Globalization of the Economy, Unemployment and Innovation: Structural Change, Schumpetrian Adjustment, and New Policy Challenges

256 Pages·1999·5.55 MB·English

by  Prof. Dr. Paul J. J. Welfens (auth.)

Globalization
of the Economy,
Unemployment
and Innovation
Structural Change,
Schumpetrian Adjustment,
and New Policy Challenges
Springer-Verlag Berlin Heidelberg GmbH
J. J.
Paul Welfens
Globalization
of the Economy,
Unemployment
and Innovation
Structural Change,
Schumpetrian Adjustment,
and New Policy Challenges
With 11 Figures
and 31 Tables
, Springer
Prof. Dr. Paul J. J. Welfens
University of Potsdam
European Institute for International
Economic Relations (EIIW)
August-Bebel-Str. 89
14482 Potsdam
Germany
http://www.euroeiiw.de
ISBN 978-3-642-63607-3
LIbrary of Congress Cataloging-in-Publication Data
Die Deutsche Bibliothek - CIP-Einheitsaufnahme
Globalization of the economy, unemployment and innovation: structural
change, schumpetrian adjustment, and new policy challenges: with 31 tables /
Paul J.J. Welfens. - Berlin; Heidelberg; New York; Barcelona; Hong Kong;
London; Milan; Paris; Singapore; Tokyo: Springer, 1999
ISBN 978-3-642-63607-3 ISBN 978-3-642-58467-1 (eBook)
DOI 10.1007/978-3-642-58467-1
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Table of Contents
Introduction
A. Economic Globalization 5
1. Globalization of the Economy and Increasing International Competition 7
1.1 Rising International Trade 9
1.2 The Increasing Role of Foreign Direct Investment 12
1.3 Global Telecoms Networks and New Communication Technologies 15
1.4 Russia and China as New Players 19
1.5 Increasing High Technology Competition and Rising Role of Trade
and FDI 21
1.5.1 Multinational Companies: Regional Concentration and Issues
ofInnovation 25
1.5.2 Environmental Problems, Innovation and Optimal Global
Growth 29
1.6 MNCs' Role for Environmental Policy and Social Policies 31
1.7 Theory of Globalization: Trade and Growth Theory in a
Technological Perspective with FDI 34
1.8 Trade, Factor Prices and Adjustment 39
1.9 MNCs' Impact upon National Economies and the ED 42
1. 10 Foreign Direct Investment in the Triad and Eastern Europe 44
2. Globalization and Rising Importance of Diffusion 47
3. Globalization, Telecommunications and Diffusion 48
B. Unemployment and Innovation in Europe 51
1. ED Labor Markets Facing Globalization and Intensified Technology
Competition 53
1.1 New Competitors from NICs and Transforming Economies in
Eastern Europe 63
1.2 Integration, R&D Dynamics and Technological Specialization 68
1.3 Theoretical Aspects of Integration, Innovation and Innovation
Policy in Open Economies 73
1.4 National R&D Financing and the Leakage Problem in the Presence
ofMNCs 76
2. The Global Economy: R&D, Structural Change and Employment Shifts 78
2.1 Foreign Direct Investment and Labor Market Problems 78
2.2 Telecoms Liberalization and Employment Growth in the
Information Society 80
2.2.1 Specifics of High-Technology Industry and the Information
Sector 82
2.2.2 Displacement Effects of Telecoms Liberalization and New
Employment Opportunities 83
2.3 R&D, Employment and SME's from a Theoretical Perspective 87
2.3.1 R&D, New Growth Theory and Employment 88
VI Table a/Contents
2.3.2 R&D, Competitiveness and Employment 92
2.4 SME's and Growth 98
2.5 Young Companies and Innovation in a Market Economy 105
2.6 Relations Between Large and Small Companies 113
2.7 Adjustment in Euro-Iand, Trade Balance Surplus and the
Nontradables Sector 119
2.8 Capital Structures ofSMEs -a German View 138
2.9 High Wage Countries, Full Employment and Effective
Competitiveness 152
Appendix 158
C. Labor Costs, Unemployment and Innovation 163
1. Labour Cost Pressure and Unemployment 165
2. Factors Underlying High Labor Costs 169
3. Analytical Types of Wage and Labor Cost Pressure 171
4. Wage Pressure, Productivity Growth and Innovation 179
5. Bargaining Regimes and Incentives 184
6. Firm Size, Productivity and Labor Costs 186
7. Wage Pressure, Innovation, FDI and Unemployment 187
7.1 Innovation and FDI 188
7.2 A Simple Innovation-Unemployment Model and Welfare 191
8. Conclusions and Policy Implications for Europe 196
Appendix 202
D. Issues of Innovation Policy 205
1. R&D Policy and Reforms 207
1.1 Coordination Between National and EU R&D Policy 210
1.2 R&D and Reforms in European Capital Markets 215
1.3 Optimizing Regional EU Policies 216
1.4 Complementary Reform Options for Competitiveness and Full
Employment 220
2. Innovation and Innovation Policy 220
3. Adjusting Guidelines, Promoting Cooperation and Increasing
Transparency 224
4. Environmental Problems and Growth: Some Policy Conclusions 225
5. Exploiting Communication Opportunities 226
6. New Role for the EU in Education Policies 227
7. Mobilizing Entrepreneurship in Universities 228
8. Perspectives: Globalization and Political Innovation in a Democracy 229
9. Globalization, the Information Society and Economic Catching-up in the
World Economy 233
Appendix 240
List of Tables and Figures 241
References 243
Introduction
The globalization of the economy is one major challenge at the end of the 20th
century. While it is true that free trade and high capital flows a century ago already
brought about a high level of international economic dependency, the high growth
rate of foreign direct investment and the global internet have established a new type
of interdependency among OEeD countries and many newly industrializing
countries. Diffusion of technological progress will gain importance as the
telecommunication networks and the internet, respectively, provide new
opportunities for spatial diffusion of knowledge.
Locational competition, the quest for mobile real capital and entrepreneurship
has intensified in a world economy in which more countries have become open to
trade, foreign investment and the internet. However, the globalization of the
economy and the increasing role of multinational companies and fast networks -
including financial market linkages - also raise fears about issues of stabilization,
inequality and inefficiency. Destabilizing impulses could stem both from the
increasing divergence of adjustment speeds in various markets - slow adjustment in
goods and labor markets versus high adjustment speed in financial markets (often
poorly regulated) - resulting in tensions in economic systems and potentially in
economic instability. Even more important is the fear that globalization goes along
with labor-saving technological progress while there are not enough new
opportunities to create jobs; rising unemployment could thus be a consequence of
globalization. Globalization also creates new opportunities to exploit economies of
scale and to recover innovation expenditures in larger markets. These developments
will stimulate the global technology race. At the same time financing innovations
becomes more crucial for economic growth; innovations are difficult to finance not
only because of the inherent technological and commercial risks involved but also
due to the inherent information asymmetry between the firm and the bank. Equity
capital financing thus will gain in importance, and continental EU countries are,
compared to the US, rather poor in this respect. Japan has a fragile banking system
and an underdeveloped stock market; however, high profits in many companies can
2 Globalization o/the Economy. Unemployment and Innovation
compensate for this systemic weakness.
The unemployment problem was not seriously tackled in Western Europe in
the 1970s and 1980s. In most EU countries trade unions and employer organizations
agreed on collective bargaining arrangements that contributed to higher
unemployment rates and a rising share of long term unemployment - indeed there
were massive negative external effects of collective bargaining in Europe. Few
governments have adopted measures to internalize negative external effects and to
fight unemployment by new initiatives in favor of creating new firms.
Our analysis will strongly focus on the EU unemployment problems and
shows that unemployment already had reached high levels in many EU countries
prior to the mid-1980s. EU internal problems are thus partly responsible for high and
sustained unemployment rates in many member countries. Quite worrying is the fact
that in several EU countries creation of jobs has mainly benefitted "mixed
households", i.e. households in which he or she already had a job. There is a high
and rather constant share of totally unemployed households which even in times of
rising employment are not reintegrated into the labor market successfully. Social
problems and political radicalization could result from this. It is clear that in such
families human capital depreciations are enormous in the long run. Moreover, in
countries with a high unemployment rate - especially with a high share of long term
unemployment - the diffusion of technological progress leaves out a considerable
share of the workforce. In a period of intensified global technological progress after
the end of the Cold War workers without experience and skills will face particular
problems to benefit from globalization and a faster international technology race
which puts a premium on computer literacy and specific skills. The EU innovation
record is rather poor compared to the US which has established its strong economic
development on supply side policies under various administrations. After the end of
the Cold War it is clear that US R&D efforts are increasingly targetting civilian
world markets, where US high technology firms - switching from military production
to civilian high technology goods - often find that world markets for civilian high
tech products are narrow. Such firms then move into less technology intensive
Introduction 3
market segments, thus attacking mainly German, French and Japanese firms'
established market niches with high Schumpeterian rents. It is still unclear whether
there is skill-biased technology change which negatively affects the wages of
production workers in Western Europe or whether falling relative wages and
unemployment of unskilled workers simply reflects the forces of a trade and
economic opening up of countries with a high and growing supply of unskilled labor.
The analysis shows that insufficient innovation and inadequate wage policies
plus a weak education system and capital market problems in many EU countries are
a major problem for regaining full employment in Western Europe. It is shown that
the links between innovation, wages and employment can be modelled in a simple
framework which is complementary to the more traditional macroeconomic analysis;
the textbook models which ignore innovation may be rather misleading in some
important aspects.
Low regional mobility and high EU expenditures on regional and structural
policies compound the problems. After more than two decades of high
unemployment rates many EU countries would need strong policy reforms and
concerted action between trade unions, employer federations and government in
order to restore full employment; monetary union will compound the adjustment
problems but could also stimulate policy reforms. However, the prospects for policy
innovations in democratic societies in the age of fragmented media are rather poor,
especially in countries where there is a weak link between academia, government and
the business community.
Main chapters of the book are based on an EIIW working paper which was
part of my input for a joint research study for the European Parliament in 1997, a
paper based on my research contribution for the Dutch Ministry of Economic Affairs
in 1997, a paper presented at the Boston conference of the Gorbachyov Foundation
of North America in December 1997 and a paper presented a CEPRIZEI conference
in Bonn in January 1998; its final version was written during my research stay with
the European Commission (DG II) which provided a stimulating environment for
analysis; current and future research is being conducted at the European Institute for
4 Globalization oft he Economy. Unemployment and Innovation
International Economic Relations (EIIW by its Gennan acronym is also found under
http://www.euroeiiw.de). While this book can only cover part of the controversial
issues, it is hoped that it will contribute to the important debate on employment,
globalization and democracy.
Potsdam, December 1998
Paul J.J. Welfens