HOW DOES GLOBALIZATION AFFECT INDUSTRIAL COMPETITIVENESS

I. INTRODUCTION Industry is of course important for economic growth and development. Industrial competitiveness (IC) is a country's ability to produce and export manufactures competitively. IC reflects not only a country's industrial capacity but also its technological sophistication and industrial upgrading. In the increasingly integrated world economy, how does globalization affect a country's IC? This article intends to analyze the issue with regression analyses of cross-country data for the years 1985 and 1998. It is motivated by the following considerations: (a) Industry still serves as a catalyst for economic growth; (1) (b) IC is likely to be substantially influenced by globalization, especially international trade and foreign direct investment (FDI) (Markusen and Venables, 1999; Pack, 1988); (c) While much work has been done on the impact of globalization on overall economic growth and development, comprehensive studies on the globalization--IC link have been limited. (2) In particular, no studies have empirically investigated the role of FDI and trade in a country's industrial performance with a reasonable measurement of IC (Rodrik, 2007; UNIDO, 2002). The objective of this article was to fill the gap by using cross-country data for the years 1985 and 1998 covering 87 countries/regions. Besides the focus on the more recent data and the use of a large sample size, this study has several distinctive features. First, it uses the IC index recently introduced by UNIDO, which probably is the best measure of multidimensional industrial performance. Second, it employs a fairly straightforward specification that is parsimonious and yet includes most major IC determinants. Third, in addition to the estimations for 1985 and 1998, it estimates structural changes in IC over 1985--1998 and the impact of the initial stock of IC determinants in 1985 on subsequent IC in 1998. Finally, the article checks if there exists complementarity between globalization and human capital and the interaction of FDI and trade. II. THEORY OF GLOBALIZATION-IC LINK In the context of IC, globalization means tighter links between all markets affecting industrial activities including final products and inputs such as raw materials, intermediate goods, machinery, finance, technology, and in many cases, high-level skills (Grossman and Helpman, 1991). While indigenous efforts in skills, technology, and infrastructure appear to be important to IC, globalization has become central to industrial performance as global production systems have grown in importance, especially in fast-moving industries. To obtain rewarding and sustainable industrial growth, a country must build domestic industrial capabilities through connecting external sources of technology and market access (Dahlman, 2007). Tapping into global value chains, especially in knowledge-driven sectors, has been viewed as a good means to enter global markets and gain access to new technology and know-how (Amann, 2002; Feenstra, 1998). As the main manifestations of globalization, international trade and FDI lead to global industrial value chains, linking the entire sequence of activities from raw materials extraction to production, design, research and development (R&D), marketing, and delivery. (3) The literature suggests several channels through which international trade may affect IC. In general, trade can promote industrial performance by increasing specialization and expanding the efficiency-raising benefits of comparative advantage (Pack, 1988). Better export performance can, for example, enhance IC by (a) creating greater economies of scale due to the enlargement of the effective market size for many manufacturing products, (b) affording greater capacity utilization of industries, and (c) inducing more rapid technological progress (Ram, 1987). Imports in general can lower production cost in industries. (4) Imports of intermediate or final products with new technology help domestic technology upgrading. …