

  4. The characterization that follows applies to the bulk of such models, but there are individual modeling efforts that allow for imbalances, imperfect competition, other kinds of barriers to trade, and other extensions, usually one at a time. And several authors, e.g., Thomas Hertel and Terrie Walmsley of Purdue University's Global Trade Analysis Project, have worked on multiple extensions to the standard modeling set-up. I rely on and cite some of the nonstandard modeling efforts later in this chapter.

  5. The focus on efficient outcomes is enabled by the assumptions listed, which ensure that a decentralized market economy, with individual agents maximizing their own utilities (deciding on work, investment, consumption, and savings) based on their endowments and (common) information on prices and investment opportunities, will achieve a competitive equilibrium in which market clearing prices accurately reflect value. Note that this is Adam Smith's invisible hand as formalized by Kenneth Arrow and Gerard Debreu, “Existence of an Equilibrium for a Competitive Economy,” Econometrica 22, no. 3 (July 1954): 265–290.

  6. More precisely, one should add up all the consumer surplus and producer profits generated by the increased trade—although, since producer profits are zero in such models, all the action is on the consumer side, with price decreases increasing their surplus.

  7. Yvan Decreux and Lionel Fontagné, “Economic Impact of Potential Outcome of the DDA,” CEPII-CIREM, February 2009.

  8. Ximena Clark, David Dollar, and Alejandro Micco, “Port Efficiency, Maritime Transport Costs, and Bilateral Trade,” Journal of Development Economics 75 (2004): 417–450.

  9. Souleymane Coulibaly and Lionel Fontagné, “South-South Trade: Geography Matters,” Journal of African Economies 15, no. 2 (June 2006): 313–341.

  10. See the World Bank's World Development Report 2009: Reshaping Economic Geography, (Washington, DC: World Bank), 187.

  11. Nannette Christ and Michael J. Ferrantino, “Land Transport for Exports: The Effects of Cost, Time, and Uncertainty in Sub-Saharan Africa,” Office of Economics working paper, U.S. International Trade Commission, October 2009.

  12. Note that the fourth category of CAGE differences, economic ones, has not been addressed here. The reason is that the usual conceptions of liberalization or opening up involve reducing artificial or unnecessary administrative, cultural, and geographic barriers so as to allow economic differences fuller play in determining cross-border outcomes. Given that, it would be inappropriate to treat economic differences as affording another separate array of levers for policy interventions.

  13. Pankaj Ghemawat, Strategy and the Business Landscape, 3rd ed. (Englewood Cliffs, NJ: Pearson Prentice Hall, 2010).

  14. Paul Samuelson and William Nordhaus, Economics (New York: McGraw Hill, 2004).

  15. W. Antweiler and D. Trefler, “Increasing Returns and All That: A View from Trade,” American Economic Review 92, no. 1 (2002): 93–119.

  16. See, for instance, John Sutton's “Quality, Trade and the Moving Window: The Globalization Process,” Economic Journal 117, no. 524 (November 2007): F469–F498.

  17. Paul Romer, “New Goods, Old Theory, and the Welfare Costs of Trade Restrictions,” Journal of Development Economics 43 (1994): 5–38.

  18. In this respect, there is a fundamental difference between the ADDING value scorecard from the perspective of a private company as opposed to society: the intensification of competition is typically bad news from a private perspective even though it is good from a social perspective.

  19. See, for instance, Padma Swaminathan and Thomas W. Hertel, “Introducing Monopolistic Competition into the GTAP Model,” Global Trade Analysis Project technical paper no. 6, 1996.

  20. Interest in such situations was motivated by the observation that intraindustry trade—much of it presumably trade in different varieties of a product (or an intermediate)—accounts for a substantial fraction of international trade.

  21. Eduardo Pérez Motta, presentation at the ICTSD-World Bank-WTO Workshop on Recent Analyses of the Doha Round, Geneva, November 2, 2010.

  22. Jagdish Bhagwati, Free Trade Today, (Princeton, NJ: Princeton University Press, 2003), 41. Bhagwati extended the idea of rent-seeking to encompass directly unproductive profit-seeking activities in general. For the original discussions, see Anne O. Krueger, “The Political Economy of the Rent-Seeking Society,” The American Economic Review 64, no. 3 (June 1974): 291–303, and Jagdish Bhagwati, “Directly Unproductive, Profit-Seeking (DUP) Activities,” The Journal of Political Economy 90, no. 5 (Oct. 1982): 988–1002.

  23. Robert M. Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70, no. 1 (February 1956): 65–94.

  24. For an exception see Ken Itakura, Thomas Hertel, and Jeff Reimer, “The Contribution of Productivity Linkages to the General Equilibrium Analysis of Free Trade Agreements,” Global Trade Analysis Project working paper no. 23, 2003.

  25. Bruno Cassiman and Elena Golovko, “Productivity of Catalan Firms: International Exposure and (Product) Innovation,” in Competitiveness in Catalonia, eds. Pankaj Ghemawat and Xavier Vives, Reports of the Public-Private Sector Rese
arch Center, IESE Business School, prepared for Foment del Treball, July 2009.

  26. See Wolfgang Keller, “International Trade, Foreign Direct Investment, and Technology Spillovers,” in The Handbook of the Economics of Innovation, eds. B. Hall and N. Rosenberg, (Oxford: North-Holland, 2010), 792–829.

  27. For a survey focused on this point, see E. J. Bartelsman and M. Doms, “Understanding Productivity: Lessons from Longitudinal Microdata,” Journal of Economic Literature 38 (2000): 569–594; and, for a recent study suggesting that the contribution of churn to productivity growth may have been underestimated significantly, see Lucia Foster, John Haltiwanger, and Chad Syverson, “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?" American Economic Review 98, no. 1 (March 2008): 394–425.

  28. Meeting with Pascal Lamy, Chongqing China, September 9, 2010.

  29. Gianni Zanini with Andreas Maurer and Aaditya Mattoo, “Services Trade, Reforms, and International Negotiations,” April 20, 2010, http://www.thecommonwealth.org/files/223344/FileName/TrendsandPerformance-GZanini.pdf; and Aaditya Mattoo with Ingo Borchert and Batshur Gootiiz, “Services in Doha: What Is on the Table?” presentation at the ICTSD-World Bank-WTO Workshop on Recent Analyses of the Doha Round, Geneva, November 2, 2010.

  30. Decreux and Fontagné, “Economic Impact of Potential Outcome of the DDA,” 2009.

  31. For a discussion of how to incorporate FDI into CGE models, see Csilla Lakatos and Terrie Walmsley, “Modeling Cross-Border Investment in CGE: Some Alternatives and Mechanisms,” Global Trade Analysis Project, unpublished draft, April 2009.

  32. See Bob Hamilton and John Whalley, “Efficiency and Distributional Implications of Global Restrictions on Labour Mobility: Calculations and Policy Implications,” Journal of Development Economics 14, no. 1–2 (1984): 61–75; and Jonathon W. Moses and Bjørn Letnes, “The Economic Costs to International Labor Restrictions: Revisiting the Empirical Discussion,” World Development 32, no. 10 (2004): 1609–1626. A more up-to-date treatment focused on current issues in U.S. immigration policy is provided by Angel H. Aguiar and Terrie L. Walmsley, “A Dynamic General Equilibrium Model of International Migration,” Center for Global Trade Analysis, 2010.

  33. These calculations are based on GNP per capita adjusted for terms of trade effects. See D. Turner et al., “The Macroeconomic Implications of Ageing in a Global Context,” OECD Economics Department, working paper 193, 1998.

  34. Keller, “International Trade, Foreign Direct Investment, and Technology Spillovers.”

  35. The data are drawn from Martin Grueber and Tim Studt, “2010 Global R&D Funding Forecast” for forty countries in R&D magazine, December 22, 2009, www.rdmag.com.

  36. Adam B. Jaffe and Manuel Trajtenberg, “International Knowledge Flows: Evidence from Patent Citations,” Economics of Innovation and New Technology 8, no. 1 (1999): 105–136.

  37. Wolfgang Keller, “The Geography and Channels of Diffusion at the World's Technology Frontier,” NBER working paper no. W8150, March 2001.

  38. David T. Coe, Elhanan Helpman, and Alexander W. Hoffmaister, “International R&D Spillovers and Institutions,” IMF working paper WP/08/104, April 2008.

  39. Cited in G. Pascal Zachary, The Global Me: New Cosmopolitans and the Competitive Edge—Picking Globalism's Winners and Losers (New York: Public Affairs, 2000), 59.

  40. Scott E. Page, The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies (Princeton, NJ: Princeton University Press, 2008), 131–173.

  41. Tyler Cowen, Creative Destruction: How Globalization Is Changing the World's Cultures, (Princeton, NJ: Princeton University Press, 2002): 129.

  42. Barry Eichengreen and David Leblang, “Democracy and Globalization,” Economics and Politics 20, no. 3 (2008): 289–334.

  43. See Randall Morck, David Stangeland, and Bernard Yeung, “Inherited Wealth, Corporate Control, and Economic Growth,” in Concentrated Corporate Ownership, ed. Randall Morck (Chicago, IL: University of Chicago Press, 2000), 319–369.

  44. This includes all forms of military response: combat, show of force, contingency positioning or reconnaissance, evacuation or security, and peacekeeping.

  45. Quoted in Wagner James Au, “The Second Life of Thomas P. M. Barnett,” New World Notes, October 27, 2005, http://nwn.blogs.com/nwn/2005/10/the_second_life.html.

  46. Andreas Hatzigeorgiou, “Migration as Trade Facilitation: Assessing the Links Between International Migration and Trade,” B. E. Journal of Economic Analysis and Policy 10, issue 1, article 24 (2010): 1–33.

  47. For further discussion of symbolic—and other—commitments, see chapter 2 of Pankaj Ghemawat, Commitment: The Dynamic of Strategy (New York: Free Press, 1991).

  48. Antoine Bouët and David Labourde, “Assessing the Potential Cost of a Failed Doha Round,” World Trade Review 9, no. 2 (2010): 319–351.

  Chapter Five

  1. Karl Marx, Capital (London: Penguin Classics, 1990), 929.

  2. Bruce D. Henderson, Henderson on Corporate Strategy (Cambridge, MA: Abt Books, 1979).

  3. Bernard Wysocki Jr., “No. 1 Can Be Runaway Even in a Tight Race,” Wall Street Journal, June 27, 1999, “Outlook” section.

  4. This information is drawn from UNCTAD's ranking of the top nonfinancial transnational corporations based on 2007 foreign assets, http://www.unctad.org/templates/Page.asp?intItemID=2443%26lang=1.

  5. World Car Market 1927, 1920-30.com, http://www.1920-30.com/automobiles/world-car-market.html.

  6. For a history of Maruti Suzuki, see R. C. Bhargava with Seetha, The Maruti Story: How a Public Sector Company Put India on Wheels (Noida, India: Collins Busines, 2010).

  7. Pankaj Ghemawat and Fariborz Ghadar, “The Dubious Logic of Global Megamergers,” Harvard Business Review 78, no. 4 (July–August 2000): 64–72. Ghadar and I were working with a Herfindahl measure of concentration (the sum of squares of firms' market shares) that went down significantly in autos even though the simple ten-firm concentration ratio reported in figure 5-1 did not. To see why, note that figure 5-1 indicates steeper declines of the five-firm and three-firm concentration ratios (as well as of the share of the single largest firm—although it is not reported) than the ten-firm concentration ratio. This indicates a tendency toward convergence rather than divergence in size among the ten largest automakers, which depresses the Herfindahl ratio but not the simple ten-firm concentration ratio.

  8. Pankaj Ghemawat and Fariborz Ghadar, “Global Integration ≠ Global Concentration,” Industrial and Corporate Change 15 (August 2006): 595–623.

  9. More specifically, the focal period was ten-plus years up to the second half of the 1990s. The data was available from a variety of different sources; as noted above, there are no standardized sources of data for concentration measures. Details on the data can be found in Ghemawat and Ghadar, “Global Integration ≠ Global Concentration.”

  10. This is based on comparing Herfindahl concentration ratios in 1950 compiled by Raymond Vernon and his associates at Harvard for cargo and passenger airlines, aluminum smelting, automobiles, copper, oil production, and paper and board with our calculations of Herfindahls (based on the same data used above to calculate five-firm concentration ratios) for more recent years.

  11. John Sutton, Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration (London: MIT Press, 1991).

  12. Also note that Euromonitor concentration data are probably biased upward by their weaker coverage of emerging markets, where most recent growth has been located. Advanced country multinationals that dominate the ranks of the top five in most categories have had trouble, so far, building their positions in emerging markets up to the share levels that they command in markets in advanced countries.

  13. Steffen Lauster and Samrat Sharma, “Is Category Consolidation Inevitable? Shaping Category Dynamics to Win in CPG,” Perspective, reports and white papers from Booz & Company, 2010. While the Booz study focuses on market shares in the U
.S., if global concentration levels were actually increasing significantly, it would be unlikely for national concentration to exhibit such a mixed pattern in what is still, for most categories, the world's largest single market.

  14. John Sutton, Technology and Market Structure: Theory and History (Cambridge, MA.: MIT Press, 1998) chapter 5.

  15. Jeffrey Hayzlett, chief marketing officer of Kodak, speaking at a Houston Interactive Marketing Assoc. (HiMA) luncheon as cited by Savage in “Brand Strategy: Reinventing Kodak,” blog post, March 8, 2010, http://blog.savagebrands.com/kodak-brand-strategy/.

  16. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper, 1942), 84.

  17. While other sources have suggested smaller decreases, there is general agreement that the five-firm seller concentration ratio in this industry has dropped since the mid-1980s.

  18. Pankaj Ghemawat, Redefining Global Strategy (Boston: Harvard Business School Press, 2007), 21.

  19. United Nations Conference on Trade and Development (UNCTAD), Iron Ore Market 2009–2011, Geneva, June 2010.

  20. Notice on the Definition of Relevant Market for the Purposes of Community Competition Law, EC Communication 97/C 372/03, http://europa.eu/legislation_summaries/competition/firms/l26073_en.htm.

  21. Susan S. DeSanti (coord.), “Competition Policy in the New High-Tech, Global Marketplace,” Federal Trade Commission, May 1996, 4.

  22. Joseph Farrell and Carl Shapiro, “Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition,” B. E. Journal of Theoretical Economics 10, no. 1 (February 2010).

  23. John A. Quelch, quoted in Barnaby J. Feder, “For White Goods, a World Beckons,” New York Times, November 25, 1997.

  24. This is based on comparing Herfindahl concentration ratios in 1950 and more recently for the seven industries out of our basic sample of eleven for which Raymond Vernon and his collaborators compiled 1950 data.

  25. For more detail, consult my textbook, Strategy and the Business Landscape, 3rd ed. (Upper Saddle River, NJ: Pearson Prentice Hall, 2010), particularly chapters 2 and 4.