Global Capitalism at Bay

Professor John H Dunning

• Publisher: Routledge
• Year: 2000
• ISBN:
  9781134555833
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In this collection of his latest essays, John H. Dunning - renowned authority in international business - elaborates his theories on the current situation of foreign direct investment and multinational enterprises. Global Capitalism at Bay considers the unique characteristics of contemporary capitalism, and what must be done if it is to survive and

Part I
Global capitalism at bay?

1 Whither global capitalism?

Introduction

The subject of this chapter has already intrigued scholars, business practitioners and politicians and various interest groups; and, no doubt, will continue to do so well into the twenty-first century. Yet, within the last decade or so, attitudes towards economic globalization, and predictions about its future, have undergone a profound transformation. From the euphoria which followed the fall of the Berlin Wall, and the liberalization of many goods, services and money markets, we are currently experiencing a kind of backlash—not dissimilar to that which followed the first positive reactions to the industrial revolution of the late eighteenth and nineteenth centuries (Kennedy 1996, Searle 1998).

For now, as then, a different set of winners and losers are being created, and new social and political concerns are emerging. Titles of books published in the last couple of years—such as: The Global Trap (Martin and Schumann 1997); The Manic Logic of Global Capitalism (Greider 1997); Has Globalization Gone Too Far? (Rodrik 1997); False Dawn (Gray 1998); Global Capitalism in Crisis (Soros 1998); Turbo-Capitalism (Luttwak 1999); The Lexus and the Olive Tree (Friedman 1999) all emphasize some of the (perceived) downsides of globalization, which need to be set against its benefits emphasized by most economists and business strategists. Globaphobia (Bartlett and Lawrence 1998), indeed, may not be an exaggerated word to describe the current and growing disquiet about the future of global capitalism.

Where next then, one might ask? Will the current round of concerns and anxieties—so dramatically displayed at Seattle in December 1999 at the time of the World Trade Organization (WTO) meetings—escalate and force a back-tracking from the path now being pursued by so many countries; or will the more optimistic view of the future prevail—albeit with a greater emphasis on what Claude Smadja, at the 1999 World Economic Forum in Davos referred to as “responsible globality”?

Let me declare my hand straight away as a “conditional” optimist. What does this mean? Well, it is my belief that global capitalism can succeed, but only if certain conditions, which are not being currently met, are met. And it is the “identification” of these conditions, and of how these might be advanced, on which this article focuses.

Two underlying paradoxes

I start by offering two paradoxes of global capitalism, then go on to look at its objectives, describe some of its unique features, and examine some of its costs and benefits. I then proceed to discuss on what (I believe) needs to be done if it is to continue as the dominant form of economic organization well into the twenty-first century.

The first paradox is this: The success of global capitalism rests largely on the efficient operation of unfettered cross-border markets. However, it is a feature of many of these markets—notably knowledge and financial markets— that they incur substantial transaction costs of one kind or another, such as those associated with structural discontinuities, volatility and information asymmetries. Hence, it follows that the role of both internal and external market governance in helping to reduce these costs, and in setting rules and standards within which transactions take place is becoming more, rather than less, important than once it was.

The second paradox—or perhaps dilemma would be a better word—is how best to reconcile the inevitably uneven distributional effects of the global marketplace with the imperatives of social justice, and to do so in the context of a reduced leverage of national governments to compensate those who, through no fault of their own, find themselves especially disadvantaged by globalization.

The objectives and nature of global capitalism

But, first, what is global capitalism; and what are its distinctive characteristics? Let me distinguish between “ideal” and “actual” global capitalism. By “ideal” global capitalism I mean the optimal cross-border interaction between, or integration of, the different forms or brands of national or regional capitalism,¹ each of which is designed to meet the specific economic social and cultural demands of its citizens. By “actual” capitalism I mean the existing state of the economic and social interconnections between regions and nation states, each of which is committed, in principle at least, to the market system of organizing economic transactions, but each of which embeds, and in some cases influences, the character of the system by its own institutional structures, ideologies, and social and cultural mores.

Let me next rehearse some of the conditions necessary to sustain “actual” global capitalism, and move it closer to “ideal” global capitalism. First, it should be concerned with the creation of both tangible and intangible wealth;² with both the quantity and the quality of assets, goods and services; and with the output of both private and collective (i.e. public) goods and services. Second, global capitalism needs to incorporate a set of appropriate ethical mores, which will fashion the behavior of the participants in the marketplace. Third, it is important that these mores should acknowledge, and, where appropriate, influence, the unique characteristics of both global capitalism and its constituent national institutions. Fourth, sustainable global capitalism must rest on the acceptance and promotion of such transcendent moral virtues as social justice, human dignity, respect for basic rights, and the absence of racial and religious discrimination. Its scope and content must also be embedded in democratic regimes.³

Let me pause at this point to give a working definition of economic globalization. According to the International Monetary Fund (1997):

Globalization refers to the growing interdependencies of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services, and of international capital flows; and also through the rapid and widespread diffusion of all kinds of technology.⁴

I might add that this definition takes as axiomatic that these tasks will best be achieved through the workings of the free markets—aided, abetted, and suitably modified by the actions and policies of extra-market institutions.

The unique features of global capitalism

What, then, is unique and special about global capitalism? Let me highlight just five features; and it is the combination of these which, I believe, sets apart the global economy from the international economy of the last century or more.⁵

1. Cross-border transactions are deeper, more extensive and more interconnected than they have ever been.
2. Resources, capabilities, goods and services are more spatially mobile than they have ever been.
3. Multinational enterprises (MNEs) play a more significant role as creators and disseminators of wealth, than they have ever done before; and they originate from, and produce in, more countries than ever before.
4. There is more real and financial volatility in cross-border markets— and particularly in capital and exchange markets—than there has ever been.
5. The advent of the digital environment and electronic commerce is completely changing the character and locational profile of crossborder transactions—particularly of all kinds of services.

Widening our analysis out a little, we might identify four distinctive features of the present stage of capitalism—of which the spatial dimension is only one. These are set out in Table 1.1. Let us consider each of these. First, in contrast to the earlier stages of capitalism, the main source of contemporary wealth creation is knowledge or intellectual capital of all kinds—be it embodied in human or physical resources, or in tangible or intangible assets. Second, although the production of many enterprises, particularly MNEs, span the planet, there is a greater spatial concentration of some kinds of economic activity—both between and within countries— than there has ever been.⁶ (This is the paradox of “sticky places” within “slippery space” (Markusen 1996).) Third, the world is entering a phase of capitalism in which all forms of alliances and cooperative ventures (e.g. within and between enterprises, between enterprises and non-market institutions and between governments) are playing a more important role. Fourth, I believe that the kind of social and moral virtues which twenty-first century capitalism especially needs to nourish if it is to properly fulfil its functions, are somewhat different from those demanded by industrial, merchant or land-based capitalism.

But, let me make three other points about the nature of global capitalism. First, to reiterate an earlier observation, there are currently many varieties of capitalism in the world economy. That of Japan and Germany is very different from that of the US or Canada; that of Taiwan and Thailand is not the same as that of Korea; that of Chile is totally different from that of China. One of the tasks of “ideal” global capitalism is then to integrate the rich mosaic of these species of capitalism in a way which acknowledges and respects their unique cultural heritages and institutional frameworks, but internalizes and builds upon their common goods. Second, to some scholars (of which I am one) global capitalism is best regarded as a process; to others it is an accomplished fact. Third, to some commentators, regionalization is part of globalization; to others it is a substitute for it; and, indeed, may impede its progress.⁷

How does one measure the extent of economic globalization?

How does one measure the extent and depth of global capitalism? The data set out in Appendix Tables A.1.1 and A.1.2 speak for themselves. Although some of these are a little dated, they all portray a similar picture. In particular we would point to the growing importance of FDI, and all forms of cross-border financial transactions over the last 30 years or so; to the more gradual dispersion of innovatory capacity, at least among the medium- and high-income industrial countries; and to the increased significance of trade, and especially intra-FDI trade as a percent of world GNP.

Table 1.1 Features of three stages of market-based capitalism (a Western model)

Table 1.2 Some indices of globalization

But do these figures over-play the uniqueness of globalization? Perhaps they do. A lot depends on the perspective one takes. Certainly, it has only been in the last 25 years that the significance of trade and FDI as a percentage of GNP of the major industrialized countries has exceeded that of 1913 (Kleinknecht and ter Wengel 1998). Certainly, too, not all industries, firms, or activities of firms are as globalized as others. Moreover, the majority of wealth in most countries—particularly in large countries such as China, India and the US—continues to be internally generated.

But, perhaps most significantly, virtually all national governments still strongly influence the character and content of innovation and corporate governance systems, education and training policies, institutional infrastructures and the entrepreneurial ethos of both institutions and individuals within their sphere of jurisdiction (Doremus, Keller, Pauly and Reich 1998). In the last resort, too, it is national governments which are the main socializers of the risks of globalization; and it is they—or their representatives at the international negotiating tables—who will determine both the extent and pattern of globalization (or regionalization); and of how many of its costs and benefits are distributed between countries and interest groups.⁸

The causes of global capitalism

In Table 1.3, I set out some of the main driving forces making for contemporary—and particularly—global capitalism. These may be identified as attracting, enabling and threatening forces. Table 1.3 gives examples of each of these. Each, in its various ways, has led to a more knowledge-based economy; more alliance-based organizational patterns, more global or regional production and marketing strategies by firms, and a shift in the significance or prioritization of particular moral or ethical norms.

The costs and benefits of global capitalism

I shall confine my attention to identifying just some of the more important of these. The benefits are primarily—though not entirely—economic. They encompass gains from the specialization of economic activity, and those from market-oriented trade and FDI; speedier rates of innovation and the diffusion of intellectual capital across national boundaries; more inter-firm competition; a revival of entrepreneurship particularly in the small firm sector; the convergence of growth and income levels—at least, among the more open industrial and advanced industrializing economies (Sachs and Warner 1995);⁹ more devolution or subsidiarity in economic decision taking (at least in some cases); and the dissemination of welfare enhancing social, cultural and behavioral mores.

What about the downsides, or—no less importantly—the perceived downsides of global capitalism? These are both economic and noneconomic. The former are frequently endemic, and are a consequence of rapid technological and social change. They include a variety of crossborder market and institutional failures, and the increased prevalence of economic shocks, discontinuities and uncertainties. The latter include a continuing spatial unevenness (both between and within countries) of the distribution of higher value-added activities (particularly between the most and least prosperous nations); the costs of structural adjustment; an increase in some kinds of long-term unemployment; widening income gaps (e.g. between skilled and unskilled workers, and between the very rich and very poor); and the challenge to social cohesion and national insurance schemes. Of no less concern is the fact that the growing porosity of national borders is facilitating the cross-border movement of disbenefits like drugs, unsafe products, environmental pollution, crime, and terrorism. Finally, in some cases, globalization is eroding the political sovereignty and weakening the economic autonomy of nation states.

Table 1.3 Causes of global capitalism

The obvious trick then—which will determine the form and sustainability of global capitalism—is then to minimize its costs while maximizing its benefits. Or, in the words of a communiqué issued by the Group of 7 in Lyon three years ago:

In an increasingly interdependent world, we must all recognize that we have an interest in spreading the benefits of economic growth as widely as possible, and diminishing the risk either of excluding individuals or groups in our own economies or of excluding certain countries or regions from the benefits of globalization.

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