Drivers of Globalization: Integration of Theories and Models

Table of contents

1  Introduction  3

2  Drivers of Globalization  3

3  Theories and Models of Gobalization and International Trade  4

3.1  From mercantilism to Smith and Ricardo  4

3.2  Ricardo to the next step: Factor Proportions Theory and the Leontief Paradox  5

3.3  Vernon Life-Cycle Theory  5

3.4  Porter’s Diamond Approach  6

3.5  Monopolistic Advantage Strategy  6

3.6  Eclectic Theory  7

4.  Discussion of Theories and Drivers  7

4.1  Ricardo-Mill and outsourcing  7

4.2  Dunning, Cantwell and the influence of technology  10

5  Bibliography  12

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1 Introduction

"Globalization is not something we can hold off or turn off . . . it is the economic equivalent of a force of nature -- like wind or water." Bill Clinton (American 42nd US president (1993-2001))

The first part of this research paper will define the major drivers of globalization and then introduce some of the basic and advanced theories of international trade and business. With this foundations it will then try to integrate theories and drivers and compare them to the actual situation and discuss if they are appropriately describing what we are seeing today.

2 Drivers of Globalization

The media and almost every book on globalization and international business speak about different drivers of globalization and they can basically be separated into five different groups:

1) Technological drivers

Technology shaped and set the foundation for modern globalization. Innovations in the transportation technology revolutionized the industry. The most important developments among these are the commercial jet aircraft and the concept of containerisation in the late 1970s and 1980s. Inventions in the area of microprocessors and telecommunications enabled highly effective computing and communication at a low-cost level. Finally the rapid growth of the Internet ¹ is the latest technological driver that created global ebusiness and e-commerce.

2) Political drivers

Liberalized trading rules and deregulated markets lead to lowered tariffs and allowed foreign direct investments in almost all over the world. The institution of GATT (General Agreement on Tariffs and Trade) 1947 and the WTO (World Trade Organization) 1995 as well as the ongoing opening and privatization in Eastern Europe are only some examples of latest developments.

¹ evolved from the military ARPA (Advanced Research Projects Agency) network 1969, which was extended to an university network 1986 and finally became public as the world wide web in 1990, due to Tim Berners-Lee at the CERN institution (Wikipedia, 2005)

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3) Market drivers

As domestic markets become more and more saturated, the opportunities for growth are limited and global expanding is a way most organizations choose to overcome this situation. Common customer needs and the opportunity to use global marketing channels and transfer marketing to some extent are also incentives to choose internationalization. (Ferrier, 2004)

4) Cost drivers

Sourcing efficiency and costs vary from country to country and global firms can take advantage of this fact. Other cost drivers to globalization are the opportunity to build global scale economies and the high product development costs nowadays. (Ferrier, 2004)

5) Competitive drivers

With the global market, global inter-firm competition increases and organizations are forced to “play” international. Strong interdependences among countries and high twoway trades and FDI actions also support this driver.

3 Theories and Models of Gobalization and International Trade

Theories of International Trade extend to the 15 ^th century and the age of mercantilism. This next paragraph will provide a brief summary of the most important theories and also cover two less popular theories, the monopolistic advantage theory (Kindleberger / Hymer) and the integrated eclectic theory (Dunning).

3.1 From mercantilism to Smith and Ricardo

Mercantilism spanned about a period of 300 years from around 1500 to 1800. The core of mercantilism is that gold and silver are the mainstays of national wealth and essential to vigorous commerce. The objective of a country is to reach a trade surplus and therefore accumulate an increasing amount of currency, which was gold and silver. 1776 Adam Smith and his theory of absolute advantage attacked the mercantilist philosophy by proving that trade could be more than a zero-sum game.

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