2

Globalization and the History of the International Economy

The 'globalization' of economic activity and the governance issues it raises are often thought to have appeared only after the Second World War, and particularly during the 1960s. The post-1960 era saw the emergence of MNC activity on the one hand and the rapid growth of international trade on the other. Subsequently, with the collapse of the Bretton Woods semi-fixed exchange-rate regime in the 1971-3 period, the expansion of international securities investment and bank lending began in earnest as capital and particularly money markets rapidly internationalized, adding to the complexity of international economic relations and heralding what is often thought to be the genuine globalization of an integrated and interdependent world economy.

Figures 2.1 and 2.2 indicate the nature of this popular history. In figure 2.1 an index of globalization has been constructed which combines a number of economic, social and political indicators to represent a composite indicator of the overall process. This shows a more or less continuous growth of globalization over the entire period since 1970. The data on financial globalization from figure 2.2 provide a similar overall picture: the relentless increase in financial integration since 1970. Note, however, that this has been much more intense in the case of the traditional industrialized countries than for the emerging and developing economies.

We will have occasion to question this popular history later in chapters 3, 4 and 6 in particular. The exact nature of the globalization indicated by these graphs is often disguised by the level of aggregation they contain and by the lack of attention to its geographical specificity. These are issues taken up in other chapters.

In this chapter we first of all scrutinize this history by tracing the main periods of the internationalization of economic activity over a much longer period than just since the 1970s. This is shown to have developed in a cyclical and uneven fashion. The key issue at stake in our assessment is the changing autonomy of national economies in the conduct of their economic activity.1 The story in this chapter takes us up to around the mid-1990s. Later chapters develop the argument for the period since then.

Figure 2.1 The development of overall globalization, 1970-2004

Source: Swiss Federal Institute of Technology 2007, p. 1, figure 1.

Figure 2.2 Overall international financial integration, 1970-2004 (trillions of US dollars)

Note: Ratio of sum of foreign assets and liabilities to GDP, 1970-2004.
Source: Derived from Rose et al. 2006, p. 63, figure 1.

MNCs, TNCs and international business

The history of the internationalization of business enterprises is a long one, in no way confined just to the period since 1960. Trading activities, for instance, date from the earliest civilizations, but it was the Middle Ages in Europe that marked the initiation of systematic cross-border trading operations carried out by institutions of a private corporate nature (though often with strong state backing and support). During the fourteenth century, for instance, the Hanseatic League organized German merchants in the conduct of their Western European and Levantine commerce - which involved them in agricultural production, iron smelting and general manufacturing. Around the same time the Merchant Adventurers organized the sale of UK-produced wool and cloth to the Low Countries and elsewhere. In addition, Italian trading and banking houses occupied a key position in the general internationalization of business activity during the early Renaissance period. By the end of the fourteenth century it is estimated that there were as many as 150 Italian banking companies already operating multinationally (Dunning 1993, pp. 97-8).

During the seventeenth and eighteenth centuries state patronage extended as the great colonial trading companies were established: the Dutch and British East India companies, the Muscovy Company, the Royal Africa Company and the Hudson's Bay Company came into existence. These pioneered wholesale trading operations in what were to become the leading colonial areas.

However, it is the development of international manufacturing as the Industrial Revolution took hold that presents the closest precursor to the modern-day MNC. Here the early pre-eminence of British firms as multinational producers becomes apparent. Initially North and South America presented the most favourable investment opportunities, but these were soon followed by Africa and Australasia. There is some dispute as to whether 'colonial investments' should be considered a true precursor of foreign direct investment, but production abroad for the local market began in this way. Technical and organizational developments after the 1870s allowed a wider variety of similar products to be produced domestically and abroad within the boundaries of the same firm, while the exploration and development of minerals and other raw material products also attracted large amounts of FDI (Dunning 1993, chap. 5).

One of the problems with such a retrospective classification, however, is that the modern concepts of 'direct' investment on the one hand (involving some notion of managerial control from abroad) and 'portfolio' investment on the other (involving the acquisition of securities issued by foreign institutions so as to claim returns without any associated control or management participation) were drawn only in the early 1960s, at the same time as the term MNC was itself introduced. The US Department of Commerce had reported outward FDI from 1929, but this was the exception.

Despite this lack of consistently classified data, it is generally agreed that manufacturing multinationals appeared in the world economy after the mid-nineteenth century and that they were well established by the First World War. International business activity grew vigorously in the 1920s as the truly diversified and integrated MNC matured, but it slowed down during the depressed 1930s and war-torn 1940s, and began a fluctuating expansion again after 1950.

There have been two approaches to quantifying the growth of international business over time. The first involves looking at whatever statistics on international investment are available, generating additional data, and then reclassifying these on the basis of modern distinctions. The second approach focuses on the businesses themselves. It traces the history of firms and the internationalization of their activity, which involves counting multinationals and their business affiliations over time (Jones 1994).

Estimates of accumulated stock of FDI held by the leading countries in 1914 and in subsequent key years are shown in table 2.1. Clearly, the growth in importance of the 'New World' (the USA and Canada in this table) is signalled up until the 1960s. As might have been expected, the traditional supplier countries such as the UK, Germany and France lost out in terms of shares. Between the 1960s and 1980s the USA's significance as a recipient of FDI faded while Germany and Japan increased in importance. And in terms of the estimated value of manufacturing exports, the UK and Germany were the leading exporters of manufactures at the outbreak of the First World War, and were over twice as important as the USA and France. Yearly export values were already less than accumulated FDI stocks by this time.

Table 2.1 Accumulated stock of FDI by country of origin, 1914-1978 (billions of current $ and percentage)

Source: Dunning 1983, derived from p. 87, table 5.1.

The analysis of companies and their history also shows the developed nature of international production before the First World War. The pioneer country here was the UK, but there was also a surprising extent of multinational production organized by the smaller advanced economies. Company-based analysis reveals that a good deal of this early FDI was modest in scale, though extensive in scope, and often came from quite small foreign companies (Jones 1994).

Trade and international integration

A better statistical base is available for exploring the trends in international trade. Again the history of this part of international economic activity goes back a long way. But good statistical evidence exists from 1830 onwards (Maddison 1962, 1987; Lewis 1981). The important period from our point of view concerns developments during the twentieth century, and particularly from the First World War. A similar pattern emerges here as in the case of FDI, though perhaps more pronounced in its features. The volume of world foreign trade expanded at about 3.4 per cent per annum between 1870 and 1913. After 1913 trade was adversely affected by the growth of tariffs, quantitative restrictions, exchange controls and then war, and it expanded by less than 1 per cent per annum on average between 1913 and 1950. After 1950, however, trade really took off, to grow at over 9 per cent per annum until 1973. Between 1973 and the mid-1980s the growth rate fell back to nearer the late nineteenth-century levels, with expansion at a rate of only 3.6 per cent.

The experience of six main economies in the development of export volumes between 1913 and 1984 is shown in table 2.2, indicating the different rates of volume growth and their fluctuations. Clearly, there was a definite fall in the volume of world trade during the 1930s. The brunt was borne first by Germany and the UK - the leading...