Term Paper on "Impact of Globalization and Import Competition on Technical Change"

/>Background

Just about the time the China entered the World Trade Organization, European and other countries around the world saw impressive increases in innovation and technological change (Bloom et al. 2012). Since the late 1970s, China has been progressively becoming more and more powerful on the international marketplace, eventually solidifying as a major power when China was inducted into the World Trade Organization in 2001. China has exploded on the international marketplace. Over a very short period of time, the nation has risen to one of the world's top manufacturers and exporters. All of these exports are being sold on the international market for dirt cheap, something made possible by the economic principles of communism in the lower wage scale for millions of Chinese workers. Here, the research suggests that "China looms large in these discussions, as her exports have grown by over 15% per year over the last two decades" (Bloom et al., 2012). India has been another major powerhouse on the international market that has continued to benefit from cheaper production, but also the cheaper availability of service practices. The nation is similar to China in that manufacturing costs are much lower, but it is also important to note that much outsourcing from the United States has not been in manufacturing industries, but service industries like customer service. As such, India has been providing an influx of service which is comparable to the way the China pumps out physical export products (Coe, 2007).

Yet, despite the fact that these events have happened in a rather close proximity of time, there has been little research on exploring them as more than mere coincidences. It is important to understand what drives innovation and technological change within an increasingly globalized work environment. With gaps in the research that discuss how increasing foreign competition on exports and other industries, our understanding of globalized innovation is limited. The research suggests "whereas considerable attention has been paid to the effects of globalization on productivity of firms in emerging market economies, the literature has only recently begun to be concerned with the effects of globalization on innovation by the local firms" (Gorodnicheno & Svejnar, 2010) (Gorodnicheno & Svejnar, 2010). Thus, there is a clear gap in regards to how external trade competition impacts internal domestic firms around the world. More research has been devoted to how globalization has affected external countries. Much more emphasis has been placed on researching gains in productivity rather than increases in innovation, which is often much harder to evaluate based on its more abstract nature. Increases in productivity can be much more easily measured through statistical analysis of import and export data; however, evolutions in innovation can be much harder to evaluate based on the in tangible nature of the characteristic being reviewed.

Research Question

The primary research question here is the following: how does international trade impact domestic and foreign levels of innovation and technological change? This examination helps shed light on the idea that foreign competition increasing from regions like China, clearly has an impact on the innovation and technological changes that occur around the globe. As countries like China have become more competitive in pumping out massive numbers of exports, other countries have had to rely on their intellectual capital as a way to develop further growth to stay competitive in lieu of the fact that they cannot physically match the number of exports being pumped out by China (Bloom et al., 2012).

The investigations which are present in the current research all point to similar conclusions that more reliable and practical indicators of technological change should be developed around the notion of how countries react to international competition in an increasingly globalized market. Here the research suggests that "many economists have traditionally argued that competition is good for an economy by providing incentives for efficient organization of production, putting downward pressure on costs, and motivating innovation" (Gorodnicheno & Svejnar, 2010). Thus, the predicted result the question is an affirmative account, where increasing trade competition does have a strong correlated relationship with levels of technological innovation in domestic and foreign firms.

Observations

One study reviewed in this analysis was conducted by Bloom et al. (2012), which reviewed changes in technology being developed in Europe from of seven years from 2000 to 2007. This study looked at the development of technological change in both developed and developing nations, in regards to how increases in competitive environments lead to higher expectations that evolved previous technologies used in production in order to account for new demands. Bloom reviewed patent filings, popular management strategies, and other sources of innovation development in comparison to trade barriers and the cost of trying to compete with Chinese exporters pumping the market full of cheap goods.

This has an impact on more developed nations, whose production costs cannot compete with the cheap labor found in China. In nations around Europe and North America, this high intensity to increase competitive abilities has led to organizations pushing the boundaries of innovation and progressing towards greater and more efficient technological change. According to Bloom (2012), "firms facing higher levels of Chinese import competition create more patents, spend more on R&D, raise their IT intensity, adopt more modern management practices, and increase their overall level of TFP." When firms in Europe and North America cannot compete with price points from producers over in China, they can rely more on their intellectual capital as a source to keep them competitive and ever-changing marketplace. As China continues to pump out cheaper and cheaper exports, nations who would otherwise suffer can begin to look at different operational practice models that highlight the importance of innovation and progress in technology as a way to stay competitive. Firms and organizations that fail to see the need to adapt their technology is dramatically with the flow of the environment are often quickly weeded out of the equation completely. Firms that spend little on technology or R&D innovation find themselves in nets to compete with the low production costs of Chinese goods and thus are more rapidly exiting the market environment. Essentially, "Chinese imports reduce the relative profitability of making low tech products that since firms cannot easily disposed of their trapped Labor and capital, the shadow cost of innovating has fallen. Hence, by reducing the profitability of current low tech products and freeing up input to innovate, Chinese trade reduces the opportunity cost of innovation" (Bloom, 2012).

The need to find new ways to compete with major exporters like China and India have led to reinvestments in strategies for provoking innovation. In one model, "the basic assumption is that firms can allocate a factor of production either to produce old goods or innovate and produce new goods" (Bloom, 2012). Such changes also have a clear impact in regards to the socioeconomic statuses of the workers within foreign and domestic firms. Slaughter and Swagel (1997) explore how "changes in technology have led to a pervasive shift in demand for labor that has favored skilled workers to the detriment of less skilled workers." In environment which constantly demands higher innovation as a way to stay competitive within the market, the gap between skilled and unskilled workers is widening in developed nations, such as the United States. As such, trade competition also has a clear impact not only on innovation levels but also how that demand for increasing innovation restructures economic classes in a domestic context. Thus, there is the assumption that "broader competition can stimulate innovation," (Lerman & Schmidt, 2010).

Other interesting facts this investigation by Bloom (2012)… READ MORE