Globalization and Growth Gene Grossman Princeton University The Onassis Prize Lectures 2015 Cass Business School September 2015 Gene Grossman () Globalization and Growth September 2015 1 / 10
Engine of Growth? Up until mid 1980s, studies of growth focused primarily on accumulation of physical capital. But capital accumulation faster than population growth likely to meet diminishing returns...... which drives down rates of return...... which extinguishes the incentives for savings and further accumulation. Capital accumulation alone could not be basis for sustained growth New growth theory focuses on accumulation of knowledge Knowledge di erent from capital, because often non-rivalrous: Use by one party in some application does not preclude simultaneous or subsequent use by others Generates increasing returns to scale Eliminates inevitability of diminishing returns when some inputs are accumulated relative to others. Gene Grossman () Globalization and Growth September 2015 2 / 10
How does globalization a ect growth? What are the mechanisms that link globalization and growth? Logic of new growth theory suggested that we should ask how globalization a ects the incentives for knowledge accumulation and the e cacy of inventiveness and di usion. Links between international integration and knowledge accumulation: Integration! international ows of ideas Integration! larger, but more competitive markets Integration! specialization according to comparative advantage Integration! possibilities and incentives for technological di usion Gene Grossman () Globalization and Growth September 2015 3 / 10
International Knowledge Spillovers and Knowledge Creation Foreign contributions to national knowledge stock Foreign contacts contribute to research and manufacturing productivity Innovators standing on the shoulders of foreign giants Substantial empirical evidence of international knowledge spillovers Endogenous knowledge spillovers Spillovers increase with interpersonal interactions Spillovers might increase with bilateral trade contacts Spillovers might increase with bilateral FDI Gene Grossman () Globalization and Growth September 2015 4 / 10
Scale vs Competition and the Creation of Knowledge Globalization! Larger stage on which to exploit new ideas More competition on global stage Grossman and Helpman: With no xed costs of production or exporting ) Scale e ect and competition e ect may exactly o set Double market size and double number of competitors: no change in pro tability of a new invention. Trade costs # ) no e ect on knowledge accumulation in long run! Baldwin and Robert-Nicoud: Model with heterogenous rms and xed costs of producing and exporting Globalization! selection of most productive Selection! more competitive world market More competitive market! reduced incentives for innovation Gene Grossman () Globalization and Growth September 2015 5 / 10
Scale vs Competition and the Creation of Knowledge Continued Strong competition e ects: National knowledge stocks and asymmetric countries Feenstra: Integration ) incentives for innovation decline in slow-growing country Multiple sectors: Some countries led to specialize in industries with slow-growth potential Grossman and Helpman and Alwyn Young: With di erent initial conditions, laggard can be driven to specialize in slow-growing industries Empirical verdict is far from in: Tentatively conclude that scale e ect outweighs competition e ect for most countries? Gene Grossman () Globalization and Growth September 2015 6 / 10
Comparative Advantage and Knowledge Accumulation Integration ) specialization according to comparative advantage Country with relatively more human capital specializes in R&D and production of innovative goods Country with relatively more unskilled labor specializes in more traditional goods, which may have lesser growth prospects If HK accumulated, then trace patterns to quality of schooling, etc. Resource endowments can be boon or bane If raw materials and labor are complements in producing resource-intensive intermediates, a resource boom draws labor into resource industry and away from innovation If raw materials and labor are substitutes in producing resource intensive intermediates, a resource boom releases labor from resource industry that can nd its to knowledge creation Gene Grossman () Globalization and Growth September 2015 7 / 10
Incentives for Technological Di usion For many countries not at the technological frontier: di usion than innovation as basis for medium-term growth Recent work: How does trade and other forms of globalization a ect incentives for di usion and e cacy of di usion process Perla, Tonetti and Waugh: Firms choose whether to produce or search Search generates chance meeting with active (domestic) producers Least productive rms choose to search (most to gain, least to lose) Fall in trade costs ) increase in relative pro tability of high productivity relative to low productivity ) increased incentive to search Gene Grossman () Globalization and Growth September 2015 8 / 10
Incentives for Technological Di usion Continued Sampson: Free entry by new inventors of di erentiated products Draw technologies from distribution that re ects those found among incumbent producers Perpetual improvement in production technologies ) sustained growth Globalization ) positive selection ) better technology draws ) greater incentive for entry Alvarez, Buera and Lucas: Each country has best practice for each good Product managers meet with others, exchange ideas Distribution of meetings re ects population of productivities among active producers Upon meeting, adopt technology if better than one s own Globalization ) weeds out less productive technologies and replaces with more productive foreign technologies ) trade is vehicle for international knowledge spillovers Gene Grossman () Globalization and Growth September 2015 9 / 10
What don t we know? Theory ahead of empirics Still know relatively little about which mechanisms operative and quantitative signi cance Empirical work hampered by: Dearth of natural experiments Limited observations of the long run Cross-country regression methodology awed: Too many endogenous variables and not enough instruments Integrated world economy ) cannot treat countries as independent observations Relationship between trade and growth varies with fundamental characteristic ) need to allow for interaction a ects More successful: focus on mediating variables, such as existence and size of international knowledge spillovers China: fascinating case study. Gene Grossman () Globalization and Growth September 2015 10 / 10