Elsevier

Economics Letters

Volume 73, Issue 1, October 2001, Pages 57-63
Economics Letters

New concepts and measures of the globalisation of production

https://doi.org/10.1016/S0165-1765(01)00469-4Get rights and content

Abstract

The paper introduces a measure of cross-border supply to allow for both armslength trade and direct production from foreign investments. It explores the implications of this for measures of trade flows and for the concepts of intra-industry supply.

Introduction

Cross-border supply can take two forms: armslength trade and direct production.1 There is an extensive literature analysing the choice between the two; exporting versus FDI. Much of it is concerned with the relationship between trade and direct investment.2 Following Mundell (1957) it was long thought they were substitutes. One by-product of the early literature on intra-industry trade, dominant in the trade between countries with similar factor endowments, is that this particular proposition has been challenged and many models dating from Agmon (1979) emphasise complementarities between trade and FDI.

There is also a substantial empirical literature on the determinants of FDI and commodity trade. In so far as this addresses the relationship between trade and foreign investment it does so by testing for substitutability or complementarity. This is useful, but misses an important issue, namely the impact of trade and direct investment into different markets, irrespective of whether they are substitutes or complements. The key reason why this issue is missed is an obvious one, there is no widely used measure of ‘aggregate’ supply in a given market. This paper addresses that fundamental measurement issue. It begins by setting out some basic definitions of trade and international production in Section 2 and uses these in Section 3 to develop some new concepts and measures of extended supply. Section 4 concludes.

Section snippets

Defining international trade and international production

“International production is defined as that production which is located in one country but controlled by a multinational corporation (MNC) based in another” (Cantwell, 1994, p. 303). Using this terminology we can identify two modes of supply as international trade and international production which together comprise ‘international supply’.

If we take the case of industry i in one country, we can define the relevant variables as: Xij are exports (supply) to the foreign country or countries by

Some new concepts

The standard measure of import penetration for industry (i) in one country is Pi=M1i/Si,where Si are total domestic sales. With two modes of cross-border supply, this measure should be modified toPi=(M1i+M2i)/Si.For the analysis of structural adjustments in markets in which FDI has been significant, this may be preferable to the traditional measure. One can trace the penetration of a market which is due to an increase in imports and that which is due to an increase in international production.

Conclusions

Extended intra-industry trade and its decomposition therefore offers a potentially powerful tool for disentangling two-way flows of trade and international production and for gaining greater insight into the relationship between the two. Clearly the data requirements for calculating the index are more demanding than those for standard indices of intra-industry trade, but the resulting output is much richer in terms of the potential it offers for disentangling various ingredients of the

Acknowledgements

The authors acknowledge financial support from The Leverhulme Trust under Programme Grant F114/BF.

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