Innovation and Globalization
This chapter discusses how our understanding of innovation and growth changes as an economy becomes integrated with the world economy. We define globalization as “the increased interdependence of economies across the world.” This definition covers a wide range of economic activities, such as trade, technology, finance, and migration. Transnational corporations (TNCs) have played an important role in globalization by increasingly breaking up their activities between countries (Friedman 2005). Globalization also alters the opportunities and threats facing smaller companies. The rise of the Internet and the falling cost of communications mean that all firms, whether small or large, can now more easily gain access to overseas economies. This could enable them to export their products, source inputs from overseas suppliers, or outsource some of their activities.
A major aspect of globalization is the increasing share of international trade as a proportion of world GDP. In 1970, the ratio of world imports to GDP was around 13%; by 1990 this had grown to 20% and by 2005 to 28%. Some of this increase is due to more trade between richer and poorer countries, but the highest growth has occurred in trade between rich countries. Rich countries increased their exports and imports of the same categories of products: a phenomenon known as intraindustry trade. For example, 80% of OECD trade takes place between OECD countries, and in many rich countries around 80% of manufacturing trade is intraindustry.1 As will be discussed, traditional trade theories do not give strong rationales for this rise in intraindustry trade; in contrast, trade theories built around product innovation do provide some support.
History has also shown that high growth is often associated with rapid growth in exports. As an example, China's recent rapid GDP growth has
1 The statistics in this paragraph are taken from Dean and Sebastia-Barriel (2004). They
ask why trade has grown faster than world output and suggest that this has been driven
by increased productivity in the tradable goods sector and reductions in tariffs.