Looking back, the next generation’s economists may be puzzled by the structure of the world economy in 1995. Today, developing countries (DCs) and the former Soviet bloc account for about one half of world output and the rich industrialized countries for the other. But this picture is likely to change rapidly over the next 25 years: At current growth rates, the rich world’s share of global output could shrink to less than two fifths by 2020. Although the absolute magnitudes are uncertain, it is safe to assume that there will be an enormous shift of economic power from today’s rich countries to what are still labeled DCs, and especially to Asian DCs This shift is the likely result of the ongoing globalization of economic activities, i.e. the increasing worldwide integration of markets for goods, capital and, last not least, labour.
Globalization refers to an evolving pattern of cross-border activities of firms involving international investment, trade and cooperation for purposes of product development, production and sourcing, and marketing. Complex patterns of cross-border activities increasingly characterize the international economic system and distinguish it from the earlier predominance of arm’s length trade in finished goods. Taken at face value, globalization is by no means a principally new phenomenon, since the globalizing economy is first and foremost an expression for an increase in the international division of labour. What is different this time is the sheer weight of new competition, the new mobility of capital and technology, and the fact that more Third World workers are educated and so capable of operating complex machinery. Hence, economic power is dispersed among more actors, and inter-regional competition is heightened. Does this process end up in a deepening divide between rich and poor countries, or will the next 25 years be a time of unprecedented opportunity for DCs? And will globalization foster or retard their industrialization? To answer such questions, it is necessary to understand why globalization has emerged and how it actually proceeds.
The main driving force behind globalization strategies of firms is no different from that which drives international trade. Firms seek to maximize profits, given the constraints they face. Changing or vanishing constraints imply new profit opportunities and thus require new strategies of firms. In a way, globalization is nothing more than the entrepreneurial response to a changing environment, while the leitmotiv of firm behaviour - constrained profit maximization - remains unchanged. One of the most important reasons for globalization is that large parts of the world have become industrialized since the Second World War. Many DCs, especially in East and South-East Asia, have attained, or are about to attain, the status of an industrialized country. This successful catching-up has increased the number of suppliers on world markets. Global production capacities and international competition have increased, and so have the opportunities to exploit market niches. This process will gain momentum once the large markets of the People’s Republic of China, India and Central and Eastern Europe, which represent roughly one half of the world’s population, are fully integrated into the world economy. Put differently, the constraint of market size, which may have hindered globalization strategies in the past, has become less relevant and probably no longer applies at all. At the same time, other constraints that prevented firms from implementing globalization strategies have disappeared.
Thanks to the micro-electronics revolution, communication technologies have undergone a dramatic change during the last decade, and new production and organization technologies such as CAD (computer-aided design) and CIM (computer-integrated manufacturing) have evolved. Successive GATT rounds have substantially reduced tariff barriers to trade, and capital...