economy is 11 times larger than China's,<sup>16</sup> and cross-country comparison shows a strong negative correlation between trade/GDP ratio and the size of an economy.

Some argue against using the trade/output ratio to measure global integration for economies with accumulated FDI stock abroad. Critics assert that a reduction of exports of the affected industry at the source country, and the resulting decline in export/GDP ratio, should not be seen as a decay in globalization. As defined at the outset of the paper, globalization is a process of integrating production, distribution, and usage of goods and services among the economies of the world, which shifts the stock of productive capacity across the national boundaries, notably in the form of accumulated FDI. The share of trade/GDP tends to increase in both supplier and recipient countries as inter-industry trade increases in the earlier stages of this process. At a later stage, in the move toward overseas production (even with a rise in accommodating imports in the affected product category), the trade/GDP share of the original capital sourcing country declines as domestic content of products increases. Components are supplied increasingly in the FDI destination, or even by cost-competitive third party economies, and spot marketing or marketing in a group of third party economies increases (this might be high from the outset for overseas production). However, for affected countries as a group, or at a world aggregate level, this accumulation of FDI stock almost surely increases trade/output ratio.'<sup>7</sup> Harrison examined correlations between seven proxies, including the aforementioned aggregate measures of trade/GDP share, and individual measures such as the black market exchange rate premium.'<sup>8</sup> Although she found that correlations across openness (by her definition) measures were sometimes weak, trade/GDP share was positively correlated with ordinal and subjective ranking measures of trade reform, and negatively correlated with measures of price distortions, including black market pre miums, where higher numbers mean an inappropriately high official exchange rate. The results confirm that although the trade/output ratio contains its own share of drawbacks, it can, with suitable size adjustments, be a simple, comprehensive, and stable measure of the openness used in time series observations or in cross-country observations.'<sup>9</sup> Speed of

- **16** Even if the size of the domestic market is compared using purchasing power parity (PPP) conversion factors, the US economy was at least three times larger than China's in 1992. This implies an enlargement of the denominator in the trade/output ratio. South Korea's trade/output ratio was 67 percent on average for 1991-93. Malaysia's ratio was 141 percent. Are these economies more open than the US economy? As economies develop, the share of the nontradable service sector in total output tends to increase. This is one major cause of the negative correlation.

- One can always argue the difference of globalizing and globalized; that is; globalization defined

- as a _process_ of integration. Trade activities often increase between source and destination economies in the ongoing process of FDI. For observed cases of FDI-trade interaction, see, for example, Kenji Takeuchi, "Does Japanese Direct Foreign Investment Promote Japanese Imports from Developing Countries?" World Bank Policy Research Working Paper No. 458, 1990.

- 18 Ann Harrison, "Openness and Growth," World Bank Policy Research Working Paper No. 809, 1991.

- **_19_** For instance, Syrquin and Chenery used the deviation of actual from predicted trade flows, with predictions based on variables such as country size. See Moshe Syrquin and Hollis Chenery, "Three Decades of Industrialization," in _The World Bank Economic Review,_ Vol. 3. No. 2, 1989.

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