Since the mid-1980s, inexorable forces of economic globalization have been dramatically and profoundly transforming global patterns of production, investment, trade, and employment, in other words, remaking the world economy once again. Some of the formidable forces that underpin such momentous and transfixing changes, and the consequent transformation in global prosperity include foreign direct investment (FDI), multinational enterprises (MNEs), and global value chains (GVCs). This book is about these forces, and how they are remaking the modern economy in the twenty-first century, and consequently reversing the fortunes of the advanced industrialized countries of the North and the developing and emerging countries of the South.
A rudimentary form of a nexus between MNEs, international business ventures that own and operate affiliates in more than one country, and FDI, through which capital moves to foreign countries with a controlling stake of owners, can be traced back to the Phoenicians and the Carthaginians who pursued internationalization of production, trade, and investment back in 1200 bc. The modern form of nexus between MNEs and FDIs is, however, a post-Industrial Revolution phenomenon, which evolved and matured over the course of the eighteenth through twentieth centuries when massive international capital moved in both directions across the Atlantic, numerous resource- and market-seeking MNEs expanded their global operations, and many nations across the world specialized based on their comparative advantage or resource endowments.
This book’s journey begins with the nineteenth-century world economy—when the rapid industrialization of Western economies propelled economic agglomeration and ushered in the first classic web of economic globalization; when the movement of international capital signified essentially a one-way traffic, with capital flowing from wealthier Western countries with abundance of capital and loanable funds to capital-scarce developing countries of the South; when the world economy was clearly divided into capital-exporting and capital-importing countries, and interest rate differentials determined international capital movement; and the needs and the opportunities of capital-rich and capital-scarce countries complemented each other.
Chapter 2 of the book explains how the internationalization of investment and production progressed historically under the traditional nexus of FDI and MNEs beginning from the early nineteenth century, how the FDI–MNE nexus reached its climax in the post-WWII period under the dominance of vertically organized US-based multinationals, how horizontally organized Japanese multinationals challenged that status quo in the 1970s through the 1980s, and how reverse FDI flows from emerging economies have been reshaping the traditional FDI–MNE nexus in recent decades.
The classical stipulations that international capital movement—no matter direct or portfolio investment—was a function of differences in real interest rates faced formidable challenge in the post-WWII period as international capital tended to move across capital-rich countries and did not flow much into capital-scarce countries as the theory had predicted. Furthermore, among other factors, the ascendancy of American MNEs in global stage in the immediate aftermath of the WWII, and the subsequent emergence of Japanese MNEs, created the need for articulating a framework for explaining and predicting international trade, movement of capital, as well as the expansion of MNEs around the world. As a result, in the early 1960s, the traditional explanation of interest rate differential gave way to more serious theoretical stipulations on the origin and proliferation of FDIs and MNEs across the world.
Chapter 3 of the book provides a critical appraisal of such theoretical stipulations of international capital movement as well as expansions of MNEs, beginning with the classical theories. The chapter also addresses theoretical developments that capture the phenomenal rise in merger and acquisitions (M&As), and flows of non-equity capital, such as franchising and management contracts during the 1970s through the 1990s, and the reverse FDI outflows from developing and emerging countries to developed countries in recent decades.
Chapter 4 focuses on empirical experiences with the traditional FDI–MNE nexus and its consequences on host developing countries. In the early 1970s, there were only about 7000 parent MNEs, but the number swelled to 320,000 parent MNEs with 1.12mn affiliates by 2015—multiplied 32 times. Similarly, global FDI inflows increased from $54.4bn in 1980 to $1.8trn in 2015—multiplied 28 times in 35 years. As the MNE-FDI nexus manages complex global businesses across multiple countries and multiple markets, they not only powerfully affect global patterns of investment, production, and trade, but also exert far-reaching influence over technology transfer, employment, and economic growth in host developing countries. Over the decades, voluminous amounts of research investigated the consequences of the FDI–MNE nexus on host countries. This chapter critically examines some of those consequences and highlights major criticisms leveled against the nexus in recent decades.
Chapter 5 takes readers to the contemporary GVC revolution, which has unleashed a sweeping and fundamental transformation in global production, investment, and trade, catapulting the world to the twenty-first-century economy. Under the GVCs, geographical fragmentations of production processes utilize skills and materials wherever they are available at competitive cost and quality, and thus the GVCs have been powerfully transforming specialization in countries and firms in terms of tasks and assignments, such as product design, marketing, and so on, and leading the world economy away from traditional Ricardian specializations in ultimate consumable goods, such as wine or cheese.
With over 70 percent of the GVCs in the world being managed by the FDI–MNE nexus, a new nexus of FDI-MNEs-GVCs has been emerging as the backbone of the modern world economy in recent decades. No matter whether they are seeking resources, markets, assets, or cheap labor, by geographically fragmenting production processes, the new nexus has been making global production networks more interdependent and interconnected than ever and, as a result, fewer and fewer products and services are being made entirely in one country, and numerous intermediate inputs are being imported and exported multiple times across borders before a final good or service reaches a market. Thus, the traditional concept of ‘Made in Country X’ is gradually being replaced by something more appropriately called ‘Made in the World.’
Chapter 5 elaborates on how the traditional nexus of FDI–MNEs has paved the way for the emergence of the GVCs and how the new nexus of FDIs–MNEs–GVCs, and the resultant internationalization of production, investment, and trade have been transforming the global economy in the twenty-first century. The chapter also provides the conceptual and theoretical context of the GVC phenomenon, examines methodologies of measuring the interconnectedness and interdependence of global production and trade under GVCs, and sheds light on the drivers and directions of GVCs in the contemporary world economy.
Chapter 6 examines GVCs in automobiles—a producer-driven high and medium-high tech capital-intensive industry with numerous backward and forward linkages for investment, production, trade, and employment—as an exemplar of the GVC revolution in the contemporary world economy. The chapter explains the evolution of the automobile industry, dynamics in global patterns of assembler–component supplier relationships, trends in global production and trade in automobiles and auto components, and the transformation of the auto industry around the world under the emerging nexus of FDI–MNEs–GVCs.
Chapter 7 provides empirical examples of GVCs in automobiles by focusing on six emerging countries/regions—Brazil, Central and Eastern Europe (CEE), China, India, Mexico, and Thailand. Although all these are emerging developing countries/regions, the chapter explains how they represent different dynamics in global automobile structures, and how all of them are increasingly being brought under the nexus of FDI–MNEs–GVCs. The automobile GVCs have been examined by focusing on historical evolution, supply chains, and trends in production and trade of automobiles in respect to each of these countries and regions.
Chapter 8 explains how the newfangled configurations of global production, investment, and trade being orchestrated by the new nexus of MNEs–FDI–GVCs have been transforming global patterns of employment and specialization in the twenty-first century. The chapter provides the conceptual underpinnings and empirical findings on the linkages between trade, investment, and GVCs and identifies the underlying forces and dynamics that have been propelling the new trends and patterns of employment and specialization across the world under the new nexus.
Chapter 9 concludes by explaining how the forces unleashed by the new nexus of MNEs-FDI-GVCs have been shifting the gravity of the world economy toward developing countries in recent decades; how the fortunes of the North and the South have been reversing; how manufacturing activities are increasingly being shifted to developing countries; how the GVCs have opened brand new paths for the industrialization of developing countries; and how, as inevitable consequences of all such forces, the center of growth and prosperity of the world has been shifting to developing countries in the twenty-first century.