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Research Article

Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities

* E-mail: [email protected]

Affiliations Faculty of Management, Universiti Teknologi Malaysia (UTM), Johor, Malaysia, Department of Management, Mobarakeh Branch, Islamic Azad University, Isfahan, Iran

Affiliation Applied Statistics Department, Economics and Administration Faculty, University of Malaya, Kuala Lumpur, Malaysia

• Parisa Samimi, 
• Hashem Salarzadeh Jenatabadi

• Published: April 10, 2014
• https://doi.org/10.1371/journal.pone.0087824
• Reader Comments

This study was carried out to investigate the effect of economic globalization on economic growth in OIC countries. Furthermore, the study examined the effect of complementary policies on the growth effect of globalization. It also investigated whether the growth effect of globalization depends on the income level of countries. Utilizing the generalized method of moments (GMM) estimator within the framework of a dynamic panel data approach, we provide evidence which suggests that economic globalization has statistically significant impact on economic growth in OIC countries. The results indicate that this positive effect is increased in the countries with better-educated workers and well-developed financial systems. Our finding shows that the effect of economic globalization also depends on the country’s level of income. High and middle-income countries benefit from globalization whereas low-income countries do not gain from it. In fact, the countries should receive the appropriate income level to be benefited from globalization. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

Citation: Samimi P, Jenatabadi HS (2014) Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities. PLoS ONE 9(4): e87824. https://doi.org/10.1371/journal.pone.0087824

Editor: Rodrigo Huerta-Quintanilla, Cinvestav-Merida, Mexico

Received: November 5, 2013; Accepted: January 2, 2014; Published: April 10, 2014

Copyright: © 2014 Samimi, Jenatabadi. This is an open-access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Funding: The study is supported by the Ministry of Higher Education of Malaysia, Malaysian International Scholarship (MIS). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing interests: The authors have declared that no competing interests exist.

Introduction

Globalization, as a complicated process, is not a new phenomenon and our world has experienced its effects on different aspects of lives such as economical, social, environmental and political from many years ago [1] – [4] . Economic globalization includes flows of goods and services across borders, international capital flows, reduction in tariffs and trade barriers, immigration, and the spread of technology, and knowledge beyond borders. It is source of much debate and conflict like any source of great power.

The broad effects of globalization on different aspects of life grab a great deal of attention over the past three decades. As countries, especially developing countries are speeding up their openness in recent years the concern about globalization and its different effects on economic growth, poverty, inequality, environment and cultural dominance are increased. As a significant subset of the developing world, Organization of Islamic Cooperation (OIC) countries are also faced by opportunities and costs of globalization. Figure 1 shows the upward trend of economic globalization among different income group of OIC countries.

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https://doi.org/10.1371/journal.pone.0087824.g001

Although OICs are rich in natural resources, these resources were not being used efficiently. It seems that finding new ways to use the OICs economic capacity more efficiently are important and necessary for them to improve their economic situation in the world. Among the areas where globalization is thought, the link between economic growth and globalization has been become focus of attention by many researchers. Improving economic growth is the aim of policy makers as it shows the success of nations. Due to the increasing trend of globalization, finding the effect of globalization on economic growth is prominent.

The net effect of globalization on economic growth remains puzzling since previous empirical analysis did not support the existent of a systematic positive or negative impact of globalization on growth. Most of these studies suffer from econometrics shortcoming, narrow definition of globalization and small number of countries. The effect of economic globalization on the economic growth in OICs is also ambiguous. Existing empirical studies have not indicated the positive or negative impact of globalization in OICs. The relationship between economic globalization and economic growth is important especially for economic policies.

Recently, researchers have claimed that the growth effects of globalization depend on the economic structure of the countries during the process of globalization. The impact of globalization on economic growth of countries also could be changed by the set of complementary policies such as improvement in human capital and financial system. In fact, globalization by itself does not increase or decrease economic growth. The effect of complementary policies is very important as it helps countries to be successful in globalization process.

In this paper, we examine the relationship between economic globalization and growth in panel of selected OIC countries over the period 1980–2008. Furthermore, we would explore whether the growth effects of economic globalization depend on the set of complementary policies and income level of OIC countries.

The paper is organized as follows. The next section consists of a review of relevant studies on the impact of globalization on growth. Afterward the model specification is described. It is followed by the methodology of this study as well as the data sets that are utilized in the estimation of the model and the empirical strategy. Then, the econometric results are reported and discussed. The last section summarizes and concludes the paper with important issues on policy implications.

Literature Review

The relationship between globalization and growth is a heated and highly debated topic on the growth and development literature. Yet, this issue is far from being resolved. Theoretical growth studies report at best a contradictory and inconclusive discussion on the relationship between globalization and growth. Some of the studies found positive the effect of globalization on growth through effective allocation of domestic resources, diffusion of technology, improvement in factor productivity and augmentation of capital [5] , [6] . In contrast, others argued that globalization has harmful effect on growth in countries with weak institutions and political instability and in countries, which specialized in ineffective activities in the process of globalization [5] , [7] , [8] .

Given the conflicting theoretical views, many studies have been empirically examined the impact of the globalization on economic growth in developed and developing countries. Generally, the literature on the globalization-economic growth nexus provides at least three schools of thought. First, many studies support the idea that globalization accentuates economic growth [9] – [19] . Pioneering early studies include Dollar [9] , Sachs et al. [15] and Edwards [11] , who examined the impact of trade openness by using different index on economic growth. The findings of these studies implied that openness is associated with more rapid growth.

In 2006, Dreher introduced a new comprehensive index of globalization, KOF, to examine the impact of globalization on growth in an unbalanced dynamic panel of 123 countries between 1970 and 2000. The overall result showed that globalization promotes economic growth. The economic and social dimensions have positive impact on growth whereas political dimension has no effect on growth. The robustness of the results of Dreher [19] is approved by Rao and Vadlamannati [20] which use KOF and examine its impact on growth rate of 21 African countries during 1970–2005. The positive effect of globalization on economic growth is also confirmed by the extreme bounds analysis. The result indicated that the positive effect of globalization on growth is larger than the effect of investment on growth.

The second school of thought, which supported by some scholars such as Alesina et al. [21] , Rodrik [22] and Rodriguez and Rodrik [23] , has been more reserve in supporting the globalization-led growth nexus. Rodriguez and Rodrik [23] challenged the robustness of Dollar (1992), Sachs, Warner et al. (1995) and Edwards [11] studies. They believed that weak evidence support the idea of positive relationship between openness and growth. They mentioned the lack of control for some prominent growth indicators as well as using incomprehensive trade openness index as shortcomings of these works. Warner [24] refuted the results of Rodriguez and Rodrik (2000). He mentioned that Rodriguez and Rodrik (2000) used an uncommon index to measure trade restriction (tariffs revenues divided by imports). Warner (2003) explained that they ignored all other barriers on trade and suggested using only the tariffs and quotas of textbook trade policy to measure trade restriction in countries.

Krugman [25] strongly disagreed with the argument that international financial integration is a major engine of economic development. This is because capital is not an important factor to increase economic development and the large flows of capital from rich to poor countries have never occurred. Therefore, developing countries are unlikely to increase economic growth through financial openness. Levine [26] was more optimistic about the impact of financial liberalization than Krugman. He concluded, based on theory and empirical evidences, that the domestic financial system has a prominent effect on economic growth through boosting total factor productivity. The factors that improve the functioning of domestic financial markets and banks like financial integration can stimulate improvements in resource allocation and boost economic growth.

The third school of thoughts covers the studies that found nonlinear relationship between globalization and growth with emphasis on the effect of complementary policies. Borensztein, De Gregorio et al. (1998) investigated the impact of FDI on economic growth in a cross-country framework by developing a model of endogenous growth to examine the role of FDI in the economic growth in developing countries. They found that FDI, which is measured by the fraction of products produced by foreign firms in the total number of products, reduces the costs of introducing new varieties of capital goods, thus increasing the rate at which new capital goods are introduced. The results showed a strong complementary effect between stock of human capital and FDI to enhance economic growth. They interpreted this finding with the observation that the advanced technology, brought by FDI, increases the growth rate of host economy when the country has sufficient level of human capital. In this situation, the FDI is more productive than domestic investment.

Calderón and Poggio [27] examined the structural factors that may have impact on growth effect of trade openness. The growth benefits of rising trade openness are conditional on the level of progress in structural areas including education, innovation, infrastructure, institutions, the regulatory framework, and financial development. Indeed, they found that the lack of progress in these areas could restrict the potential benefits of trade openness. Chang et al. [28] found that the growth effects of openness may be significantly improved when the investment in human capital is stronger, financial markets are deeper, price inflation is lower, and public infrastructure is more readily available. Gu and Dong [29] emphasized that the harmful or useful growth effect of financial globalization heavily depends on the level of financial development of economies. In fact, if financial openness happens without any improvement in the financial system of countries, growth will replace by volatility.

However, the review of the empirical literature indicates that the impact of the economic globalization on economic growth is influenced by sample, econometric techniques, period specifications, observed and unobserved country-specific effects. Most of the literature in the field of globalization, concentrates on the effect of trade or foreign capital volume (de facto indices) on economic growth. The problem is that de facto indices do not proportionally capture trade and financial globalization policies. The rate of protections and tariff need to be accounted since they are policy based variables, capturing the severity of trade restrictions in a country. Therefore, globalization index should contain trade and capital restrictions as well as trade and capital volume. Thus, this paper avoids this problem by using a comprehensive index which called KOF [30] . The economic dimension of this index captures the volume and restriction of trade and capital flow of countries.

Despite the numerous studies, the effect of economic globalization on economic growth in OIC is still scarce. The results of recent studies on the effect of globalization in OICs are not significant, as they have not examined the impact of globalization by empirical model such as Zeinelabdin [31] and Dabour [32] . Those that used empirical model, investigated the effect of globalization for one country such as Ates [33] and Oyvat [34] , or did it for some OIC members in different groups such as East Asia by Guillaumin [35] or as group of developing countries by Haddad et al. [36] and Warner [24] . Therefore, the aim of this study is filling the gap in research devoted solely to investigate the effects of economic globalization on growth in selected OICs. In addition, the study will consider the impact of complimentary polices on the growth effects of globalization in selected OIC countries.

Model Specification

Methodology and Data

This paper applies the generalized method of moments (GMM) panel estimator first suggested by Anderson and Hsiao [38] and later developed further by Arellano and Bond [39] . This flexible method requires only weak assumption that makes it one of the most widely used econometric techniques especially in growth studies. The dynamic GMM procedure is as follow: first, to eliminate the individual effect form dynamic growth model, the method takes differences. Then, it instruments the right hand side variables by using their lagged values. The last step is to eliminate the inconsistency arising from the endogeneity of the explanatory variables.

The consistency of the GMM estimator depends on two specification tests. The first is a Sargan test of over-identifying restrictions, which tests the overall validity of the instruments. Failure to reject the null hypothesis gives support to the model. The second test examines the null hypothesis that the error term is not serially correlated.

The GMM can be applied in one- or two-step variants. The one-step estimators use weighting matrices that are independent of estimated parameters, whereas the two-step GMM estimator uses the so-called optimal weighting matrices in which the moment conditions are weighted by a consistent estimate of their covariance matrix. However, the use of the two-step estimator in small samples, as in our study, has problem derived from proliferation of instruments. Furthermore, the estimated standard errors of the two-step GMM estimator tend to be small. Consequently, this paper employs the one-step GMM estimator.

In the specification, year dummies are used as instrument variable because other regressors are not strictly exogenous. The maximum lags length of independent variable which used as instrument is 2 to select the optimal lag, the AR(1) and AR(2) statistics are employed. There is convincing evidence that too many moment conditions introduce bias while increasing efficiency. It is, therefore, suggested that a subset of these moment conditions can be used to take advantage of the trade-off between the reduction in bias and the loss in efficiency. We restrict the moment conditions to a maximum of two lags on the dependent variable.

Data and Empirical Strategy

We estimated Eq. (1) using the GMM estimator based on a panel of 33 OIC countries. Table S1 in File S1 lists the countries and their income groups in the sample. The choice of countries selected for this study is primarily dictated by availability of reliable data over the sample period among all OIC countries. The panel covers the period 1980–2008 and is unbalanced. Following [40] , we use annual data in order to maximize sample size and to identify the parameters of interest more precisely. In fact, averaging out data removes useful variation from the data, which could help to identify the parameters of interest with more precision.

The dependent variable in our sample is logged per capita real GDP, using the purchasing power parity (PPP) exchange rates and is obtained from the Penn World Table (PWT 7.0). The economic dimension of KOF index is derived from Dreher et al. [41] . We use some other variables, along with economic globalization to control other factors influenced economic growth. Table S2 in File S2 shows the variables, their proxies and source that they obtain.

We relied on the three main approaches to capture the effects of economic globalization on economic growth in OIC countries. The first one is the baseline specification (Eq. (1)) which estimates the effect of economic globalization on economic growth.

The second approach is to examine whether the effect of globalization on growth depends on the complementary policies in the form of level of human capital and financial development. To test, the interactions of economic globalization and financial development (KOF*FD) and economic globalization and human capital (KOF*HCS) are included as additional explanatory variables, apart from the standard variables used in the growth equation. The KOF, HCS and FD are included in the model individually as well for two reasons. First, the significance of the interaction term may be the result of the omission of these variables by themselves. Thus, in that way, it can be tested jointly whether these variables affect growth by themselves or through the interaction term. Second, to ensure that the interaction term did not proxy for KOF, HCS or FD, these variables were included in the regression independently.

In the third approach, in order to study the role of income level of countries on the growth effect of globalization, the countries are split based on income level. Accordingly, countries were classified into three groups: high-income countries (3), middle-income (21) and low-income (9) countries. Next, dummy variables were created for high-income (Dum 3), middle-income (Dum 2) and low-income (Dum 1) groups. Then interaction terms were created for dummy variables and KOF. These interactions will be added to the baseline specification.

Findings and Discussion

This section presents the empirical results of three approaches, based on the GMM -dynamic panel data; in Tables 1 – 3 . Table 1 presents a preliminary analysis on the effects of economic globalization on growth. Table 2 displays coefficient estimates obtained from the baseline specification, which used added two interaction terms of economic globalization and financial development and economic globalization and human capital. Table 3 reports the coefficients estimate from a specification that uses dummies to capture the impact of income level of OIC countries on the growth effect of globalization.

https://doi.org/10.1371/journal.pone.0087824.t001

https://doi.org/10.1371/journal.pone.0087824.t002

https://doi.org/10.1371/journal.pone.0087824.t003

The results in Table 1 indicate that economic globalization has positive impact on growth and the coefficient is significant at 1 percent level. The positive effect is consistent with the bulk of the existing empirical literature that support beneficial effect of globalization on economic growth [9] , [11] , [13] , [19] , [42] , [43] .

According to the theoretical literature, globalization enhances economic growth by allocating resources more efficiently as OIC countries that can be specialized in activities with comparative advantages. By increasing the size of markets through globalization, these countries can be benefited from economic of scale, lower cost of research and knowledge spillovers. It also augments capital in OICs as they provide a higher return to capital. It has raised productivity and innovation, supported the spread of knowledge and new technologies as the important factors in the process of development. The results also indicate that growth is enhanced by lower level of government expenditure, lower level of inflation, higher level of human capital, deeper financial development, more domestic investment and better institutions.

Table 2 represents that the coefficients on the interaction between the KOF, HCS and FD are statistically significant at 1% level and with the positive sign. The findings indicate that economic globalization not only directly promotes growth but also indirectly does via complementary reforms. On the other hand, the positive effect of economic globalization can be significantly enhanced if some complementary reforms in terms of human capital and financial development are undertaken.

In fact, the implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. However, countries with higher level of human capital can be better and faster to imitate and implement the transferred technologies. Besides, the financial openness brings along the knowledge and managerial for implementing the new technology. It can be helpful in improving the level of human capital in host countries. Moreover, the strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in developing countries. Overall, with higher level of human capital and stronger financial systems, the globalized countries benefit from the growth effect of globalization. The obtained results supported by previous studies in relative to financial and trade globalization such as [5] , [27] , [44] , [45] .

Table (3 ) shows that the estimated coefficients on KOF*dum3 and KOF*dum2 are statistically significant at the 5% level with positive sign. The KOF*dum1 is statistically significant with negative sign. It means that increase in economic globalization in high and middle-income countries boost economic growth but this effect is diverse for low-income countries. The reason might be related to economic structure of these countries that are not received to the initial condition necessary to be benefited from globalization. In fact, countries should be received to the appropriate income level to be benefited by globalization.

The diagnostic tests in tables 1 – 3 show that the estimated equation is free from simultaneity bias and second-order correlation. The results of Sargan test accept the null hypothesis that supports the validity of the instrument use in dynamic GMM.

Conclusions and Implications

Numerous researchers have investigated the impact of economic globalization on economic growth. Unfortunately, theoretical and the empirical literature have produced conflicting conclusions that need more investigation. The current study shed light on the growth effect of globalization by using a comprehensive index for globalization and applying a robust econometrics technique. Specifically, this paper assesses whether the growth effects of globalization depend on the complementary polices as well as income level of OIC countries.

Using a panel data of OIC countries over the 1980–2008 period, we draw three important conclusions from the empirical analysis. First, the coefficient measuring the effect of the economic globalization on growth was positive and significant, indicating that economic globalization affects economic growth of OIC countries in a positive way. Second, the positive effect of globalization on growth is increased in countries with higher level of human capital and deeper financial development. Finally, economic globalization does affect growth, whether the effect is beneficial depends on the level of income of each group. It means that economies should have some initial condition to be benefited from the positive effects of globalization. The results explain why some countries have been successful in globalizing world and others not.

The findings of our study suggest that public policies designed to integrate to the world might are not optimal for economic growth by itself. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

The policy implications of this study are relatively straightforward. Integrating to the global economy is only one part of the story. The other is how to benefits more from globalization. In this respect, the responsibility of policymakers is to improve the level of educated workers and strength of financial systems to get more opportunities from globalization. These economic policies are important not only in their own right, but also in helping developing countries to derive the benefits of globalization.

However, implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. In fact, countries with higher level of human capital can better and faster imitate and implement the transferred technologies. The higher level of human capital and certain skill of human capital determine whether technology is successfully absorbed across countries. This shows the importance of human capital in the success of countries in the globalizing world.

Financial openness in the form of FDI brings along the knowledge and managerial for implementing the new technology. It can be helpful in upgrading the level of human capital in host countries. Moreover, strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in OICs.

In addition, the results show that economic globalization does affect growth, whether the effect is beneficial depends on the level of income of countries. High and middle income countries benefit from globalization whereas low-income countries do not gain from it. As Birdsall [46] mentioned globalization is fundamentally asymmetric for poor countries, because their economic structure and markets are asymmetric. So, the risks of globalization hurt the poor more. The structure of the export of low-income countries heavily depends on primary commodity and natural resource which make them vulnerable to the global shocks.

The major research limitation of this study was the failure to collect data for all OIC countries. Therefore future research for all OIC countries would shed light on the relationship between economic globalization and economic growth.

Supporting Information

Sample of Countries.

https://doi.org/10.1371/journal.pone.0087824.s001

The Name and Definition of Indicators.

https://doi.org/10.1371/journal.pone.0087824.s002

Author Contributions

Conceived and designed the experiments: PS. Performed the experiments: PS. Analyzed the data: PS. Contributed reagents/materials/analysis tools: PS HSJ. Wrote the paper: PS HSJ.

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How our interconnected world is changing

Globalization isn’t going away, but it is changing, according to recent research  from the McKinsey Global Institute (MGI). In this episode of The McKinsey Podcast , MGI director Olivia White speaks with global editorial director Lucia Rahilly about the flows of goods, knowledge, and labor that drive global integration—and about what reshaping these flows might mean for our interconnected future.

After, global brewer AB InBev has flourished in the throes of what its CFO Fernando Tennenbaum describes as the recent “twists and turns.” Find out how in this excerpt from “ How to thrive in a downturn: A CFO perspective ,” recorded in December 2022 as part of our McKinsey Live series. 1 Please note that market conditions may have changed since this interview was conducted in December 2022.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

This transcript has been edited for clarity and length.

Globalization is here to stay

Lucia Rahilly: Pundits and other public figures have wrongly predicted the demise of globalization for what seems like years. Now, given the war in Ukraine and other disruptions, many are once again sounding its death knell. What does this new MGI research  tell us about the fate of globalization? Is it really in retreat?

Olivia White: The flows of goods, the real tangible stuff, have leveled off after nearly 20-plus years of growing at twice the rate of GDP. But the flows of goods kept pace with GDP and even rose a little bit, surprisingly, in the past couple of years. Since GDP has been growing, that means actual ties have gotten stronger.

One of the most striking findings from this research was that flows representing knowledge and know-how, such as IP and data, and flows of services and international students have accelerated and are now growing faster than the flow of goods. Flows of data grew by more than 40 percent per annum over the past ten years.

Lucia Rahilly: Goods are a smaller share of total flows, a smaller share of economic output, than in the past. That doesn’t necessarily sound like a bad thing. Could it be a sign of progress?

Olivia White: The fact that certain goods are growing less quickly than other types of flows shows this shift in our economy and what’s most important to the way the economy functions. It comes on the back of a long history of different factors that influence growth and shifts in the way patterns work. What’s happening, in part, is that a variety of countries are producing more domestically—first and foremost China. That has been driving a lot of the flow down, if you take the longitudinal view, over the past ten years versus before.

The world remains interdependent

Lucia Rahilly: How interdependent would you say we are at this stage? Could you give us some examples of the ways we’re interconnected?

Olivia White: The top line is, every region in the world depends on another significant region for at least 25 percent of a flow it values most.

In general, regions that are manufacturing regions—Europe, Asia–Pacific, and China, if we look at it on its own because it’s such a large economy—depend very strongly on the rest of the world for resources: food to some degree, but really energy and minerals of different sorts. I’ll give you a few examples.

In general, regions that are manufacturing regions depend very strongly on the rest of the world for resources: food to some degree, but really energy and minerals. Olivia White

China imports over 25 percent of its minerals, from places as far-flung as Brazil, Chile, and South Africa. China imports energy, particularly in the form of oil from the Middle East and Russia. Europe is emblematic of these forms of dependency on energy. It was dependent on Russia for over 50 percent of its energy, but now that has drastically changed.

In some other regions in the world—places that are resource rich, like the Middle East, sub-Saharan Africa, and Latin America—those places are highly dependent on the rest of the world for their manufactured goods. Well over half the world’s population lives in those places. They import well over 50 percent of their electronics and similar amounts of their pharmaceuticals. They are highly dependent on other parts of the world for things that are really quite critical to development and for modern life.

North America is somewhat of a different story. We don’t have any single spot of quite as great a dependency, at least at the broad category level. We import close to 25 percent of what we use in net value terms across the spectrum, both of resources and of manufactured goods.

This doesn’t yet speak of data and IP, where, for example, the US and Europe are fairly significant producers/exporters. A country like China is a very large consumer of IP.

Lucia Rahilly: How interdependent are we in terms of the global workforce?

Olivia White: This is quite striking. We asked how many workers in regions outside North America serve North American demand. And we asked the same question for Europe. It turns out that 60 million people in regions outside North America serve North American demand, and in Europe the corresponding number is 50 million.

These numbers are very substantial versus the working populations in those countries. So when you consider how much of what North Americans or Europeans are consuming could be produced onshore, by onshore labor, the answer is not even remotely close to those sorts of numbers—at least given the means of production or the way services are delivered today and the role people play in that.

Lucia Rahilly: Let’s turn to some of the categories of flows that have increased in recent years. What’s driving growth in global flows now that the trade in goods has stabilized?

Olivia White: Flows linked to knowledge and know-how. Knowledge services that have historically grown more slowly than manufactured goods and resources, with increased global connection over time, have flipped over the past ten years.

Professional services, such as engineering services, are among those more traditional trade flows that have been growing fastest, at about 6 percent a year, versus resources, which have slowed to just around two percent. Anything that involves real know-how—engineering, but also providing, say, call center support—is in that category.

The flows of IP are growing even faster. Now, IP is tricky because accounting for it is a very tricky thing to do. But it roughly looks at flows of the fun stuff. In the report we talk about Squid Game , but IP also includes movies, streaming platforms, music, and any sort of cultural elements that we consume.

It’s also important to consider flows of patents and ideas and the way countries or companies will use ideas or know-how developed in one country to help what they do broadly across the world. Those flows have been growing at roughly 6 percent per year as well.

There are data flows—the flows of packets of data. For example, if we were in different countries while conducting this interview there would be the flows between us. There are also flows linked to our ever-expanding use of cloud and data localization. Data transfer is happening more and more quickly.

The flows of international students have also been rising. That was mightily interrupted by the pandemic, for reasons I don’t need to belabor, but these flows seem to be rebounding. It’s important to consider the degree to which those will jump back on their accelerated growth trajectory.

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How covid-19 has affected global flows.

Lucia Rahilly: You mentioned flows of international students dropping off during COVID, for the obvious reasons. Did other flows generally drop off during the pandemic? Or were there examples of flows that were particularly resilient throughout that period?

Olivia White: There’s some variation, but many flows were remarkably resilient—resilient in a way that’s a bit counter to the general narrative about what happened during the pandemic.

The flows of resources and manufactured goods jumped reasonably significantly in 2020 and 2021, both to levels of about 6 percent per year on an annualized basis. To some degree, what was happening is that cross-border flows stepped in to replace interrupted domestic production. Flows from Asia came in, for example, to the US or to Europe. We’ve seen some flows go in reverse directions. There was a bunch of interruption in domestic production, which was quite surprising.

Flows of capital also jumped quite a lot as people needed to shift the way they were financing themselves. Multinationals needed to shift the way they were financing themselves. Some were moving liquidity to different parts of the world under times of financial stress. But those jumped to levels of growth in the tens of digits from what had actually been reversed growth for the past ten years. All those things jumped. IP jumped a little bit; data remained high. So these flows have been remarkably resilient.

The good and bad news about resource concentration

Lucia Rahilly: You invoked concentration a bit when you talked about Europe being dependent on Russia for 50 percent of its energy. Can you say a bit more about what concentration means in this context and how it affects the dynamics of the way we’re connected globally?

Olivia White: From the global perspective, there are some products that truly originate in only a few places in the world, and all of us across the globe are dependent on those few places for our supply. Iron ore is quite concentrated, and cobalt is concentrated in the DRC [Democratic Republic of the Congo].

The second type of concentration is viewed from the standpoint of an individual country. Lucia, you talked about Europe and gas dependency.

For example, Germany was getting gas from only a very concentrated set of sources. These are places where, for a variety of reasons, countries have built up dependencies on just a small number of other countries.

Why has this happened? Why are we in this position? Cost is one reason. People have made decisions based on economic factors. Another reason is regional preference. Not all goods are created equal, even if they fall in the same category.

The third reason is preferential trade agreements between different countries or other forms of tariffs or taxes that shape the way flows occur. We’re in a world in which suddenly people are realizing they have to contemplate the consequences associated with concentration—not of suppliers, but of the country of origin from which they’re buying things.

Lucia Rahilly: It sounds like concentration also increases efficiency in some cases where those disruptions don’t occur. Is concentration always a bad thing? If we rethink concentration, can we expect to see some loss of efficiency in the interim?

Olivia White: No, it’s not always a bad thing. But there are a lot of considerations to make that involve costs, involve geopolitical relationships, involve the role that various countries want to play themselves, how they’re thinking about development, how they’re thinking about their workforces. All those things have to be part of the mix.

Imagine three or four different countries, each with three trading partners, and they’re largely different trading partners. Swapping off who’s supplied by whom is a huge problem of coordination.

How global chains will evolve

Lucia Rahilly: Geopolitical risks  have obviously trained a policy spotlight on reimagining these global value chains, whether for security reasons or to strengthen resilience more generally. Accepting that the world remains interdependent, how do we see trade flows continuing to evolve in coming years?

Olivia White: Broadly speaking, there are four categories of potential evolution. Semiconductors are most prominent in public discussion. Electronics, more broadly, is one of the fastest-moving value chains since 1995, with 21 percentage points of share movement per decade. Pharmaceuticals and the mining of critical minerals are other examples. And they will be part of what shifts the way that flows crisscross the globe.

Second category: textiles and apparel. This category is not as sensitive in a geopolitical sense as some of the things I was talking about before. This category is one where you actually do have new hub creation right now. Consumer electronics, other forms of electric equipment that aren’t particularly sensitive, possibly fall in that category too.

Third category: IT services and financial intermediation or professional services. That will reconfigure the ways in which services flow.

Fourth and finally, there’s the stuff that’s just going to be steady—food and beverages, paper and printing. There’s no particular reason to expect that there are strong forcing mechanisms that will change the way those things are flowing across the world right now. They’re things that have remained relatively steady for the past ten or more years.

Global flows are necessary for a net-zero transition

Lucia Rahilly: Do we have a view on whether the evolving state of global flows is helping or hindering the net-zero transition ?

Olivia White: The way I’d put it is, there is no way we move quickly toward a net-zero transition without global flows. There are certainly things about global flows that are tricky from a net-zero perspective. It costs carbon to ship things and move things a long way. But in order for net zero to be attainable, we need to make sure that energy-generating technologies and fuels are able to flow across the world.

Energy-generating technologies include both the minerals that underpin construction of those technologies and the actual manufacturing. So, in the first category, think nickel and lithium. In the second category, think about the actual manufacturing of solar panels. The minerals themselves are processed in only a few countries around the world. So people are going to have to move them from one place to another. Maybe the world could have broader diversification of such things, but on average, the timeline from discovering a mineral to being able to produce it at scale is well in excess of 16 years. If we want to move fast, we have the luxury to move things across the world. Meeting cost curves for manufacturing at scale and in locations where you have at least some established presence is going to be important.

The final element that’s crucial with respect to net zero is cross-border capital flows. It’s really important that developing countries are able to finance shifts in the way that energy is produced and consumed in their countries, which means they may have to both spend more, at least as a ratio of GDP, and have less ability to spend, given other forms of development imperative.

Multinationals and global resilience

Lucia Rahilly: What’s the role of major multinational companies as we look ahead toward reimagining the future of our global connectedness?

Olivia White: The first thing that needs to be recognized is that major multinational corporations play an outsize role in global flows today. Multinationals are responsible for about 30 percent of trade. They’re responsible for 60 percent of exports and 82 percent of exports of knowledge-intensive goods. So they disproportionately drive flows, especially the ones associated with knowledge. And therefore, they’re going to be the center of managing for their own resilience, but also in a collective sense, for the resilience of the world.

The future of global flows

Lucia Rahilly: The media tends to focus on what some see as globalization’s imminent demise. Accepting that global ties continue to bind and connect us across the world, it’s also natural for folks to have pretty strong reactions to these intense and ongoing global disruptions that we’ve experienced in recent years. How would you sum up the way we think about the future of globalization at a high level?

Olivia White: The world we live in right now is highly dependent on flows. Will those flows reconfigure and shift? Yes, absolutely. They have in the past, and they will in the future.

Lucia Rahilly: Do we see anything in the research to indicate that the world is actually moving toward decoupling, which is also very much part of the media narrative?

Olivia White: If you look along regional lines, individual regions can’t be independent. If you just start to play with what sorts of decoupling of regions would be possible, you see very quickly that it’s not something you can do.

Now, is it possible that you would get groups of countries that become more strongly interconnected among themselves and less strongly connected with others? Absolutely. It’s possible to move in that direction. The question becomes, is there an actual decoupling, or do you just have a shift in degree? As with most things in the world, the answer tends toward the shift in degree rather than an abrupt or sharp true change or decoupling.

Lucia Rahilly: Does greater regionalization improve resilience?

Olivia White: To some degree you can say, “Look, if I’m self-sufficient, I’m more resilient.” On the other hand, all of a sudden you depend on yourself for everything, and that’s a point of vulnerability in the same way that getting it only from one other person would be a problem.

There are a whole host of reasons some degree of regionalization might help. You’ve got things closer to you. But dependency just on a few sets of people, whether or not they’re in your region, means you’ve got dependency on just a few points of potential weaknesses rather than a broad web, which in general is a more resilient and robust structure.

Lucia Rahilly: Thanks so much, Olivia. That was such an interesting discussion.

Olivia White: A real pleasure, Lucia. Thank you.

Roberta Fusaro: One example of resilience is AB InBev. Here to talk about how it’s prospering in the face of worldwide disruption is its CFO, Fernando Tennenbaum. This excerpt, “ How to thrive in a downturn: A CFO perspective ,” from our McKinsey Live series, was recorded in December 2022.

Lucia Rahilly: Fernando, we’re confronting an unusual constellation of disruptions: inflation, high interest rates driving up the cost of capital, geopolitical turbulence unexpectedly upending supply chains and sending energy prices spiking—it’s genuinely a volatile moment. Tell us, how is AB InBev faring in the current context?

Fernando Tennenbaum: We’re fortunate to be in a resilient category. Despite these twists and turns in different parts of the world, beer sales have been quite strong. That said, inflation has turned out to be much higher than expected. 2 Market conditions may have changed since this interview was conducted. We need to ensure our operations are in sync with the market, to meet this unique moment. We need to understand the state of the consumer and adjust our operations accordingly.

In emerging markets like Latin America and Africa, inflation is not new news. There are different levels of inflation, but inflation has been a part of these economies for a very long time. Consumers are more used to it, companies are more used to it—and it’s probably a more straightforward discussion.

Lucia Rahilly: You’ve spent much of your career in Latin America where, as you said, inflation has historically been much higher and more volatile than in the US or in Western Europe. Walk us through some of the lessons that we in the US, for example, could learn from.

Fernando Tennenbaum: Make sure that you’re always looking at your customers, and that you’re always keeping up with inflation. You should avoid lagging too much, and you should avoid overpricing compared with inflation. If you do too little or too much, you start disturbing the health of the consumer. If you get it right, it’s probably a good thing for the business. You have to make sure you navigate the rising cost environment while ensuring that the consumer is in a good place, your product is in a good place, and the category is a healthy one. It’s a balancing act.

You should avoid lagging too much, and you should avoid overpricing compared with inflation. If you do too little or too much, you start disturbing the health of the consumer. Fernando Tennenbaum

Lucia Rahilly: AB InBev has a diverse portfolio of brands. Volumes are good. Are customers trading up or down, during this period, between your premium and mass-market brands?

Fernando Tennenbaum: Premiumization continues to be a trend, and consumers continue to trade up to premium brands. Over the course of this year, people often asked whether consumers were trading down—and we see no evidence of trading down. That is true for the US, that is true for Africa, and that is true for Latin America—which is quite unique.

I don’t know if the future will be different; the world is changing so fast. But if you were to ask me ten years from now, I’d expect premium to be even bigger than it is today.

Lucia Rahilly: Let’s talk about uncertainty. The economy could play out in many different ways. How do you manage for that?

Fernando Tennenbaum: Let’s take our debt portfolio. Now is the moment that interest rates are going up. Inflation and borrowing are going up. Overall, this tends to be bad news—but for us, it’s quite the opposite because we don’t have any debt maturing in the next three years. We prepared for this when we saw the world going to a very different place at the beginning of 2020.

We ended up raising some long-term debt and repaying all our short-term debt. Now we’re left with a debt portfolio that has an average maturity of 16 years and no meaningful amount of debt maturing in the next three years—all at a fixed rate. Since we don’t need to refinance, we’re actually buying back our debt. Rising interest rates can be good when you can buy back debt cheaper than it cost to issue.

Lucia Rahilly: You became CFO at AB InBev in 2020, when pandemic uncertainty was at its peak. Talk to us about how you navigated that period.

Fernando Tennenbaum: The first thing we did in 2020 was pump up our cash position. Not that we needed it, but I felt it would give operations peace of mind. To be prepared, we started borrowing a lot of money. And we started taking care of our people. We needed to make sure our people were safe—that was priority number one.

Once we made sure our employees were safe, our operations were safe, then we looked at opportunities and started to fast-forward. I remember we looked at May, for example, and started to see a lot of markets doing well in terms of volume. We had a lot of cash. We started buying back some debt, especially near-term debt, to create even more optionality for the future.

We also accelerated our digital transformation. The moment was uniquely suited for it. Digital was a much better way to reach customers at a time when everybody was afraid to meet in person. In hindsight, the company ended up in a much better place today than it was three years ago—in terms of our portfolio, our digital transformation, and even financially—because we acted very quickly and created a lot of optionality during the first few months of the pandemic.

Lucia Rahilly: Any mistakes to avoid?

Fernando Tennenbaum: Looking back, I wouldn’t have done anything massively different. If I had known the outcome, I might have done things differently. But without knowing the outcome, I felt that the way we managed and the optionality we created set us up well.

Lucia Rahilly: Brewing is such an agriculturally dependent business, and agriculture has been significantly disrupted, both because of the war in Ukraine and because of climate-related risk. As CFO, how do you think about sustainability in terms of longer-term value creation?

Fernando Tennenbaum: Sustainability cuts across the whole of our business. We have a lot of local suppliers—20,000 local farmers. Our brewing processes are natural. The more efficient we are there, the more sustainable we are and, actually, the more profitable we are. We have local operations, and we sell to the local community. And most of our customers are very small entrepreneurs. The more we help them, the better they can run their business. And we say beer is inclusive because we have two billion consumers.

Lucia Rahilly: Is packaging also part of the sustainability approach?

Fernando Tennenbaum: Definitely. For example, we have returnable glass bottles. That’s very efficient, very sustainable, and from an economic standpoint, that’s probably the most profitable packaging we have. It’s also the most affordable for consumers. So it’s good for us, good for the environment, and good for the consumers.

Lucia Rahilly: You said beer is inclusive in part because so many of us drink it. How else do you approach inclusion at AB InBev?

Fernando Tennenbaum: Our two billion consumers are very different from one another. We need to make sure that, as a company, we reflect our consumers. Whenever we look at our colleagues, we need to make sure they reflect the societies where we operate—and we operate in very different societies.

A diverse and inclusive team is going to be a better team. That also applies to our suppliers. For example, if you think about suppliers in Africa, some are very poor. They manage to get access to technology, which means we can track whether they’re receiving the funds we pay them. We can track where agricultural commodities are being sourced. So how we financially empower them is also a very important part of our sustainability strategy.

Lucia Rahilly: Looking ahead, how are you thinking about innovation and investment in technology, in order to enable growth?

Fernando Tennenbaum: Innovation is a key component of beer, and there are two sides to that. One is innovation in products. The other is packaging. In Mexico, for example, we have different pack sizes for different consumption occasions and consumer needs.

Beyond that, there’s also technological innovation. Take our B2B platform, which we started piloting in 2019. Now, three or four years later, we have around $30 billion of GMV [gross merchandise value] in our e-commerce platform, which is accessible in more than 19 countries. That’s the optimal portfolio to improve customer engagement at their point of sale. Before we launched our B2B platform, we used to spend seven minutes per week interacting with our customers. Today, with our B2B platform, we interact with them 30 minutes per week. We increased the number of points of sales. For example, in Brazil, we used to have 700,000 customers, and now we have more than a million customers. Previously, they were buying our products from a distributor. Now we can reach them directly with the B2B system in place.

This connection with our customers means we can do a lot of other things, like our online marketplace, where third-party products generated an annualized GMV of $850 million, up from zero four years ago. That marketplace now continues to grow and to deliver a lot of value for our customers and for ourselves.

Lucia Rahilly: One more question: If you could give one piece of advice to a brand-new CFO of a large, multinational corporation, what would it be in this market?

Fernando Tennenbaum: Make sure you plan for different scenarios. The world is moving very fast, and you can’t expect it to unfold in a certain way. But if you have options, are agile in making decisions, and have a very engaged team, then regardless of the twists and turns, you are able to meet the moment. And you are definitely able to deliver on your objectives.

Lucia Rahilly: I lied. I’m going to ask you one more. How do you see, for these new CFOs, the relationship between sustainability and inclusivity and growth? Do you see those in tension?

Fernando Tennenbaum: There is this myth that you are either sustainable or profitable. At least at AB InBev, we’re sure they go hand in hand. The more sustainable you are, the more profitable you are, and the more value you create for your different stakeholders.

Fernando Tennenbaum is the CFO of Anheuser-Busch InBev. Olivia White is a director of the McKinsey Global Institute and a senior partner in McKinsey’s Bay Area office. Roberta Fusaro is an editorial director in the Waltham, Massachusetts, office, and Lucia Rahilly is global editorial director and deputy publisher of McKinsey Global Publishing and is based in the New York office.

Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.

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Globalization and Economic Growth

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Globalization, or the increased interconnectedness and interdependence of peoples, companies, institutions and countries. It is generally understood to include two inter-related elements: the opening of international borders to increasingly fast flows of goods, services, finance, investment, people, information, ideas and technology; and the changes in institutions and policies at national and international levels that facilitate or promote such flows (WHO 2020 ). Globalization process has impacts on economies, prosperity, development of societies, political systems, environment, and cultures around the world.

Economic globalization can be defined as the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies. It reflects the continuing expansion and mutual...

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Trade and Globalization

How did international trade and globalization change over time? What is the structure today? And what is its impact?

By: Esteban Ortiz-Ospina , Diana Beltekian and Max Roser

This page was first published in 2014 and last revised in April 2024.

On this topic page, you can find data, visualizations, and research on historical and current patterns of international trade, as well as discussions of their origins and effects.

Other research and writing on trade and globalization on Our World in Data:

• Is globalization an engine of economic development?
• Is trade a major driver of income inequality?

Related topics

Economic Growth

See all our data, visualizations, and writing on economic growth.

Economic Inequality

See all our data, visualizations, and writing on economic inequality.

See all our data, visualizations, and writing on migration.

See all interactive charts on Trade and Globalization ↓

Trade has changed the world economy

Trade has grown remarkably over the last century.

One of the most important developments of the last century has been the integration of national economies into a global economic system. This process of integration, often called globalization, has resulted in a remarkable growth in trade between countries.

The chart here shows the growth of world exports over more than the last two centuries. These estimates are in constant prices (i.e. have been adjusted to account for inflation) and are indexed at 1913 values.

The chart shows an extraordinary growth in international trade over the last couple of centuries: Exports today are more than 40 times larger than in 1913.

You can switch to a logarithmic scale under ‘Settings’. This will help you see that, over the long run, growth has roughly followed an exponential path.

The increase in trade has even outpaced economic growth

The chart above shows how much more trade we have today relative to a century ago. But what about trade relative to total economic output?

Over the last couple of centuries the world economy has experienced sustained positive economic growth , so looking at changes in trade relative to GDP offers another interesting perspective.

The next chart plots the value of traded goods relative to GDP (i.e. the value of merchandise trade as a share of global economic output).

Up to 1870, the sum of worldwide exports accounted for less than 10% of global output. Today, the value of exported goods around the world is around 25%. This shows that over the last hundred years, the growth in trade has even outpaced rapid economic growth.

Trade expanded in two waves

The first "wave of globalization" started in the 19th century, the second one after ww2.

The following visualization presents a compilation of available trade estimates, showing the evolution of world exports and imports as a share of global economic output .

This metric (the ratio of total trade, exports plus imports, to global GDP) is known as the “openness index”. The higher the index, the higher the influence of trade transactions on global economic activity. 1

As we can see, until 1800 there was a long period characterized by persistently low international trade – globally the index never exceeded 10% before 1800. This then changed over the course of the 19th century, when technological advances triggered a period of marked growth in world trade – the so-called “first wave of globalization”.

This first wave came to an end with the beginning of World War I, when the decline of liberalism and the rise of nationalism led to a slump in international trade. In the chart we see a large drop in the interwar period.

After World War II trade started growing again. This new – and ongoing – wave of globalization has seen international trade grow faster than ever before. Today the sum of exports and imports across nations amounts to more than 50% of the value of total global output.

Before the first wave of globalization, trade was driven mostly by colonialism

Over the early modern period, transoceanic flows of goods between empires and colonies accounted for an important part of international trade. The following visualizations provide a comparison of intercontinental trade, in per capita terms, for different countries.

As we can see, intercontinental trade was very dynamic, with volumes varying considerably across time and from empire to empire.

Leonor Freire Costa, Nuno Palma, and Jaime Reis, who compiled and published the original data shown here, argue that trade, also in this period, had a substantial positive impact on the economy. 2

The first wave of globalization was marked by the rise and collapse of intra-European trade

The following visualization shows a detailed overview of Western European exports by destination. Figures correspond to export-to-GDP ratios (i.e. the sum of the value of exports from all Western European countries, divided by the total GDP in this region). You can use “Settings” to switch to a relative view and see the proportional contribution of each region to total Western European exports.

This chart shows that growth in Western European trade throughout the 19th century was largely driven by trade within the region: In the period 1830-1900 intra-European exports went from 1% of GDP to 10% of GDP, and this meant that the relative weight of intra-European exports doubled over the period. However, this process of European integration then collapsed sharply in the interwar period.

After the Second World War trade within Europe rebounded, and from the 1990s onwards exceeded the highest levels of the first wave of globalization. In addition, Western Europe then started to increasingly trade with Asia, the Americas, and to a smaller extent Africa and Oceania.

The next graph, using data from Broadberry and O'Rourke (2010) 3 , shows another perspective on the integration of the global economy and plots the evolution of three indicators measuring integration across different markets – specifically goods, labor, and capital markets.

The indicators in this chart are indexed, so they show changes relative to the levels of integration observed in 1900. This gives us another perspective on how quickly global integration collapsed with the two World Wars. 4

The second wave of globalization was enabled by technology

The worldwide expansion of trade after the Second World War was largely possible because of reductions in transaction costs stemming from technological advances, such as the development of commercial civil aviation, the improvement of productivity in the merchant marines, and the democratization of the telephone as the main mode of communication. The visualization shows how, at the global level, costs across these three variables have been going down since 1930.

Reductions in transaction costs impacted not only the volumes of trade but also the types of exchanges that were possible and profitable.

The first wave of globalization was characterized by inter-industry trade. This means that countries exported goods that were very different from what they imported – England exchanged machines for Australian wool and Indian tea. As transaction costs went down, this changed. In the second wave of globalization, we are seeing a rise in intra -industry trade (i.e. the exchange of broadly similar goods and services is becoming more and more common). France, for example, now both imports and exports machines to and from Germany.

The following visualization, from the UN World Development Report (2009) , plots the fraction of total world trade that is accounted for by intra-industry trade, by type of goods. As we can see, intra-industry trade has been going up for primary, intermediate, and final goods.

This pattern of trade is important because the scope for specialization increases if countries are able to exchange intermediate goods (e.g. auto parts) for related final goods (e.g. cars).

Trade and trade partners by country

Above, we examined the broad global trends over the last two centuries. Let's now examine country-level trends over this long and dynamic period.

This chart plots estimates of the value of trade in goods, relative to total economic activity (i.e. export-to-GDP ratios).

These historical estimates obviously come with a large margin of error (in the measurement section below we discuss the data limitations); yet they offer an interesting perspective.

You can edit the countries and regions selected. Each country tells a different story. 6

In the next chart we plot, country by country, the regional breakdown of exports. India is shown by default, but you can edit the countries and regions shown.

When switching to displaying relative values under ‘Settings’, we see the proportional contribution of purchases from each region. For example, we see that more than a third of Indian exports went to Asian countries in recent decades.

This gives us an interesting perspective on the changing nature of trade partnerships. In India, we see the rising importance of trade with Africa—a pattern that we discuss in more detail below .

Trade around the world today

How much do countries trade, trade openness around the world.

The metric trade as a share of GDP gives us an idea of global integration by capturing all incoming and outgoing transactions of a country.

The charts shows that countries differ a lot in the extent to which they engage in trade. Trade, for example, is much less important to the US economy than for other rich countries.

If you press the play button on the map, you can see changes over time. This reveals that, despite the great variation between countries, there is a common trend: over the last couple of decades trade openness has gone up in most countries.

Exports and imports in real dollars

Expressing the value of trade as a share of GDP tells us the importance of trade in relation to the size of economic activity. Let's now take a look at trade in monetary terms – this tells us the importance of trade in absolute, rather than relative terms.

The chart shows the value of exports (goods plus services) in dollars, country by country.

The main takeaway here is that the trend towards more trade is more pronounced than in the charts showing shares of GDP. This is not surprising: most countries today produce more than a couple of decades ago , and at the same time they trade more of what they produce. 7

What do countries trade?

Trade in goods vs. trade in services.

Trade transactions include goods (tangible products that are physically shipped across borders by road, rail, water, or air) and services (intangible commodities, such as tourism, financial services, and legal advice).

Many traded services make merchandise trade easier or cheaper—for example, shipping services, or insurance and financial services.

Trade in goods has been happening for millennia , while trade in services is a relatively recent phenomenon.

In some countries services are today an important driver of trade: in the UK services account for around half of all exports; and in the Bahamas, almost all exports are services.

In other countries, such as Nigeria and Venezuela, services account for a small share of total exports.

Globally, trade in goods accounts for the majority of trade transactions. But as this chart shows, the share of services in total global exports has slightly increased in recent decades. 8

How are trade partnerships changing?

Bilateral trade is becoming increasingly common.

If we consider all pairs of countries that engage in trade around the world, we find that in the majority of cases, there is a bilateral relationship today: most countries that export goods to a country also import goods from the same country.

The interactive visualization shows this. 9 In the chart, all possible country pairs are partitioned into three categories: the top portion represents the fraction of country pairs that do not trade with one another; the middle portion represents those that trade in both directions (they export to one another); and the bottom portion represents those that trade in one direction only (one country imports from, but does not export to, the other country).

As we can see, bilateral trade is becoming increasingly common (the middle portion has grown substantially). However, many countries still do not trade with each other at all.

South-South trade is becoming increasingly important

The next visualization here shows the share of world merchandise trade that corresponds to exchanges between today's rich countries and the rest of the world.

The 'rich countries' in this chart are: Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and the United States. 'Non-rich countries' are all the other countries in the world.

As we can see, up until the Second World War, the majority of trade transactions involved exchanges between this small group of rich countries. But this has changed quickly over the last couple of decades, and today, trade between non-rich countries is just as important as trade between rich countries.

In the past two decades, China has been a key driver of this dynamic: the UN Human Development Report (2013) estimates that between 1992 and 2011, China's trade with Sub-Saharan Africa rose from $1 billion to more than $140 billion. 10

The majority of preferential trade agreements are between emerging economies

The last few decades have not only seen an increase in the volume of international trade, but also an increase in the number of preferential trade agreements through which exchanges take place. A preferential trade agreement is a trade pact that reduces tariffs between the participating countries for certain products.

The visualization here shows the evolution of the cumulative number of preferential trade agreements in force worldwide, according to the World Trade Organization (WTO). These numbers include notified and non-notified preferential agreements (the source reports that only about two-thirds of the agreements currently in force have been notified to the WTO) and are disaggregated by country groups.

This figure shows the increasingly important role of trade between developing countries (South-South trade), vis-a-vis trade between developed and developing countries (North-South trade). In the late 1970s, North-South agreements accounted for more than half of all agreements – in 2010, they accounted for about one-quarter. Today, the majority of preferential trade agreements are between developing economies.

Trading patterns have been changing quickly in middle-income countries

An important change in the composition of exported goods in these countries has accompanied the increase in trade among emerging economies over the last half century.

The next visualization plots the share of food exports in each country's total exported merchandise. These figures, produced by the World Bank, correspond to the Standard International Trade Classification, in which 'food' includes, among other goods, live animals, beverages, tobacco, coffee, oils, and fats.

Two points stand out. First, the relative importance of food exports has substantially decreased in most countries since the 1960s (although globally, it has gone up slightly more recently). Second, this decrease has been largest in middle-income countries, particularly in Latin America.

Regarding levels, as one would expect, in high-income countries, food still accounts for a much smaller share of merchandise exports than in most low- and middle-income-countries.

Trade generates efficiency gains

The raw correlation between trade and growth.

Over the last couple of centuries, the world economy has experienced sustained positive economic growth , and over the same period, this process of economic growth has been accompanied by even faster growth in global trade .

In a similar way, if we look at country-level data from the last half century we find that there is also a correlation between economic growth and trade: countries with higher rates of GDP growth also tend to have higher rates of growth in trade as a share of output. This basic correlation is shown in the chart here, where we plot the average annual change in real GDP per capita, against growth in trade (average annual change in value of exports as a share of GDP). 11

Is this statistical association between economic output and trade causal?

Among the potential growth-enhancing factors that may come from greater global economic integration are: competition (firms that fail to adopt new technologies and cut costs are more likely to fail and be replaced by more dynamic firms); economies of scale (firms that can export to the world face larger demand, and under the right conditions, they can operate at larger scales where the price per unit of product is lower); learning and innovation (firms that trade gain more experience and exposure to develop and adopt technologies and industry standards from foreign competitors). 12

Are these mechanisms supported by the data? Let's take a look at the available empirical evidence.

Evidence from cross-country differences in trade, growth, and productivity

When it comes to academic studies estimating the impact of trade on GDP growth, the most cited paper is Frankel and Romer (1999). 13

In this study, Frankel and Romer used geography as a proxy for trade to estimate the impact of trade on growth. This is a classic example of the so-called instrumental variables approach . The idea is that a country's geography is fixed, and mainly affects national income through trade. So if we observe that a country's distance from other countries is a powerful predictor of economic growth (after accounting for other characteristics), then the conclusion is drawn that it must be because trade has an effect on economic growth. Following this logic, Frankel and Romer find evidence of a strong impact of trade on economic growth.

Other papers have applied the same approach to richer cross-country data, and they have found similar results. A key example is Alcalá and Ciccone (2004). 14

This body of evidence suggests trade is indeed one of the factors driving national average incomes (GDP per capita) and macroeconomic productivity (GDP per worker) over the long run. 15

Evidence from changes in labor productivity at the firm level

If trade is causally linked to economic growth, we would expect that trade liberalization episodes also lead to firms becoming more productive in the medium and even short run. There is evidence suggesting this is often the case.

Pavcnik (2002) examined the effects of liberalized trade on plant productivity in the case of Chile, during the late 1970s and early 1980s. She found a positive impact on firm productivity in the import-competing sector. She also found evidence of aggregate productivity improvements from the reshuffling of resources and output from less to more efficient producers. 16

Bloom, Draca, and Van Reenen (2016) examined the impact of rising Chinese import competition on European firms over the period 1996-2007 and obtained similar results. They found that innovation increased more in those firms most affected by Chinese imports. They also found evidence of efficiency gains through two related channels: innovation increased and new existing technologies were adopted within firms, and aggregate productivity also increased because employment was reallocated towards more technologically advanced firms. 17

Trade does not only increase efficiency gains

Overall, the available evidence suggests that trade liberalization does improve economic efficiency. This evidence comes from different political and economic contexts and includes both micro and macro measures of efficiency.

This result is important because it shows that there are gains from trade. But of course, efficiency is not the only relevant consideration here. As we discuss in a companion article , the efficiency gains from trade are not generally equally shared by everyone. The evidence from the impact of trade on firm productivity confirms this: "reshuffling workers from less to more efficient producers" means closing down some jobs in some places. Because distributional concerns are real it is important to promote public policies – such as unemployment benefits and other safety-net programs – that help redistribute the gains from trade.

Trade has distributional consequences

The conceptual link between trade and household welfare.

When a country opens up to trade, the demand and supply of goods and services in the economy shift. As a consequence, local markets respond, and prices change. This has an impact on households, both as consumers and as wage earners.

The implication is that trade has an impact on everyone. It's not the case that the effects are restricted to workers from industries in the trade sector; or to consumers who buy imported goods. The effects of trade extend to everyone because markets are interlinked, so imports and exports have knock-on effects on all prices in the economy, including those in non-traded sectors.

Economists usually distinguish between "general equilibrium consumption effects" (i.e. changes in consumption that arise from the fact that trade affects the prices of non-traded goods relative to traded goods) and "general equilibrium income effects" (i.e. changes in wages that arise from the fact that trade has an impact on the demand for specific types of workers, who could be employed in both the traded and non-traded sectors).

Considering all these complex interrelations, it's not surprising that economic theories predict that not everyone will benefit from international trade in the same way. The distribution of the gains from trade depends on what different groups of people consume, and which types of jobs they have, or could have. 18

The link between trade, jobs and wages

Evidence from chinese imports and their impact on factory workers in the us.

The most famous study looking at this question is Autor, Dorn and Hanson (2013): "The China syndrome: Local labor market effects of import competition in the United States". 19

In this paper, Autor and coauthors examined how local labor markets changed in the parts of the country most exposed to Chinese competition. They found that rising exposure increased unemployment, lowered labor force participation, and reduced wages. Additionally, they found that claims for unemployment and healthcare benefits also increased in more trade-exposed labor markets.

The visualization here is one of the key charts from their paper. It's a scatter plot of cross-regional exposure to rising imports, against changes in employment. Each dot is a small region (a 'commuting zone' to be precise). The vertical position of the dots represents the percent change in manufacturing employment for the working-age population, and the horizontal position represents the predicted exposure to rising imports (exposure varies across regions depending on the local weight of different industries).

The trend line in this chart shows a negative relationship: more exposure goes along with less employment. There are large deviations from the trend (there are some low-exposure regions with big negative changes in employment); but the paper provides more sophisticated regressions and robustness checks, and finds that this relationship is statistically significant.

This result is important because it shows that the labor market adjustments were large. Many workers and communities were affected over a long period of time. 20

But it's also important to keep in mind that Autor and colleagues are only giving us a partial perspective on the total effect of trade on employment. In particular, comparing changes in employment at the regional level misses the fact that firms operate in multiple regions and industries at the same time. Indeed, Ildikó Magyari found evidence suggesting the Chinese trade shock provided incentives for US firms to diversify and reorganize production. 21

So companies that outsourced jobs to China often ended up closing some lines of business, but at the same time expanded other lines elsewhere in the US. This means that job losses in some regions subsidized new jobs in other parts of the country.

On the whole, Magyari finds that although Chinese imports may have reduced employment within some establishments, these losses were more than offset by gains in employment within the same firms in other places. This is no consolation to people who lost their jobs. But it is necessary to add this perspective to the simplistic story of "trade with China is bad for US workers".

Evidence from the expansion of trade in India and the impact on poverty reductions

Another important paper in this field is Topalova (2010): "Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India". 22

In this paper, Topalova examines the impact of trade liberalization on poverty across different regions in India, using the sudden and extensive change in India's trade policy in 1991. She finds that rural regions that were more exposed to liberalization experienced a slower decline in poverty and lower consumption growth.

Analyzing the mechanisms underlying this effect, Topalova finds that liberalization had a stronger negative impact among the least geographically mobile at the bottom of the income distribution and in places where labor laws deterred workers from reallocating across sectors.

The evidence from India shows that (i) discussions that only look at "winners" in poor countries and "losers" in rich countries miss the point that the gains from trade are unequally distributed within both sets of countries; and (ii) context-specific factors, like worker mobility across sectors and geographic regions, are crucial to understand the impact of trade on incomes.

Evidence from other studies

• Donaldson (2018) uses archival data from colonial India to estimate the impact of India’s vast railroad network. He finds railroads increased trade, and in doing so they increased real incomes (and reduced income volatility). 23
• Porto (2006) looks at the distributional effects of Mercosur on Argentine families, and finds this regional trade agreement led to benefits across the entire income distribution. He finds the effect was progressive: poor households gained more than middle-income households because prior to the reform, trade protection benefitted the rich disproportionately. 24
• Trefler (2004) looks at the Canada-US Free Trade Agreement and finds there was a group who bore "adjustment costs" (displaced workers and struggling plants) and a group who enjoyed "long-run gains" (consumers and efficient plants). 25

The link between trade and the cost of living

The fact that trade negatively affects labor market opportunities for specific groups of people does not necessarily imply that trade has a negative aggregate effect on household welfare. This is because, while trade affects wages and employment, it also affects the prices of consumption goods. So households are affected both as consumers and as wage earners.

Most studies focus on the earnings channel and try to approximate the impact of trade on welfare by looking at how much wages can buy, using as a reference the changing prices of a fixed basket of goods.

This approach is problematic because it fails to consider welfare gains from increased product variety, and obscures complicated distributional issues such as the fact that poor and rich individuals consume different baskets so they benefit differently from changes in relative prices. 26

Ideally, studies looking at the impact of trade on household welfare should rely on fine-grained data on prices, consumption, and earnings. This is the approach followed in Atkin, Faber, and Gonzalez-Navarro (2018): "Retail globalization and household welfare: Evidence from Mexico". 27

Atkin and coauthors use a uniquely rich dataset from Mexico, and find that the arrival of global retail chains led to reductions in the incomes of traditional retail sector workers, but had little impact on average municipality-level incomes or employment; and led to lower costs of living for both rich and poor households.

The chart here shows the estimated distribution of total welfare gains across the household income distribution (the light-gray lines correspond to confidence intervals). These are proportional gains expressed as a percent of initial household income.

As we can see, there is a net positive welfare effect across all income groups; but these improvements in welfare are regressive, in the sense that richer households gain proportionally more (about 7.5 percent gain compared to 5 percent). 28

Evidence from other countries confirms this is not an isolated case – the expenditure channel really seems to be an important and understudied source of household welfare. Giuseppe Berlingieri, Holger Breinlich, Swati Dhingra, for example, investigated the consumer benefits from trade agreements implemented by the EU between 1993 and 2013; and they found that these trade agreements increased the quality of available products, which translated into a cumulative reduction in consumer prices equivalent to savings of €24 billion per year for EU consumers. 29

Implications of trade’s distributional effects

The available evidence shows that, for some groups of people, trade has a negative effect on wages and employment opportunities; at the same time, it has a large positive effect via lower consumer prices and increased product availability.

Two points are worth emphasizing.

For some households, the net effect is positive. But for some households that's not the case. In particular, workers who lose their jobs can be affected for extended periods of time, so the positive effect via lower prices is not enough to compensate them for the reduction in earnings.

On the whole, if we aggregate changes in welfare across households, the net effect is usually positive. But this is hardly a consolation for the worse off.

This highlights a complex reality: There are aggregate gains from trade , but there are also real distributional concerns. Even if trade is not a major driver of income inequalities , it's important to keep in mind that public policies, such as unemployment benefits and other safety-net programs, can and should help redistribute the gains from trade.

Explaining trade patterns: Theory and Evidence

Comparative advantage, theory: what is 'comparative advantage' and why does it matter to understand trade.

In economic theory, the 'economic cost' – or the 'opportunity cost' – of producing a good is the value of everything you need to give up in order to produce that good.

Economic costs include physical inputs (the value of the stuff you use to produce the good), plus forgone opportunities (when you allocate scarce resources to a task, you give up alternative uses of those resources).

A country or a person is said to have a 'comparative advantage' if it can produce something at a lower opportunity cost than its trade partners.

The forgone opportunities of production are key to understanding this concept. It is precisely this that distinguishes absolute advantage from comparative advantage.

To see the difference between comparative and absolute advantage, consider a commercial aviation pilot and a baker. Suppose the pilot is an excellent chef, and she can bake just as well, or even better than the baker. In this case, the pilot has an absolute advantage in both tasks. Yet the baker probably has a comparative advantage in baking, because the opportunity cost of baking is much higher for the pilot.

The freely available economics textbook The Economy: Economics for a Changing World explains this as follows: "A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods."

At the individual level, comparative advantage explains why you might want to delegate tasks to someone else, even if you can do those tasks better and faster than them. This may sound counterintuitive, but it is not: If you are good at many things, it means that investing time in one task has a high opportunity cost, because you are not doing the other amazing things you could be doing with your time and resources. So, at least from an efficiency point of view, you should specialize on what you are best at, and delegate the rest.

The same logic applies to countries. Broadly speaking, the principle of comparative advantage postulates that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, and imports the rest: “do what you do best, import the rest”. 30

In countries with a relative abundance of certain factors of production, the theory of comparative advantage predicts that they will export goods that rely heavily upon those factors: a country typically has a comparative advantage in those goods that use its abundant resources. Colombia exports bananas to Europe because it has comparatively abundant tropical weather.

Is there empirical support for comparative-advantage theories of trade?

The empirical evidence suggests that the principle of comparative advantage does help explain trade patterns. Bernhofen and Brown (2004) 31 , for instance, provide evidence using the experience of Japan. Specifically, they exploit Japan’s dramatic nineteenth-century move from a state of near complete isolation to wide trade openness.

The graph here shows the price changes of the key tradable goods after the opening up to trade. It presents a scatter diagram of the net exports in 1869 graphed in relation to the change in prices from 1851–53 to 1869. As we can see, this is consistent with the theory: after opening to trade, the relative prices of major exports such as silk increased (Japan exported what was cheap for them to produce and which was valuable abroad), while the relative price of imports such as sugar declined (they imported what was relatively more difficult for them to produce, but was cheap abroad).

Trade diminishes with distance

The resistance that geography imposes on trade has long been studied in the empirical economics literature – and the main conclusion is that trade intensity is strongly linked to geographic distance.

The visualization, from Eaton and Kortum (2002), graphs 'normalized import shares' against distance. 32 Each dot represents a country pair from a set of 19 OECD countries, and both the vertical and horizontal axes are expressed on logarithmic scales.

The 'normalized import shares' in the vertical axis provide a measure of how much each country imports from different partners (see the paper for details on how this is calculated and normalized), while the distance in the horizontal axis corresponds to the distance between central cities in each country (see the paper and references therein for details on the list of cities). As we can see, there is a strong negative relationship. Trade diminishes with distance. Through econometric modeling, the paper shows that this relationship is not just a correlation driven by other factors: their findings suggest that distance imposes a significant barrier to trade.

The fact that trade diminishes with distance is also corroborated by data on trade intensity within countries. The visualization here shows, through a series of maps, the geographic distribution of French firms that export to France's neighboring countries. The colors reflect the percentage of firms that export to each specific country.

As we can see, the share of firms exporting to each of the corresponding neighbors is the largest close to the border. The authors also show in the paper that this pattern holds for the value of individual-firm exports – trade value decreases with distance to the border.

Institutions

Conducting international trade requires both financial and non-financial institutions to support transactions. Some of these institutions are fairly obvious (e.g. law enforcement); but some are less obvious. For example, the evidence shows that producers in exporting countries often need credit in order to engage in trade.

The scatter plot, from Manova (2013), shows the correlation between levels in private credit (specifically exporters’ private credit as a share of GDP) and exports (average log bilateral exports across destinations and sectors). 34 As can be seen, financially developed economies – those with more dynamic private credit markets – typically outperform exporters with less evolved financial institutions.

Other studies have shown that country-specific institutions, like the knowledge of foreign languages, for instance, are also important to promote foreign relative to domestic trade. 35

Increasing returns to scale

The concept of comparative advantage predicts that if all countries had identical endowments and institutions, there would be little incentive for specialization because the opportunity cost of producing any good would be the same in every country.

So you may wonder: why is it then the case that in the last few years, we have seen such rapid growth in intra-industry trade between rich countries?

The increase in intra-industry between rich countries seems paradoxical under the light of comparative advantage because in recent decades we have seen convergence in key factors, such as human capital , across these countries.

The solution to the paradox is actually not very complicated: Comparative advantage is one, but not the only force driving incentives to specialization and trade.

Several economists, most notably Paul Krugman, have developed theories of trade in which trade is not due to differences between countries, but instead due to "increasing returns to scale" – an economic term used to denote a technology in which producing extra units of a good becomes cheaper if you operate at a larger scale.

The idea is that specialization allows countries to reap greater economies of scale (i.e. to reduce production costs by focusing on producing large quantities of specific products), so trade can be a good idea even if the countries do not differ in endowments, including culture and institutions.

These models of trade, often referred to as “New Trade Theory”, are helpful in explaining why in the last few years we have seen such rapid growth in two-way exchanges of goods within industries between developed nations.

In a much-cited paper, Evenett and Keller (2002) show that both factor endowments and increasing returns help explain production and trade patterns around the world. 36

You can learn more about New Trade Theory, and the empirical support behind it, in Paul Krugman's Nobel lecture .

Measurement and data quality

There are dozens of official sources of data on international trade, and if you compare these different sources, you will find that they do not agree with one another. Even if you focus on what seems to be the same indicator for the same year in the same country, discrepancies are large.

Such differences between sources can also be found in rich countries where statistical agencies tend to follow international reporting guidelines more closely.

There are also large bilateral discrepancies within sources: the value of goods that country A exports to country B can be more than the value of goods that country B imports from country A.

Here we explain how international trade data is collected and processed, and why there are such large discrepancies.

What data is available?

The data hubs from several large international organizations publish and maintain extensive cross-country datasets on international trade. Here's a list of the most important ones:

• World Bank Open Data
• WTO Statistics
• UN Comtrade
• UNCTAD World Integrated Trade Solutions

In addition to these sources, there are also many other academic projects that publish data on international trade. These projects tend to rely on data from one or more of the sources above, and they typically process and merge series in order to improve coverage and consistency. Three important sources are:

• The Correlates of War Project . 37
• The NBER-United Nations Trade Dataset Project .
• The CEPII Bilateral Trade and Gravity Data Project . 38

How large are the discrepancies between sources?

In the visualization here, we compare the data published by several of the sources listed above, country by country, from 1955 to today.

For each country, we exclude trade in services, and we focus only on estimates of the total value of exported goods, expressed as shares of GDP. 39

As this chart clearly shows, different data sources often tell very different stories. If you change the country or region shown you will see that this is true, to varying degrees, across all countries and years.

Constructing this chart was demanding. It required downloading trade data from many different sources, collecting the relevant series, and then standardizing them so that the units of measure and the geographical territories were consistent.

All series, except the two long-run series from CEPII and NBER-UN, were produced from data published by the sources in current US dollars and then converted to GDP shares using a unique source (World Bank).

So, if all series are in the same units (share of national GDP) and they measure the same thing (value of goods exported from one country to the rest of the world), what explains the differences?

Let's dig deeper to understand what's going on.

Why doesn't the data add up?

Differences in guidelines used by countries to record and report trade data.

Broadly speaking, there are two main approaches used to estimate international merchandise trade:

• The first approach relies on estimating trade from customs records , often complementing or correcting figures with data from enterprise surveys and administrative records associated with taxation. The main manual providing guidelines for this approach is the International Merchandise Trade Statistics Manual (IMTS).
• The second approach relies on estimating trade from macroeconomic data , typically National Accounts . The main manual providing guidelines for this approach is the Balance of Payments and International Investment Position Manual (BPM6), which was drafted in parallel with the 2008 System of National Accounts of the United Nations (SNA 2008). The idea behind this approach is to record changes in economic ownership. 40

Under these two approaches, it is common to distinguish between 'traded merchandise' and 'traded goods'. The distinction is often made because goods simply being transported through a country (i.e., goods in transit) are not considered to change a country's stock of material resources and are hence often excluded from the more narrow concept of 'merchandise trade'.

Also, adding to the complexity, countries often rely on measurement protocols developed alongside approaches and concepts that are not perfectly compatible to begin with. In Europe, for example, countries use the 'Compilers guide on European statistics on international trade in goods'.

Measurement error and other inconsistencies

Even when two sources rely on the same broad accounting approach, discrepancies arise because countries fail to adhere perfectly to the protocols.

In theory, for example, the exports of country A to country B should mirror the imports of country B from country A. But in practice this is rarely the case because of differences in valuation. According to the BPM6, imports, and exports should be recorded in the balance of payments accounts on a ' free on board (FOB) basis', which means using prices that include all charges up to placing the goods on board a ship at the port of departure. Yet many countries stick to FOB values only for exports, and use CIF values for imports (CIF stands for 'Cost, Insurance and Freight', and includes the costs of transportation). 41

The chart here gives you an idea of how large import-export asymmetries are. Shown are the differences between the value of goods that each country reports exporting to the US, and the value of goods that the US reports importing from the same countries. For example, for China, the figure in the chart corresponds to the “Value of merchandise imports in the US from China” minus the “Value of merchandise exports from China to the US”.

The differences in the chart here, which are both positive and negative, suggest that there is more going on than differences in FOB vs. CIF values. If all asymmetries were coming from FOB-CIF differences, then we should only see positive values in the chart (recall that, unlike FOB values, CIF values include the cost of transportation, so CIF values are larger).

What else may be going on here?

Another common source of measurement error relates to the inconsistent attribution of trade partners. An example is failure to follow the guidelines on how to treat goods passing through intermediary countries for processing or merchanting purposes. As global production chains become more complex, countries find it increasingly difficult to unambiguously establish the origin and final destination of merchandise, even when rules are established in the manuals. 42

And there are still more potential sources of discrepancies. For example differences in customs and tax regimes, and differences between "general" and "special" trade systems (i.e. differences between statistical territories and actual country borders, which do not often coincide because of things like 'custom free zones'). 43

Even when two sources have identical trade estimates, inconsistencies in published data can arise from differences in exchange rates. If a dataset reports cross-country trade data in US dollars, estimates will vary depending on the exchange rates used. Different exchange rates will lead to conflicting estimates, even if figures in local currency units are consistent.

A checklist for comparing sources

Asymmetries in international trade statistics are large and arise for a variety of reasons. These include conceptual inconsistencies across measurement standards and inconsistencies in the way countries apply agreed-upon protocols. Here's a checklist of issues to keep in mind when comparing sources.

• Differences in underlying records: is trade measured from National Accounts data rather than directly from custom or tax records?
• Differences in import and export valuations: are transactions valued at FOB or CIF prices?
• Inconsistent attribution of trade partners: how is the origin and final destination of merchandise established?
• Difference between 'goods' and 'merchandise': how are re-importing, re-exporting, and intermediary merchanting transactions recorded?
• Exchange rates: how are values converted from local currency units to the currency that allows international comparisons (most often the US-$)?
• Differences between 'general' and 'special' trade system: how is trade recorded for custom-free zones?
• Other issues: Time of recording, confidentiality policies, product classification, deliberate mis-invoicing for illicit purposes.

Many organizations producing trade data have long recognized these factors. Indeed, international organizations often incorporate corrections in an attempt to improve data quality.

The OECD's Balanced International Merchandise Trade Statistics , for example, uses its own approach to correct and reconcile international merchandise trade statistics. 44

The corrections applied in the OECD's 'balanced' series make this the best source for cross-country comparisons. However, this dataset has low coverage across countries, and it only goes back to 2011. This is an important obstacle since the complex adjustments introduced by the OECD imply we can't easily improve coverage by appending data from other sources. At Our World in Data we have chosen to rely on CEPII as the main source for exploring long-run changes in international trade, but we also rely on World Bank and OECD data for up-to-date cross-country comparisons.

There are two key lessons from all of this. The first lesson is that, for most users of trade data out there, there is no obvious way of choosing between sources. And the second lesson is that, because of statistical glitches, researchers and policymakers should always take analyses of trade data with a pinch of salt. For example, in a recent high-profile report , researchers attributed mismatches in bilateral trade data to illicit financial flows through trade mis-invoicing (or trade-based money laundering). As we show here, this interpretation of the data is not appropriate, since mismatches in the data can, and often do arise from measurement inconsistencies rather than malfeasance. 45

Hopefully, the discussion and checklist above can help researchers better interpret and choose between conflicting data sources.

Interactive charts on Trade and Globalization

The openness index, when calculated for the world as a whole, includes double-counting of transactions: When country A sells goods to country B, this shows up in the data both as an import (B imports from A) and as an export (A sells to B).

Indeed, if you compare the chart showing the global trade openness index and the chart showing global merchandise exports as a share of GDP , you find that the former is almost twice as large as the latter.

Why is the global openness index not exactly twice the value reported in the chart plotting global merchandise exports? There a three reasons.

First, the global openness index uses different sources. Second, the global openness index includes trade in goods and services, while merchandise exports include goods but not services. And third, the amount that country A reports exporting to country B does not usually match the amount that B reports importing from A.

We explore this in more detail in our measurement section .

Leonor Freire Costa, Nuno Palma, and Jaime Reis (2015) – The great escape? The contribution of the empire to Portugal's economic growth, 1500–1800 Leonor Freire Costa Nuno Palma Jaime Reis European Review of Economic History, Volume 19, Issue 1, 1 February 2015, Pages 1–22, https://doi.org/10.1093/ereh/heu019

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press.

Integration in the goods markets is measured here through the 'trade openness index', which is defined by the sum of exports and imports as a share of GDP. In our interactive chart you can explore trends in trade openness over this period for a selection of European countries.

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press. The graph depicts the “evolution of three indicators measuring integration in commodity, labor, and capital markets over the long run. Commodity market integration is measured by computing the ratio of exports to GDP. Labor market integration is measured by dividing the migratory turnover by population. Financial integration is measured using Feldstein–Horioka estimators of current account disconnectedness.”

We also have the same chart but showing imports .

We also have the same chart, but showing imports .

This interactive chart shows trade in services as a share of GDP across countries and regions.

This chart was inspired by a chart from Helpman, E., Melitz, M., & Rubinstein, Y. (2007). Estimating trade flows: Trading partners and trading volumes (No. w12927). National Bureau of Economic Research.

We also have the same data, but as a stacked-area chart .

There are different ways of capturing this correlation. I focus here on all countries with data over the period 1945-2014. You can find a similar chart using different data sources and time periods in Ventura, J. (2005). A global view of economic growth. Handbook of economic growth, 1, 1419-1497. Online here .

The textbook The Economy: Economics for a Changing World explains this in more detail.

Frankel, J. A., & Romer, D. H. (1999). Does trade cause growth? American Economic Review, 89(3), 379-399.

Alcalá, F., & Ciccone, A. (2004). Trade and productivity . The Quarterly Journal of Economics, 119(2), 613-646.

There are many papers that try to answer this specific question with macro data. For an overview of papers and methods see: Durlauf, S. N., Johnson, P. A., & Temple, J. R. (2005). Growth econometrics. Handbook of economic growth, 1, 555-677.

Pavcnik, N. (2002). Trade liberalization, exit, and productivity improvements: Evidence from Chilean plants . The Review of Economic Studies, 69(1), 245-276.

Bloom, N., Draca, M., & Van Reenen, J. (2016). Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity. The Review of Economic Studies, 83(1), 87-117. Available online here .

You can read more about these economic concepts, and the related predictions from economic theory, in Chapter 18 of the textbook The Economy: Economics for a Changing World .

David, H., Dorn, D., & Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States . American Economic Review, 103(6), 2121-68.

It's important to mention here that the economist Jonathan Rothwell wrote a paper suggesting these findings are the result of a statistical illusion. Rothwell's critique received some attention from the media , but Autor and coauthors provided a reply , which I think successfully refutes this claim.

Magyari, I. (2017). Firm Reorganization, Chinese Imports, and US Manufacturing Employment . US Census Bureau, Center for Economic Studies.

Topalova, P. (2010). Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India . American Economic Journal: Applied Economics, 2(4), 1-41.

Donaldson, D. (2018). Railroads of the Raj: Estimating the impact of transportation infrastructure . American Economic Review, 108(4-5), 899-934.

Porto, G (2006). Using Survey Data to Assess the Distributional Effects of Trade Policy. Journal of International Economics 70 (2006) 140–160.

Trefler, D. (2004). The long and short of the Canada-US free trade agreement . American Economic Review, 94(4), 870-895.

See: (i) Feenstra, R. C., & Weinstein, D. E. (2017). Globalization, markups, and US welfare . Journal of Political Economy, 125(4), 1040-1074. (ii) Fajgelbaum, P. D., & Khandelwal, A. K. (2016). Measuring the unequal gains from trade . The Quarterly Journal of Economics, 131(3), 1113-1180.

Atkin, David, Benjamin Faber, and Marco Gonzalez-Navarro. "Retail globalization and household welfare: Evidence from Mexico." Journal of Political Economy 126.1 (2018): 1-73.

In the paper, Atkin and coauthors explore the reasons for this and find that the regressive nature of the distribution is mainly due to richer households placing higher weight on the product variety and shopping amenities on offer at these new foreign stores.

Berlingieri, G., Breinlich, H., & Dhingra, S. (2018). The Impact of Trade Agreements on Consumer Welfare—Evidence from the EU Common External Trade Policy. Journal of the European Economic Association.

Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam: "Name me one proposition in all of the social sciences which is both true and non-trivial." It was several years later than he thought of the correct response: comparative advantage. "That it is logically true need not be argued before a mathematician; that is is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

(NB. This is an excerpt from https://www.wto.org/english/res_e/reser_e/cadv_e.htm)

Bernhofen, D., & Brown, J. (2004). A Direct Test of the Theory of Comparative Advantage: The Case of Japan. Journal of Political Economy, 112(1), 48-67. doi:1. Retrieved from http://www.jstor.org/stable/10.1086/379944 doi:1

Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5), 1741-1779.

Crozet, M., & Koenig, P. (2010). Structural Gravity Equations with Intensive and Extensive Margins. The Canadian Journal of Economics / Revue Canadienne D'Economique, 43(1), 41-62. Retrieved from http://www.jstor.org/stable/40389555

Manova, Kalina. "Credit constraints, heterogeneous firms, and international trade." The Review of Economic Studies 80.2 (2013): 711-744.

Melitz, J. (2008). Language and foreign trade. European Economic Review, 52(4), 667-699.

Evenett, S. J., & Keller, W. (2002). On theories explaining the success of the gravity equation . Journal of Political Economy, 110(2), 281-316.

For more information on how the COW trade datasets were constructed see: (i) Barbieri, Katherine, and Omar M. G. Omar Keshk. 2016. Correlates of War Project Trade Data Set Codebook, Version 4.0. Available at http://correlatesofwar.org and (ii) Barbieri, Katherine, Omar M. G. Keshk, and Brian Pollins. 2009. TRADING DATA: Evaluating our Assumptions and Coding Rules. Conflict Management and Peace Science, 26(5): 471–491.

Further information on CEPII's methodology can be found in their working paper .

The chart includes series labeled by the sources as 'merchandise trade' and 'goods trade'. As we explain below, part of the asymmetries in trade data comes from the fact that, although 'merchandise' and 'goods' are equivalent in the dictionary, these two terms often measure related but different things.

For example, if there is no change in ownership (e.g. a firm exports goods to its factory in another country for processing, and then re-imports the processed goods) the manual says that statistical agencies should only record the net difference in value. You can find more details about this in an OECD Statistics Briefing .

This issue is actually also a source of disagreement between National Accounts data and customs data. You can read more about it in this report: Harrison, Anne (2013) FOB/CIF Issue in Merchandise Trade/Transport of Goods in BPM6 and the 2008 SNA, Twenty-Fifth Meeting of the IMF Committee on Balance of Payments Statistics, Washington, D.C .

Precisely because of the difficulty that arises when trying to establish the origin and final destination of merchandise, some sources distinguish between national and dyadic (i.e. 'directed') trade estimates.

For more details about general and special trade see the Eurostat glossary .

The OECD approach consists of four steps, which they describe as follows: "First, data are collected and organized, and imports are converted to FOB prices to match the valuation of exports. Secondly, data are adjusted for several specific large problems known to drive asymmetries. Presently these include “modular” adjustments for unallocated and confidential trade; for exports by Hong Kong, China; for Swiss non-monetary gold; and for clear-cut cases of product misclassifications. The list of modules is expected to grow over time. In the third step, adjusted data are balanced using a “Symmetry Index” that weights exports and imports. As the final step, the data are also converted to Classification of Products by Activity (CPA) products to better align with National Accounts statistics, such as in national Supply-Use tables." You can read more about it here . In addition to the OECD, other sources also use corrections. The IMF's DOTS dataset, for example, uses a 6 percent rule for converting import valuations (in CIF) into export values (in FOB). More information can be found in the IMF's (2018) working paper on 'New Estimates for Direction of Trade Statistics'.

For more details on this see Forstater, M. (2018) Illicit Financial Flows, Trade Misinvoicing, and Multinational Tax Avoidance: The Same or Different? , CGD Policy Paper 123.

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• Library of Congress
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Globalization: A Resource Guide

Defining globalization.

• Introduction
• Historical Analysis
• History of International Economics & Trade
• History of International Finance & Global Markets
• Elements of Globalization
• Trends in Globalization
• Globalization and Pandemics
• Organizations & Research Institutions
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• Using the Library of Congress

Literature about globalization is produced by sociologists, political theorists, economists, historians, anthropologists, and journalists. Globalization is a term variously employed, even by experts within a single discipline. There is substantial debate, not only about its definition, but also about its significance, and how it shapes our world. Most agree that globalization rests upon, or simply is, the growth in international exchange of goods, services, and capital, and the increasing levels of integration that characterize economic activity. In this sense, globalization, is only another word for internationalization. Importantly, it is economic activity that is fuel and furnace of cross-border integration.

Listed below are books and online resources that help researchers understand globalization and related concepts. The following materials link to fuller bibliographic information in the  Library of Congress Online Catalog . Links to digital content are provided when available.

The following internet resources provide further definition of the topic of globalization.

• Globalization (Stanford Encyclopedia of Philosophy) External An online encyclopedia that provides a comprehensive analysis on the history of globalization, covering: 1. Globalization in the History of Ideas; 2. Globalization in Contemporary Social Theory; 3. Normative Challenges of Globalization; Bibliography; and Other Internet Resources.
• What Is Globalization? And How Has the Global Economy Shaped the United States? External An online guide by Peterson Institute for International Economics. "After centuries of technological progress and advances in international cooperation, the world is more connected than ever. But how much has the rise of trade and the modern global economy helped or hurt American businesses, workers, and consumers? Here is a basic guide to the economic side of this broad and much debated topic, drawn from current research."--Publisher description.
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• December 2014

Market Competition, Earnings Management, and Persistence in Accounting Profitability Around the World

We examine how cross-country differences in product, capital, and labor market competition, and earnings management affect mean reversion in accounting return on assets. Using a sample of 48,465 unique firms from 49 countries, we find that accounting returns mean revert faster in countries where there is more product and capital market competition, as predicted by economic theory. Country differences in labor market competition and earnings management are also related to mean reversion in accounting returns—but the relation varies with firm performance. Country labor competition increases mean reversion when unexpected returns are positive, but dampens it when unexpected returns are negative. Accounting returns in countries with higher earnings management mean revert more slowly for profitable firms and more rapidly for loss firms. Thus, earnings management incentives to slow or speed up mean reversion in accounting returns are accentuated in countries where there is a high propensity for earnings management. Overall, these findings suggest that country factors explain mean reversion in accounting returns and are therefore relevant for firm valuation.

We examine how cross-country differences in product, capital, and labor market competition, and earnings management affect mean reversion in accounting return on assets. Using a sample of 48,465 unique firms from 49 countries, we find that accounting returns mean revert faster in countries where there is more product and capital market...

Spanning the Institutional Abyss: The Intergovernmental Network and the Governance of Foreign Direct Investment

Global economic transactions such as foreign direct investment must extend over an institutional abyss between the jurisdiction, and therefore protection, of the states involved. Intergovernmental organizations (IGOs), whose members are states, represent an important attempt to span this abyss. IGOs are mandated variously to smooth economic transactions, facilitate global cooperation, and promote cultural contact and awareness. We use a network approach to demonstrate that the connections between two countries through joint-membership in the same IGOs are associated with a large positive influence on the foreign direct investment that flows between them. Moreover, we show that this effect occurs not only in the case of IGOs that focus on economic issues, but also on those with social and cultural mandates. This demonstrates that relational governance is important and feasible in the global context and for the most risky transactions. Finally we examine the interdependence between the IGO network and the domestic institutions of states. The interdependence between these global and domestic institutional forms is complex, with target-country democracy being a substitute for economic IGOs, but a complement for social and cultural IGOs.

Global economic transactions such as foreign direct investment must extend over an institutional abyss between the jurisdiction, and therefore protection, of the states involved. Intergovernmental organizations (IGOs), whose members are states, represent an important attempt to span this abyss. IGOs are mandated variously to smooth economic...

Ethnic Innovation and U.S. Multinational Firm Activity

This paper studies the impact that immigrant innovators have on the global activities of U.S. firms by analyzing detailed data on patent applications and on the operations of the foreign affiliates of U.S. multinational firms. The results indicate that increases in the share of a firm's innovation performed by inventors of a particular ethnicity are associated with increases in the share of that firm's affiliate activity in their native countries. Ethnic innovators also appear to facilitate the disintegration of innovative activity across borders and to allow U.S. multinationals to form new affiliates abroad without the support of local joint venture partners. Thus, this paper points out that immigration can enhance the competitiveness of multinational firms.

This paper studies the impact that immigrant innovators have on the global activities of U.S. firms by analyzing detailed data on patent applications and on the operations of the foreign affiliates of U.S. multinational firms. The results indicate that increases in the share of a firm's innovation performed by inventors of a particular ethnicity...

Multinational Enterprises and Incomplete Institutions: The Demandingness of Minimum Moral Standards

Multinational enterprises (MNEs) operate across countries that vary widely in their legal, political, and regulatory institutions. One question that arises is whether there are certain minimum standards that ought to guide managers in their decision making independently of local institutional requirements, especially when institutional arrangements are incomplete. This chapter examines what follows if managers recognize two kinds of duties of forbearance in their decision making that are commonly held to be among the most minimal of moral duties: the duty not to harm and the duty not to violate the liberty of others. The chapter concludes that the standards for MNEs may be more demanding than what the minimalist nature of duties of forbearance initially would suggest.

Multinational enterprises (MNEs) operate across countries that vary widely in their legal, political, and regulatory institutions. One question that arises is whether there are certain minimum standards that ought to guide managers in their decision making independently of local institutional requirements, especially when institutional...

• Working Paper

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions

We examine the heterogeneous effects of globalization on the interest rate setting by microfinance institutions (MFIs) around the world. We consider MFIs as a mechanism to overcome the institutional void of credit for small entrepreneurs in developing and emerging economies. Using a large global panel of MFIs from 119 countries, we find that social globalization that embraces egalitarian institutions on average reduces MFIs' interest rates. In contrast, economic globalization that embraces neoliberal institutions on average increases MFIs' interest rates. Moreover, the proportions of female borrowers and of poorer borrowers negatively moderate the relationship between social globalization and MFI interest rate, and positively moderate the relationship between economic globalization and MFI interest rate. This paper contributes to understanding how globalization processes can both ameliorate and exacerbate challenges of institutional voids in emerging and developing economies.

We examine the heterogeneous effects of globalization on the interest rate setting by microfinance institutions (MFIs) around the world. We consider MFIs as a mechanism to overcome the institutional void of credit for small entrepreneurs in developing and emerging economies. Using a large global panel of MFIs from 119 countries, we find that...

Global Initiative

The globalization of business has long encouraged Harvard Business School (HBS) faculty to research international business practices and the effects of globalization. Seminal contributions - Christopher Bartlett on managing across borders , Michael Porter on competition in global industries , and Louis Wells on foreign investment in emerging markets - helped pave today’s global research path. Supported by eight Global Research Centers that facilitate our contact with global companies and the collection of international data, key investigations concentrate on the effectiveness of management practices in global organizations; cross-cultural learning and adaptation processes; the challenges of taking companies global; emerging-market companies with global potential; and international political economy and its impact on economic development.

The Global Initiative builds on a legacy of global engagement by supporting faculty, students, and alumni in their work, and encouraging a global outlook in research, study, and practice.

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From 'BIG' Ideas to Sustainable Impact at ICL Group (A)

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Funderbeam: Teaming Up or Going Alone?

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What the Rise of Far-Right Politics Says About the Economy in an Election Year

• 12 Dec 2023

COVID Tested Global Supply Chains. Here’s How They’ve Adapted

• 17 Aug 2020

Of Learning and Forgetting: Centrism, Populism, and the Legitimacy Crisis of Globalization

Harvard business publishing.

• August 29, 2017

How to Successfully Work Across Countries, Languages, and Cultures

Effects of Economic Globalization

Globalization has led to increases in standards of living around the world, but not all of its effects are positive for everyone.

Social Studies, Economics, World History

Bangladesh Garment Workers

The garment industry in Bangladesh makes clothes that are then shipped out across the world. It employs as many as four million people, but the average worker earns less in a month than a U.S. worker earns in a day.

Photograph by Mushfiqul Alam

Put simply, globalization is the connection of different parts of the world. In economics, globalization can be defined as the process in which businesses, organizations, and countries begin operating on an international scale. Globalization is most often used in an economic context, but it also affects and is affected by politics and culture. In general, globalization has been shown to increase the standard of living in developing countries, but some analysts warn that globalization can have a negative effect on local or emerging economies and individual workers. A Historical View Globalization is not new. Since the start of civilization, people have traded goods with their neighbors. As cultures advanced, they were able to travel farther afield to trade their own goods for desirable products found elsewhere. The Silk Road, an ancient network of trade routes used between Europe, North Africa, East Africa, Central Asia, South Asia, and the Far East, is an example of early globalization. For more than 1,500 years, Europeans traded glass and manufactured goods for Chinese silk and spices, contributing to a global economy in which both Europe and Asia became accustomed to goods from far away. Following the European exploration of the New World, globalization occurred on a grand scale; the widespread transfer of plants, animals, foods, cultures, and ideas became known as the Columbian Exchange. The Triangular Trade network in which ships carried manufactured goods from Europe to Africa, enslaved Africans to the Americas, and raw materials back to Europe is another example of globalization. The resulting spread of slavery demonstrates that globalization can hurt people just as easily as it can connect people. The rate of globalization has increased in recent years, a result of rapid advancements in communication and transportation. Advances in communication enable businesses to identify opportunities for investment. At the same time, innovations in information technology enable immediate communication and the rapid transfer of financial assets across national borders. Improved fiscal policies within countries and international trade agreements between them also facilitate globalization. Political and economic stability facilitate globalization as well. The relative instability of many African nations is cited by experts as one of the reasons why Africa has not benefited from globalization as much as countries in Asia and Latin America. Benefits of Globalization Globalization provides businesses with a competitive advantage by allowing them to source raw materials where they are inexpensive. Globalization also gives organizations the opportunity to take advantage of lower labor costs in developing countries, while leveraging the technical expertise and experience of more developed economies. With globalization, different parts of a product may be made in different regions of the world. Globalization has long been used by the automotive industry , for instance, where different parts of a car may be manufactured in different countries. Businesses in several different countries may be involved in producing even seemingly simple products such as cotton T-shirts. Globalization affects services, too. Many businesses located in the United States have outsourced their call centers or information technology services to companies in India. As part of the North American Free Trade Agreement (NAFTA), U.S. automobile companies relocated their operations to Mexico, where labor costs are lower. The result is more jobs in countries where jobs are needed, which can have a positive effect on the national economy and result in a higher standard of living. China is a prime example of a country that has benefited immensely from globalization. Another example is Vietnam, where globalization has contributed to an increase in the prices for rice, lifting many poor rice farmers out of poverty. As the standard of living increased, more children of poor families left work and attended school. Consumers benefit also. In general, globalization decreases the cost of manufacturing . This means that companies can offer goods at a lower price to consumers. The average cost of goods is a key aspect that contributes to increases in the standard of living. Consumers also have access to a wider variety of goods. In some cases, this may contribute to improved health by enabling a more varied and healthier diet; in others, it is blamed for increases in unhealthy food consumption and diabetes. Downsides Not everything about globalization is beneficial. Any change has winners and losers, and the people living in communities that had been dependent on jobs outsourced elsewhere often suffer. Effectively, this means that workers in the developed world must compete with lower-cost markets for jobs; unions and workers may be unable to defend against the threat of corporations that offer the alternative between lower pay or losing jobs to a supplier in a less expensive labor market. The situation is more complex in the developing world, where economies are undergoing rapid change. Indeed, the working conditions of people at some points in the supply chain are deplorable. The garment industry in Bangladesh, for instance, employs an estimated four million people, but the average worker earns less in a month than a U.S. worker earns in a day. In 2013, a textile factory building collapsed, killing more than 1,100 workers. Critics also suggest that employment opportunities for children in poor countries may increase negative impacts of child labor and lure children of poor families away from school. In general, critics blame the pressures of globalization for encouraging an environment that exploits workers in countries that do not offer sufficient protections. Studies also suggest that globalization may contribute to income disparity and inequality between the more educated and less educated members of a society. This means that unskilled workers may be affected by declining wages, which are under constant pressure from globalization. Into the Future Regardless of the downsides, globalization is here to stay. The result is a smaller, more connected world. Socially, globalization has facilitated the exchange of ideas and cultures, contributing to a world view in which people are more open and tolerant of one another.

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globalization

globalization , integration of the world’s economies, politics, and cultures. German-born American economist Theodore Levitt has been credited with having coined the term globalization in a 1983 article titled “The Globalization of Markets.” The phenomenon is widely considered to have begun in the 19th century following the advent of the Industrial Revolution , but some scholars date it more specifically to about 1870, when exports became a much more significant share of some countries’ gross domestic product (GDP). Its continued escalation is largely attributable to the development of new technologies—particularly in the fields of communication and transportation—and to the adoption of liberal trade policies by countries around the world.

Social scientists have identified the central aspects of globalization as interconnection, intensification, time-space distanciation (conditions that allow time and space to be organized in a manner that connects presence and absence), supraterritoriality, time-space compression, action at a distance, and accelerating interdependence. Modern analysts also conceive of globalization as a long-term process of deterritorialization—that is, of social activities (economic, political, and cultural) occurring without regard for geographic location. Thus, globalization can be defined as the stretching of economic, political, and social relationships in space and time. A manufacturer assembling a product for a distant market , a country submitting to international law , and a language adopting a foreign loanword are all examples of globalization.

Of course history is filled with such occurrences: Chinese artisans once wove silk bound for the Roman Empire ( see Silk Road ); kingdoms in western Europe honoured dictates of the Roman Catholic Church ; and English adopted many Norman French words in the centuries after the Battle of Hastings . These interactions and others laid the groundwork for globalization and are now recognized by historians and economists as important predecessors of the modern phenomenon. Analysts have labeled the 15th to 18th century as a period of “proto-globalization,” when European explorers established maritime trade routes across the Atlantic and Pacific oceans and encountered new lands. Integration prior to this time has been characterized as “archaic globalization.”

What distinguishes the process of modern globalization from those forms of global integration that preceded it are its pace and extent. According to some academics, three distinct eras of modern globalization can be identified, each of them marked by points of sudden acceleration in international interaction. Under this scheme, the “first globalization” era refers to the period between approximately 1870 and 1914, during which new transportation and communication technology decreased or eliminated many of the drawbacks to distance. The “second globalization” era is said to have lasted from roughly 1944 to 1971, a period in which an international monetary system based on the value of the U.S. dollar facilitated a new level of trade between capitalist countries. And the “third globalization” era is thought to have begun with the revolutions of 1989–90, which opened the communist Eastern bloc to the flow of capital and coincided with the creation of the World Wide Web . Some scholars argue that a new period of globalization, the “fourth globalization,” is underway, but there is little consensus on when this era began or whether it is truly distinct enough to merit its own designation.

New levels of interconnectedness fostered by globalization are credited for numerous benefits to humanity. The spread of industrial technology and the resulting increase in productivity have contributed to a reduction in the percentage of the world’s population living in poverty. The sharing of medical knowledge has dramatically decreased the incidence of once-feared diseases and even eliminated smallpox. And economic interdependence among countries discourages war between them.

However, the implementation of globalization has been much criticized, leading to the development of the anti-globalization movement. Opponents of globalization—or at least, globalization in its present form ( see neoliberal globalization )—represent a variety of interests on both the political left and right. Labour unions disdain multinational companies’ ability to move their operations to countries with cheaper labour; Indigenous peoples rue the difficulty of maintaining their traditions; and leftists object to the neoliberal character of the new world economy, arguing that the capitalist logic on which they contend globalization is based leads to asymmetrical power relations (both internationally and domestically) and transforms every aspect of life into a commodity. Right-wing critics of globalization believe that it threatens both national economies and national identity. They advocate national control of a country’s economy and rigidly restricted immigration.

Globalization has also produced effects that are more universally worrisome. Expanded transportation networks facilitate not only increased trade but also the spread of diseases. Undesirable trade, such as human trafficking and poaching, has flourished alongside legitimate commerce. Moreover, the pollution generated by the world’s modernization has resulted in global warming and climate change , threatening Earth’s very habitability.

Whether globalization will adapt to these problems remains to be seen, but it is already changing again. For example, globalization began in the 19th century with an explosion in exports, but, even before the COVID-19 pandemic that swept through the world in 2020 resulted in global lockdowns, trade as a share of many countries’ GDP had fallen. It can be argued that the global supply chains today rely more on knowledge than on labour . And services now constitute a larger share of the global economy than goods. A “fourth globalization” might indeed be here—or at least on the way.

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The Effect of Globalization on Economic Growth: Evidence From Emerging Economies

• August 2018
• In book: Emerging Economic Models for Global Sustainability and Social Development
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• 21 May 2024
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What Is Globalization?

• How It Works
• Pros & Cons

The Bottom Line

• Macroeconomics

Globalization in Business With History and Pros and Cons

Globalization refers to the growing interconnection of nations' economies. It represents the flow of financial products, goods, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of countries around the globe fostered through free trade .

Key Takeaways

• Globalization is the spread of products, technology, information, and jobs across nations.
• Corporations in developed nations can gain a competitive edge through globalization.
• Developing countries also benefit from globalization as they tend to be more cost-effective locations and therefore attract jobs.
• The benefits of globalization have been questioned as the positive effects are not necessarily distributed equally.
• One clear result of globalization is that an economic downturn in one country can have a domino effect on its trade partners.

Alex Dos Diaz / Investopedia

Understanding Globalization

Corporations gain a competitive advantage on multiple fronts from globalization. They can reduce operating costs by manufacturing abroad, buy raw materials more cheaply because of the reduction or removal of tariffs , and most of all, gain access to millions of new consumers.

What Globalization Means

Globalization is a social, cultural, political, and legal phenomenon. 

• Socially, it leads to greater interaction among various populations.
• Culturally, globalization represents the exchange of ideas, values, and artistic expression among cultures.
• Globalization also represents a trend toward the development of a single world culture. 
• Politically, globalization has shifted attention to intergovernmental organizations like the United Nations (UN) and the World Trade Organization (WTO) .
• Legally, globalization has altered how international law is created and enforced.

On the one hand, globalization has created new jobs and economic growth through the cross-border flow of goods, capital, and labor. On the other hand, this growth and job creation are not distributed evenly across industries or countries.

Specific industries in certain countries, such as textile manufacturing in the United States or corn farming in Mexico, have suffered severe disruption or outright collapse as a result of increased international competition.

Globalization's motives are idealistic, as well as opportunistic, but the development of a global free market has benefited large corporations based in the Western world. Its impact remains mixed for workers, cultures, and small businesses around the globe, in both developed and emerging nations .

Globalization has grown at an unprecedented pace, with public policy changes and communications technology innovations cited as the two main driving factors.

The History of Globalization

Globalization is not a new concept. Traders traveled vast distances in ancient times to buy commodities that were rare and expensive for sale in their homelands. The Industrial Revolution brought advances in transportation and communication in the 19th century that eased trade across borders.

The think tank Peterson Institute for International Economics (PIIE) states globalization stalled after World War I. Nations moved toward protectionism as they launched import taxes to guard their industries in the aftermath of the conflict. This trend continued through the Great Depression and World War II until the U.S. took on an instrumental role in reviving international trade .

One of the critical steps in the path to globalization came with the North American Free Trade Agreement (NAFTA) , signed in 1993. One of NAFTA's many effects was to give American auto manufacturers the incentive to relocate a portion of their manufacturing to Mexico where they could save on the costs of labor. NAFTA was replaced in 2020 by the United States-Mexico-Canada Agreement (USMC) .

Governments worldwide have integrated a free market economic system through  fiscal policies  and trade agreements in the 20th century. The core of most trade agreements is the removal or reduction of tariffs.

This evolution of economic systems has increased industrialization and financial opportunities in many nations. Governments now focus on removing barriers to trade and promoting international commerce.

Pros and Cons of Globalization

• Proponents of globalization believe it allows developing countries to catch up to industrialized nations through increased manufacturing, diversification, economic expansion, and improvements in standards of living .
• Outsourcing by companies brings jobs and technology to developing countries, which helps them to grow their economies. Trade initiatives increase cross-border trading by removing supply-side and trade-related constraints.
• Globalization has advanced  social justice  on an international scale as well, and advocates report that it has focused attention on human rights worldwide that might have otherwise been ignored on a large scale.
• One clear result of globalization is that an economic downturn in one country can have a domino effect on its trade partners. For example, the 2008 financial crisis had a severe impact on Portugal, Ireland, Italy, Greece, and Spain. All of these countries were members of the European Union , which had to bail out debt-laden nations, which were thereafter known by the acronym PIIGS .
• Globalization detractors argue that it has created a concentration of wealth and power in the hands of a small corporate elite that can gobble up smaller competitors around the globe.
• Globalization has become a polarizing issue in the U.S. with the disappearance of entire industries to new locations abroad. It's seen as a major factor in the economic squeeze on the middle class .
• For better or worse, globalization can reduce the cultural and social aspects unique to people and geographic areas around the world and increase product homogeneity. Starbucks, Nike, and Gap dominate commercial space in many nations. The sheer size and reach of the U.S. have made the cultural exchange among nations largely a one-sided affair.

A larger market for goods and services

Cheaper consumer prices

Outsourcing can benefit domestic firms and foreign labor

Increased standard of living

Concentrates wealth in richer countries

Some poorer countries can be left behind

Labor and the physical and intellectual resources of poorer countries can be exploited

Regions and cultures lose their uniqueness and products available around the world can become homogeneous

Why Is Globalization Important?

Globalization is important as it increases the size of the global market, and allows more and different goods to be produced and sold for cheaper prices. It is also important because it is one of the most powerful forces affecting the modern world, so much so that it can be difficult to make sense of the world without understanding globalization.

For example, many of the largest and most successful corporations in the world are in effect truly multinational organizations, with offices and supply chains stretched right across the world. These companies would not be able to exist if not for the complex network of trade routes, international legal agreements, and telecommunications infrastructure that were made possible through globalization. Important political developments, such as the ongoing trade conflict between the U.S. and China, are also directly related to globalization.

Is Globalization Good or Bad?

It depends. Proponents of globalization will point to the dramatic decline in poverty throughout the world for more than two decades after around year 2000, which many economists attribute in part to increased trade and investment between nations. Similarly, they will argue that globalization has allowed products and services such as cellphones, airplanes, and information technology to be spread far more widely throughout the world.

On the other hand, critics of globalization will point to the negative impact it has had on specific nations’ industries, which might face increased competition from international firms. Globalization can also have negative environmental impacts due to economic development, industrialization, and international travel.

How Does Globalization Impact Society?

Globalization has had a large impact on societies around the world, leading to massive migrations from rural to industrial or urban areas and to the rapid growth of cities and trade hubs. While this has meant an overall increase in incomes and a higher standard of living in general, it has also led to problems such as crime, domestic violence, homelessness, and poverty. Concepts of national identity, national or regional culture, and consumption patterns also change as goods from around the world become increasingly available and at low prices. The competitiveness of global capitalism may also lead to more individualistic ideals that contradict the cultural orientations of certain, more collectivist societies.

What Is an Example of Globalization?

A simple example of globalization would be a car manufactured in the U.S. that sources parts from China, Japan, South Korea, Sri Lanka, and South Africa. The car is then exported to Europe, where it is sold to a driver who fills the car's gas tank with gasoline refined from Saudi oil.

Globalization refers to the ongoing trend of increased interconnectivity of nations across the globe, as enabled by advancements in transportation and information technology, among others.

Globalization is facilitated economically by free trade agreements, which permit barrier-free imports and exports across borders. While globalization brings many advantages—including lower prices and higher standards of living to some—it also has drawbacks, including wealth concentration and cultural homogeneity.

Peterson Institute for International Economics. " What Is Globalization? "

Congressional Research Service. " The North American Free Trade Agreement ," Page 1.

Congressional Research Service. " The North American Free Trade Agreement ." Pages 16-17.

Office of the United States Trade Representative. " United States-Mexico-Canada Agreement ."

FasterCapital. “ Financial Bailout: PIIGS and Financial Bailouts: Lessons From the Crisis .”

Macrotrends. “ World Poverty Rate 1981-2024 .”

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• Published: 27 June 2024

Suppression or promotion: research on the impact of industrial structure upgrading on urban economic resilience

• Lu Zhang 1 ,
• Guodong Lin 1 ,
• Xiao Lyu 2 &
• Wenjie Su 3  

Humanities and Social Sciences Communications volume  11 , Article number:  843 ( 2024 ) Cite this article

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Industrial The upgrading of industrial structure, as the main means of urban economic transformation, plays a crucial role in the process of achieving urban economic resilience construction. We conducted a study on the nonlinear impact mechanism of industrial structure upgrading on urban economic resilience based on panel data from 267 prefecture-level and above-level cities and above in China from 2008 to 2021, using globalization as a threshold variable. The obtained results demonstrated the following: (1) there existed a significant nonlinear relationship between industrial structure upgrading and rationalization and urban economic resilience, with a significant double threshold effect. (2) A robustness test was performed by removing extreme values from the sample, controlling for the time series and individual interaction terms while considering control variables, which did not change the basic conclusions based on the model. This demonstrated that the threshold regression model constructed in this study is robust and reliable. (3) From a regional heterogeneity perspective, the impact of industrial structure upgrading on urban economic resilience varied among different regions. Notably, industrial structure upgrading imposed a significant double threshold effect on urban economic resilience in the eastern and central regions, manifested as an inverted U-shaped trend. In the northeastern region, there was only a single threshold effect with globalization as the threshold variable, which still occurred on the left side of the inverted U-shaped curve, while no threshold effect was observed in the western region.

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Introduction.

As the main focus area of economic activity and the core subject of mitigating various risks, enhancing the economic resilience of cities is a necessary means to effectively enhance the ability of their economic systems to resist risks and shocks (Fingleton and Palombi, 2013 ; Martin and Sunley, 2014 ; Cheng et al. 2022 ; Wang and Wang, 2021 ; Papaioannou, 2023 ; Fan et al. 2023 ). With the increasingly close global socioeconomic development, economic cooperation among countries is gradually moving toward a path of diversification, openness, and sharing (Zhou and Qi, 2023 ; Hynes et al. 2022 ; Jayasinghe et al. 2022 ; Gajewski, 2022 ). While countries worldwide share the fruits of economic development due to globalization, some countries have become “shock absorbers” for the cyclic regulation of the international economic system (Andrew et al. 2020 ; Ye and Qian, 2021 ; Ben and Ifergane, 2022 ). In particular, problems related to notable fluctuations in economic development, limited defense capabilities, and low competitiveness are particularly prominent in developing countries. These problems further exacerbate the vulnerability of cities in various countries in response to internal and external changes (Ženka et al. 2019 ; Wang et al. 2021 ; Mai et al. 2021 ). Therefore, how to build a strong and resilient economic system and employ resilience thinking to enhance the driving force and capacity of regional economic development has become an important research topic for countries globally, with the aim of promoting high-quality urban economic development.

The term resilience first evolved from the Latin word “resilio” (Yang et al. 2023 ). With the increase in the occurrence of uncertain events and external shocks, scholars have applied resilience in fields such as urban engineering resilience, ecological resilience, and economic resilience (Dario and Weterings, 2015 ; Paolo, 2017 ; Lemke et al. 2023 ; Du, 2023 ; Yu et al. 2023 ). The connotation of urban economic resilience has been widely investigated by the government, society, and academia, as it better conforms with the current stage of urban economic development in certain countries and the interpretation of the practical problems faced (Du et al. 2023 ; Gai and Yang, 2023 ; Hui and Tan, 2023 ). Urban economic resilience refers to the ability of a city to prevent and resist risks, as well as maintain efficient and sustainable economic development during a specific period (Drobniak, 2017 ; Tan et al. 2017 ; Pashapour et al. 2019 ; Erika and Mangirdas, 2020 ). Today’s world is vulnerable to severe impacts such as economic crises, epidemics, and natural disasters. Some regions may continue to maintain stable economic growth after impact, while others may suffer heavy losses and fail to recover (Deng et al. 2023 ; Wang et al. 2023 ; Lee and Wang, 2023 ). The reason for this difference is that countries with greater urban economic resilience often exhibit characteristics such as dynamic balance, redundant buffering, and self-healing, which can enable these countries to quickly eliminate risks and automatically adjust and recover, thus effectively resisting external shocks and mitigating internal disasters (Cheng et al. 2023 ; Zhou and Qi, 2023 ). Notably, 2008 and 2019 were critical time points in terms of global fluctuations and changes. Under the impacts of the global crisis and the COVID-19 pandemic, respectively, Compared with developed countries such as the United States and Japan, although China’s economic development has also encountered obstacles, its economic growth rate has decreased by 1.8% and 0.1% respectively compared to the previous year, But China’s long-term economic fundamentals have not changed, and the characteristics of sustained economic recovery, notable development potential, high resilience and broad space have not changed (Hao, 2023 ; Wang et al. 2024 ; Yang, 2023 ). For example, under the influence of the COVID-19 pandemic, the economies of the United States and Japan shrank by 3.5 and 5.3%, respectively, in 2021. On the one hand, the economy of China benefited from a series of policy documents issued by the Chinese government on “optimizing the environment, expanding the domestic demand, stabilizing growth, and promoting development”. On the other hand, it benefited from a strong labor force and high consumer market supply capacity.

Industrial structure upgrading is important for exploring the economic resilience of Chinese cities (Drobniak, 2017 ; Zhou et al. 2019 ; Betts and Buzzanell, 2022 ). Especially at this stage, China’s economy is transitioning from high-speed growth to high-quality development, and industrial structure upgrading plays an important role in the urban economy resilience process in different regions and stages (Zhang, 2022 ; Yin et al. 2023 ). On the one hand, industrial structure upgrading can cause an acceleration in regional industrial structure transformation from traditional high energy-consuming industries to high-tech industries. In this process, with the emergence of an advanced industrial structure and a specialized division of labor, new economic growth paths can be created, which can enhance the ability of cities to withstand market risks and can facilitate resilient growth of the urban economy (Tan et al. 2017 ; Cheng et al. 2023 ; Li et al. 2024 ). On the other hand, industrial structure upgrading can lead to enhancement in the service industry, but a high proportion of the service industry can easily cause the problem of hollowing out industries, which is not conducive to improving urban economic resilience (Gai and Yang, 2023 ; Hui and Tan, 2023 ). It should be noted that industrial structure upgrading entails a long and tortuous process, and its impact on urban economic resilience cannot be achieved overnight. Therefore, the causal relationship between industrial structure upgrading and urban economic resilience is not direct nor obvious. However, the impact of the former on the latter still objectively occurs through various transmission mechanisms. Moreover, due to the poor coherence and sustainability of relevant systems, this impact relationship may be repetitive and not simply linear.

From 1492 to 2023, globalization increased from the 1.0 era to the 4.0 era (Roberta et al. 2015 ; Aida et al. 2016 ; Gereffi et al. 2022 ). Globalization has firmly woven all countries into the network of the world system, and the commerce, economy, and system of each country have undergone tremendous transformation (Dunn, 2020 ; Carlos et al. 2022 ). In the globalization process, achieving high-quality and sustainable economic development has become a major challenge for the international community (Ngo, 2023 ). Since its accession to the World Trade Organization (WTO), China has received a large amount of foreign direct investment due to its own resource endowment. Foreign direct investment has, to a certain extent, accelerated the process of high-quality development of China’s urban economy, which is mainly reflected in two aspects: on the one hand, foreign direct investment can effectively promote industrial structure upgrading and optimization (Tao et al. 2023 ). Foreign direct investment usually leads to the introduction of technology, management, and market factors, accelerating the transformation of traditional Chinese industries to high-tech and high value-added industries and promoting sustainable development of the urban economy (Anis and Andreea, 2023 ). On the other hand, foreign direct investment not only provides financial support but also introduces advanced technology and management experience, providing Chinese industries with a larger market and more abundant resources (Knoke et al. 2022 ; Gereffi et al. 2022 ). Production scale increase, product quality improvement, and cost reduction further enhance the competitiveness of China’s industries (Carlos et al. 2022 ; Johnson and Mundell, 2023 ). Therefore, we must consider several questions: under the acceleration of globalization, what is the impact of industrial structure upgrading (with a focus on industrial structure upgrading and rationalization) on urban economic resilience? Are there certain stage characteristics? These questions should be explored in depth. To this end, this study links the above three aspects and focuses on determining whether there exists a threshold effect in terms of the impact of industrial structure upgrading on urban economic resilience with globalization as the threshold variable, examining its mechanism and effect, and investigating whether there is regional heterogeneity to provide an empirical basis for relevant departments to formulate targeted policies.

The remainder of this study is organized as follows: in the second section, a literature review is provided, in which the existing research on industrial structure upgrading, globalization, and urban economic resilience is summarized, providing a sound basis for this analysis. The third section constructs a theoretical framework and research hypotheses, elaborates on the theoretical basis of industrial structure upgrading, explores the impact of industrial structure upgrading and rationalization on urban economic resilience in the context of globalization, and proposes research hypotheses. In the fourth section, the research design is described in detail, including model settings, variable selection, data sources, and descriptive statistical analysis. In the fifth section, the empirical tests are introduced, including threshold effect assessment, threshold panel model-based estimation, and regional heterogeneity analysis. Finally, the sixth and seventh selections, respectively outline the conclusions, policy recommendations, and future prospects of this article.

Literature review

The study of urban economic resilience has become an important topic for countries to explore high-quality and sustainable economic development (Guo et al. 2023 ). Boschma ( 2015 ) first proposed the concept of economic resilience, stating that economic resilience is the ability of an economic system to absorb shocks without catastrophic changes in its basic functional organization. Thereafter, the academic community investigated urban economic resilience from the perspectives of regional and geographic economics (Wang and Ge, 2023 ; Wang et al. 2024 ). Regional economics mainly explores how to cope with the decline in the regional economy, while geographic economics largely focuses on the study of spatial differences, correlations, and influencing factors of urban economic resilience (Zhang et al. 2023 ). In recent years, academic research on urban economic resilience has focused on three main aspects (Jesse, 2023 ; Cheng et al. 2022 ): measurement methods, influencing factors, and the impact of industries on urban economic resilience. First, from the perspective of measurement methods for urban economic resilience, scholars have measured the urban economic resilience index based on methods such as the core variable method and comprehensive indicator method from different disciplinary backgrounds (Qiang et al. 2020 ; Wang and Wang, 2021 ). However, due to the varying focuses, there is no consensus at present. Second, from the perspective of the influencing factors of urban economic resilience, scholars have considered that fiscal gaps, geographical location conditions, and resource endowments are key factors that constrain urban economic resilience (Gan and Chen, 2021 ; Cheng et al. 2022 ; Wang and Wang, 2021 ). The processes of urbanization, technological innovation, economic development, and industrial agglomeration are major factors driving urban economic resilience (Du et al. 2023 ; Gai and Yang, 2023 ). Third, from the perspective of the impact of industries on urban economic resilience, existing research has focused on two main aspects: (1) from a microscopic perspective, the impact of a single industry, such as the digital industry, financial industry, or manufacturing industry, on urban economic resilience has been examined; and (2) from a macroscopic perspective, the impacts of industrial structure upgrading, adjustment, transformation, and agglomeration on urban economic resilience have been explored. For example, Feng et al. ( 2023 ) empirically determined that industrial structure rationalization and upgrading are important ways for regional integration to affect urban economic resilience. However, the policy effects of regional integration on economic resilience vary over time, by region, and by urban structure. Zhang et al. ( 2023 ) noted that regional economic resilience is closely related to the state of the industrial structure, and there exists a spatiotemporal correlation in the evolution of the two systems. In the literature review process, we could conclude that the existing research on the relationship between industry and urban economic resilience has not yet reached a consensus, both at the micro- and macroscopic levels, thus providing a theoretical basis and new ideas for this study.

Regarding the relationship between globalization, industrial structure upgrading, and urban economic resilience, studies have mostly focused on the relationship between globalization and industrial structure upgrading, as well as the relationship between industrial structure upgrading and economic resilience (Carlos et al. 2022 ). In terms of the relationship between globalization and industrial structure upgrading, studies have suggested that globalization can promote industrial structure upgrading through the division of labor and cooperation in the industrial structure (Dunn, 2020 ) and that globalization can promote industrial structure upgrading through technological innovation and industrial transformation (Ngo, 2023 ). Globalization can improve factor allocation efficiency and drive industrial structure upgrading by influencing the direction and quantity of factor flow. In addition, scholars have noted that the development of globalization encompasses various stages, while its impact on the industrial structure is also cyclical, which can lead to instability in the impact of globalization on industrial structure rationalization and upgrading. In terms of the relationship between globalization and urban economic resilience, there are three specific viewpoints: globalization imposes a reducing effect on urban economic resilience (Tao et al. 2023 ), globalization exerts an expanding effect on urban economic resilience (Anis and Andreea, 2023 ), and the impact of globalization on urban economic resilience is dynamic (Martin et al. 2016 ). In terms of the relationship between industrial structure upgrading and urban economic resilience, industrial structure rationalization and upgrading can help to reduce the impact of international markets by improving the industrial configuration and quality level, providing greater development space for adaptive structural adjustment after impact occurrence and thus continuously enhancing urban economic resilience.

In the literature, scholars have empirically evaluated industrial structure upgrading and globalization as important factors affecting urban economic resilience based on econometric models, geographic models, and spatial econometric models (Maria, 2023 ; Cheng et al. 2023 ); however, few scholars have explored the relationships among these three factors. Within the context of globalization, the transformation of the new international division of labor model profoundly affects the process of industrial structure adjustment in various countries worldwide. However, existing research has overlooked the moderating effect of globalization on industrial structure upgrading and urban economic resilience. Moreover, the literature has mostly focused on analyzing the linear effect of industrial structure upgrading on urban economic resilience, and various conclusions have been obtained. This also reflects the complexity of the relationship between the two aspects, which suggests that they may not be characterized by a simple linear relationship, namely, there may be a nonlinear relationship. Compared with the literature, the marginal contribution of this study lies in coupling industrial structure upgrading, globalization, and urban economic resilience. It was preliminarily determined that the impact of industrial structure upgrading on urban economic resilience is nonlinear, and globalization was used as a threshold variable. Panel data from 267 prefecture-level cities and above in China from 2008 to 2021 were selected, and we empirically examined the nonlinear relationship between industrial structure upgrading and urban economic resilience and studied its stage characteristics. Moreover, we conducted robustness tests.

Theoretical foundations and research hypotheses

Industrial structure upgrading is important for exploring the economic resilience of Chinese cities. Especially at the current stage, China’s economy is shifting from high-speed growth to high-quality development, and industrial structure upgrading fulfills an important role in the resilience process of the urban economy in different regions and stages (Feng et al. 2023 ). The theory of industrial structure was first proposed by Fisher, who divided the overall industrial structure into the primary industry, secondary industry, and tertiary industry (Zheng et al. 2023 ; Li, 2024 ). William Petty established the theory of industrial structure upgrading, which refers to the process of industrial structure transformation from lower to higher stages, and constructed a theoretical analysis framework for industrial structure upgrading, including two aspects: the rationalization and advancement in the industrial structure (Feng et al. 2023 ). This theoretical framework laid the foundation for subsequent related research. With the deepening and development of theoretical research, the theory of industrial structure upgrading is the result of the joint action of the two forces of industrial structure upgrading and rationalization. There is widespread consensus among scholars at home and abroad, and this approach has been widely applied in fields such as social crises, regional environments, grassroots governance, and high-quality urban development. This has provided a new research approach for exploring the impact of industrial structure upgrading on urban economic resilience.

Since China joined the WTO, the Chinese economy has been further integrated into the world economy and become an important destination for FDI worldwide. Since then, FDI has become an important manifestation of globalization (Zhang et al. 2020 ). Globalization not only enhances the frequent exchange of resources such as technology, capital, and labor among countries but also promotes increasingly close economic development relationships among countries. Within the context of globalization, while countries achieve effective resource allocation in their industrial structures, they also move toward advanced and rational industrial structures, thereby promoting high-quality development of urban economic resilience through the release of structural dividends. In other words, industrial structure upgrading has become an important driving force for urban economic resilience within the context of globalization (Fig. 1 ).

In the figure, S denotes suppression, P denotes promotion, C denotes connection, and R denotes regular.

Industrial structure upgrading involves a process of rationalization. The singularity of the industrial structure is not conducive to urban entities overcoming internal and external market risks within an uncertain environmental context. At the primary stage of globalization, foreign direct investment can not only solve the problem of imbalanced and insufficient development of the regional industrial structure via the utilization of local resource endowments but also reduce production costs, provide stable and long-term global competitive advantages, and promote the intensive and large-scale development of local industries by achieving a reasonable division of labor and allocation of various industries in the regional industrial chain. The entry of labor- and capital-intensive industries into developing countries creates a large number of employment opportunities, promotes the flow of surplus labor from the agricultural sector to the nonagricultural sector, and enhances regional resistance to internal and external market risks. With the improvement in the globalization level and the increase in foreign investment, the formation of a diversified industrial system in cities is accelerating. Cities rely on industrial diversification, product richness, high-added value, and asynchronous industrial cycles to avoid drastic fluctuations in output and employment, thereby enhancing the ability of the urban economic system to overcome risks and adapt to shocks. Therefore, Hypothesis 1 was proposed.

Hypothesis 1: Industrial structure rationalization exerts a significant positive impact on urban economic resilience at different stages of globalization.

Another main feature of industrial structure upgrading is the upgrade process. At the early stages of globalization, foreign direct investment in factory construction, to some extent, dealt a heavy blow to traditional industries in developing countries, reducing the ability of urban economic entities to eliminate market risks. With the increase in globalization, on the one hand, FDI can promote the return of technology, labor, and capital and accelerate the replacement of high value-added industries and low value-added industries. On the other hand, foreign direct investment can not only promote the transition from traditional resource-intensive industries to resource-intensive industries but also attract more high-quality labor and technological resources, thereby increasing the resistance of urban economic systems to risks and the ability to adapt to impact factors. Therefore, Hypothesis 2 was proposed.

Hypothesis 2: There may be significant stage differences in the impact of industrial structure upgrading on urban economic resilience between different levels of globalization.

Research design and data sources

Model settings.

As mentioned earlier, industrial structure upgrading is accompanied by the reasonable flow and optimized allocation of production factors between industries and countries, which exerts a certain impact on urban economic resilience. Globalization also plays an important role in this process, but confirmation of the existence of threshold effects still requires further empirical testing. Therefore, in this study, globalization was adopted as a threshold variable, urban economic resilience was used as the dependent variable, and industrial structure upgrading and rationalization were employed as the core explanatory variables. Then, the following threshold panel model was constructed (Dou and Gao, 2023 ; Zheng et al. 2023 ):

where UER it denotes the urban economic resilience of city i during the t-th period; GL it denotes the globalization of city i during the t-th period as a threshold variable, with r 1 , r 2 …, r n representing n threshold values; RIS it and AIS it denote industrial structure rationalization and advancement, respectively; α 1 , α 2 , and α n, and β 1 , β 2 , and β n denote the regression coefficients for different threshold intervals; X it is a series of control variables; and θ and k are the regression coefficients of the control variables. Note that the only difference between Models (1) and (2) is the core explanatory variables (without considering differences in the parameter values), which are industrial structure upgrading and industrial structure rationalization, respectively. For the sake of brevity, Models (1) and (2) are distinguished by their core explanatory variables and are thus referred to as the RIS and AIS models, respectively.

Variable selection

Explained variable, calculation model for urban economic resilience.

The regional economic foundation often determines the lower limit of a region’s ability to withstand shocks, which, to a certain extent, affects its resilience and recovery level (Wang et al. 2021 ). Notably, urban economic resilience is not only related to the total economic output but also closely related to the economic structure. The higher the total economic output is, the higher the urban economic resilience when facing risks. The GDP is an appropriate indicator of the total economic output of a city, while a reasonable economic structure is also a key factor in ensuring healthy and dynamic growth of the urban economy. In contrast to the former, the economic structure more strongly reflects changes in economic growth rates. The main research methods for measuring urban economic resilience are the core variable method and the comprehensive indicator method, but a consensus has not yet been reached. Considering the representativeness and continuity of the core variable method, this study refers to existing research, and the output method was used to measure urban economic resilience. This indicator can directly reflect the degree of change in the urban economy in the face of pressure and shocks (Feng et al. 2023 ). Compared with previous studies, this approach avoids the subjectivity of using a comprehensive indicator system, but it neglects the relationships and dependencies between factors and does not fully reflect the actual situation. The specific calculation method is as follows:

where GDP denotes the standardized value of the GDP and ∆GDPV is the standardized value of the absolute change in the GDP growth rate in adjacent years. As the product of multiple standardized values is very small, to better visualize the differences in urban economic resilience, the regression coefficient is multiplied by 100.

Core explanatory variables

According to existing research, industrial structure rationalization and advancement were used as alternative indicators to measure urban industrial structure upgrading (Gan and Chen, 2021 ; Yin et al. 2023 ). As expressed in the equation below, rationalization of the industrial structure (RIS) mainly reflects the coupling relationship between the input and output, where i denotes the primary industry, secondary industry, or tertiary industry, Y represents industrial economic output, L represents labor input, and I represents industrial sector (i = 1,2,3). Upgrading of the industrial structure (AIS) largely reflects the proportion of the service industry, measured as the ratio of the added value of the tertiary industry to that of the secondary industry.

Threshold variables

The threshold variable selected in this study is globalization (GL). After China’s accession to the WTO, China gained a large amount of foreign direct investment due to its resource endowment. With the increasingly close relationship between China’s economic development and the global economy, FDI transformed globalization into a localization force through location selection, which, to a certain extent, promoted the development of the regional economy. However, the greater the degree of closeness to the global economy is, the greater the occurrence probability of unpredictable risks, thereby exacerbating the vulnerability of regional economic resilience. Therefore, the per capita foreign direct investment amount was selected as a characterization indicator to measure globalization.

Control variables

(1) Industrial agglomeration level of industrial enterprises. We selected the total number of industrial enterprises/urban construction land area as an indicator to measure the level of industrial enterprise agglomeration (Wang et al. 2021 ). The agglomeration of industrial enterprises can accelerate the convergence of regional enterprises, goods, services, and highly skilled labor. The agglomeration of a large number of intermediate inputs, high-level services, and human capital imposes a significant positive effect on urban economic resilience. However, the excessive agglomeration of industrial enterprises could also lead to significant negative externalities with respect to factors such as infrastructure, residents’ health, and the ecological environment, reducing the responsiveness of urban economic systems to external shocks. (2) Local financial gap. We selected the indicator of (expenditure within the local fiscal budget—revenue within the local fiscal budget)/revenue within the local fiscal budget to measure fiscal gaps (Xiong et al. 2023 ). The level of local finance fulfills an important role in achieving the optimal allocation of regional resources. Research has shown that the smaller the local fiscal gap, the more capable local governments are of achieving a balance and structural optimization between the total social demand and supply when facing external shocks. In contrast, the greater the local fiscal gap is, the lower the ability of local governments to self-adjust and repair in the face of external shocks. (3) Technology investment level Footnote 1 . We selected scientific and technological investment/local general public budget expenditure as a measurement indicator (Zhang et al. 2020 ). Improving the technology investment level can, to a certain extent, accelerate the elimination of traditional industries and the growth of emerging industries in a given region, enhance the competitive advantage of the entire industry chain in key fields, and overcome the monopoly of core technologies in certain foreign fields, thus increasing urban economic resilience. (4) Population density. We selected the total number of permanent residents in cities within the province/the area of provincial jurisdiction as a measurement indicator (Tan et al. 2020 ). The population density is a key factor affecting urban economic resilience and varies across different regions. The regional agglomeration effect generated by the population density can cause various resources to gather in cities, while population aggregation can cause various high-quality resources to accumulate in cities, generating a positive agglomeration effect, which facilitates the construction of regional spatial governance systems, high-quality and intelligent public services, and infrastructure systems and has a certain significance in building urban economic resilience. When there is a turning point in the population density, the phenomenon of excessive development and utilization of regional resources may occur, requiring local governments to consume more financial and material resources to solve problems such as environmental damage, severe resource depletion, and high carrying pressure caused by population agglomeration. This exerts a significant inhibitory effect on urban economic resilience, so the total number of permanent residents in cities within the province/the area of provincial jurisdiction was chosen as a measurement indicator. (5) Infrastructure level. We selected the coverage of public transportation routes/total population as a measurement indicator (Zhang, 2022 ). Infrastructure, including transportation and communication facilities, provides the basic guarantee for urban economic activities. The convenience of infrastructure is directly related to the development of local economic resilience. Research has shown that improving infrastructure is not only conducive to high-quality development of the local economy but also enhances the ability of urban economic systems to overcome risks and adapt to shocks. (6) The economic development level was measured by the total GDP/total population ratio in this study (Deng et al. 2023 ). The economic strength and development level of a city significantly impact its resilience: the stronger the economy is, the more reasonable the structure, and the higher the innovation ability is, the greater the resilience level of a city. Research has indicated that the urban economic development level is related to the ability to withstand macroeconomic and financial risks.

Data sources and descriptive statistics

We selected panel data for 267 prefecture-level cities and above in China (Excluding Hong Kong, Macao, Taiwan, Xinjiang, and Xizang) from 2008 to 2021 for empirical analysis. The panel data were obtained from the Statistical Yearbook of Urban Construction in China and the Statistical Yearbook of Chinese Cities from 2008 to 2021. Descriptive statistics of all variables are listed in Table 1 . The differences between the minimum and maximum values for measuring the urban economic resilience index were significant, indicating a significant difference in urban economic resilience among the 267 prefecture-level cities and above in China between 2008 and 2022. The maximum value of urban economic resilience was observed for Shanghai in 2019, with an urban economic resilience of 20.033, while the minimum value was obtained for Dingxi city in 2018, with an urban economic resilience of 0.000. The minimum and maximum values of the industrial structure rationalization indicator were 0.581 and 29.114, respectively, while the minimum and maximum values of the industrial structure upgrading indicator were 0.139 and 5.350, respectively. This reflects the considerable differences in industrial structure rationalization and upgrading among the 267 prefecture-level cities and above between 2008 and 2022. Similarly, there was a significant difference between the minimum value (−2.028) and the maximum value (9.970) of the globalization indicator, indicating a significant difference in globalization among the 267 prefecture-level cities and above between 2008 and 2022.

Empirical testing

Hausman test.

Before conducting the Hausman test, we first applied the Durbin–Wu–Hausman (DWH) test to assess for endogeneity issues in the benchmark panel model (Zheng et al. 2023 ). According to the test results, the P value of the DWH test was 0.000, indicating that the null hypothesis of “all explanatory variables are exogenous” could not be rejected at a significance level of 1%. Therefore, the model did not exhibit endogeneity issues. Finally, we conducted a Hausman test of the relationship between industrial structure rationalization and upgrading and urban economic resilience. The results indicated that the P value of both models (1 and 2) in the Hausman test was 0.0000, indicating that the original hypothesis of random effects could be rejected at the 1% significance level and that the alternative hypothesis of fixed effects could be accepted. Therefore, we utilized the panel fixed effects model to estimate Models 1 and 2.

Assessing the threshold effect of industrial structure upgrading

Before establishing a specific threshold effect model, two important tests were conducted: one involved testing for the existence of threshold effects, with the aim of exploring whether the parameter spaces within different threshold intervals divided by the threshold values significantly differ; the other was using the bootstrap method for consistency testing, with the aim of determining whether the estimated threshold value is consistent with the actual value. The former is generally evaluated by the F statistic, while the latter is assessed by the likelihood ratio (LR) statistic.

The test results for the industrial structure rationalization and upgrading models with globalization as the threshold variable are provided in Table 2 . First, a single threshold test was conducted, and the corresponding F values were 193.71 and 514.98, respectively, while the P values were 0.0033 and 0.0000, indicating that there exists a threshold effect in both the rationalized and advanced industrial structure models. Second, the double threshold effect existence test was performed, with corresponding F values of 55.85 and 90.97, respectively, and P values of 0.0700 and 0.0133, respectively, which were significant at the 10 and 5% levels. The original hypothesis of the existence of a single threshold could be rejected, and it could be considered that both models contain a double threshold effect. Finally, a triple threshold test was conducted, and the P values at this time indicated that the original hypothesis of the existence of double thresholds could not be rejected. Therefore, in this study, a dual threshold effect model was chosen for estimation. The model can be formulated as follows:

We used the estimation method of minimizing the sum of squares of residuals to determine the specific threshold values, and the results are provided in Table 3 . The first and second threshold values for the model variables of industrial structure rationalization and upgrading (GL) were 6.8724 and 6.5514, respectively, and 7.5034 and 6.8724, respectively. Table 3 also provides the confidence intervals for each threshold value at a 95% confidence level.

Next, we performed a consistency test between the estimated threshold values and the actual values. Based on the estimation results listed in Table 3 , a likelihood ratio function graph was created. The horizontal axis in Fig. 2 represents the threshold value for globalization, the vertical axis represents the likelihood ratio function value, and the dashed line represents the critical value at the 95% confidence level. Here, the upper half represents the confidence interval for the first threshold of globalization, while the lower half represents the confidence interval for the second threshold of globalization. According to Hansen’s likelihood ratio test model, for LR(γ) > C(θ), the original hypothesis can be rejected. For θ = 5%, the critical value of the LR statistic is 7.35. According to Fig. 1 , the threshold values of the LR statistic corresponding to industrial structure rationalization and globalization of the advanced models were significantly lower than the critical values, so the above threshold estimates could be considered true and effective.

Dual threshold values and likelihood ratio function of GL in the RIS and AIS model.

Estimation results of the threshold panel model

Regression estimates of the impact threshold of industrial structure upgrading on urban economic resilience are provided in Table 4 . Among them, the regression results for basic Models (I) and (V) indicated that the relationship between industrial structure upgrading and globalization could be divided into three intervals by the threshold variable of globalization, and there were significant differences between the different intervals. At a lower globalization level, the impact of industrial structure rationalization on globalization was significantly positive at the 1% level, while the impact of industrial structure upgrading on globalization was not significantly negative. On the one hand, this suggests that at a lower globalization level, industrial structure rationalization could significantly improve urban economic resilience. When faced with external shocks, the economic resilience of cities significantly differs. Cities with a reasonable industrial layout exhibit higher economic resilience, namely, cities with a more reasonable industrial structure can quickly adjust their industrial structure, thereby obtaining more persistent and robust economic resilience. On the other hand, this result indicates that the level of industrial upgrading in China is still low, and products are at a disadvantage in the global market competition process. At this time, globalization is still dominated by the negative siphon effect.

Notably, at the early stages of globalization, industrial structure rationalization is the foundation for the economy to overcome external shocks, while later, the same process is the source of sustained economic resilience. When globalization crosses the first threshold and reaches the intermediate stage, the regression coefficient between industrial structure rationalization and urban economic resilience remains significantly positive, The above research confirms the validity of Hypothesis 1. This may occur because, with the acceleration of globalization, industrial structure rationalization eliminates market barriers between regions and internationally through the rational division of labor and the allocation of various industries within the industrial chain, achieving effective resource allocation, releasing structural dividends, and providing stable and long-term global competitive advantages, thus enhancing the ability of urban economic systems to mitigate risks and adapt to shocks. The impact of an advanced industrial structure on urban economic resilience within this interval shifted from negative to positive, indicating that with the improvement in the level of the advanced industrial structure, the return of technology, talent, and capital is promoted, accelerating the replacement of high value-added industries and low value-added industries, improving the demand income elasticity of high value-added products, reducing the operational risks of urban entities, and increasing the ability of urban economic entities to withstand market risks. When globalization crosses the second threshold and reaches a high level, the impact coefficients of industrial structure rationalization and upgrading on globalization are significantly positive at the 1% significance level, with regression coefficients of 0.037 and 0.780, respectively. The main reason is that with the rapid development of globalization, the industrial structure layout becomes more reasonable, which is conducive to the formation of a diversified industrial system in cities. Cities rely on industrial diversification, product richness, high-added value, and asynchronous industrial cycles to prevent sharp fluctuations in output and employment, thereby improving the ability of the urban economic system to overcome risks and adapt to shocks. In contrast, the deepening of globalization promotes the transition from traditional resource-intensive industries to resource-intensive industries, thus vigorously enhancing the level of industrial intensification and, in return, the ability of the urban economic system to withstand risks and adapt to shocks. The above research confirms the validity of Hypothesis 2.

After benchmark regression, to ensure the reliability of the conclusions obtained, we conducted two robustness tests. First, considering that extreme values in the sample may impact the results, Beijing (which attained the highest urban economic resilience value in 2019) and Dingxi (which attained the lowest urban economic resilience value in 2018) were excluded, and the model was again regressed to obtain robustness test results (II and VI in Table 4 ). Second, robustness tests were performed by controlling for time and individual interaction terms, and the results of robustness tests III and VII are listed in Table 4 . Finally, by including control variables for robustness testing, additional robustness test results (IV) and (VIII) were obtained, as provided in Table 4 . The three additional control variables were the market size, financial development level, and cultural soft power (Guo et al. 2023 ; Zhang and Yao., 2023 ), where the market size can be measured by the proportion of the total retail sales of consumer goods to the GDP. The financial development level can be measured by the ratio of the bank loan scale to the GDP. Cultural soft power can be measured by the logarithmic value of book collection. Compared with the estimation results of the basic model, the core explanatory variables in the robustness test results—namely, industrial structure rationalization and industrial structure upgrading—basically exhibited regression coefficients of the same sign and significance within the various threshold ranges of globalization (represented by GL L , GL M , and GL H ). For example, robustness test result II was relatively close to that of basic Model I, while robustness test result VI was relatively close to that of basic Model V. The sign and significance of the regression coefficients for the core explanatory variable, i.e., industrial structure rationalization, within the various threshold intervals of globalization were highly similar. However, after removing the extreme values in the sample data, the regression coefficient and significance of industrial structure upgrading exhibited significant changes within the various threshold ranges of globalization, with significance decreasing from the previous 1% level to the 5% level. However, it should be noted that although the removal of extreme values generated a certain impact in this study, the existence of individual extreme values did not affect the basic conclusions of the model. For example, robustness test result III was related to basic Model I, while robustness test result VII was related to basic Model V. The regression coefficients for the core explanatory variables of industrial structure rationalization and industrial structure upgrading did not show significant changes within the various threshold ranges of globalization, as Model VII incorporated time and individual interaction terms, and the main difference between the two models was only the fact that within the third threshold range (GL H ) of globalization, the significance of the regression coefficient of Model VI slightly decreased. However, it was still significantly positive at the 5% level, and the conclusion remained significant. This indicates that, regardless of whether time and individual interaction terms were controlled, the conclusions of model analysis remained consistent. The results of robustness tests (IV) and (VIII) showed that the three additional control variables slightly but significantly affected the basic regression results. Therefore, the threshold regression model constructed based on panel data from 267 prefecture-level and above cities in China for assessing the impact of industrial structure upgrading on urban economic resilience was robust and reliable.

Analysis of regional heterogeneity

To eliminate the interference of regional heterogeneity factors and verify the moderating effect of globalization on industrial structure upgrading and urban economic resilience, we divided the 267 prefecture-level and above cities into four major regions—eastern, central, northeastern, and western regions—and conducted threshold effect testing and threshold model estimation. The specific results are listed in Table 5 . The industrial structure rationalization and upgrading models in both the eastern and central regions passed the double threshold test. The threshold values for globalization of the two models in the eastern region were 6.54 and 6.88, respectively, and 6.44 and 6.88, respectively, while the threshold values for globalization of the two models in the central region were 6.63 and 6.97, respectively, and 6.97 and 7.23, respectively. The industrial structure rationalization and upgrading models in the western region and the industrial structure upgrading model in the northeastern region did not pass the double threshold test, while the industrial structure rationalization model in the northeastern region exhibited only a single threshold effect.

The threshold panel regression results for the eastern, central, western, and northeastern regions are listed in Table 6 , which indicates certain differences between the regression results for each region and the national level.

In the eastern region, when globalization fell below the first threshold, the regression coefficients of industrial structure rationalization and upgrading on globalization were 0.056 and 0.275, respectively, and both passed the 1% significance test. When globalization crossed the first threshold but remained lower than the second threshold, the regression coefficients of both were significant. After globalization crossed the second threshold, the regression coefficients of the two variables were 0.109 and 1.546, respectively, and both passed the 1% significance test. These results indicated that with the continuous improvement in globalization, the relationship between industrial structure rationalization and upgrading and urban economic resilience in eastern China exhibits an inverted U-shaped trend. The reason for this may be that the eastern region has become the preferred region for accepting foreign investment due to its inherent resource endowment and location advantages. On the one hand, with increasing foreign investment, cities in the eastern region have launched a prelude to traditional industrial transformation. The optimization and improvement in industrial and product structures have, to a certain extent, increased the overall development level of regional industries and international competitiveness while also driving the improvement in urban economic resilience. On the other hand, with the limited urban carrying capacity in the eastern region, foreign direct investment is expected to be gradually transferred to the central and western regions, resulting in the phenomenon of urban economic resilience first increasing and then decreasing.

The threshold effect of industrial structure upgrading and rationalization on urban economic resilience in the central region was similar to that in the eastern region, also exhibiting an inverted U-shaped trend. On the one hand, in recent years, the central region has become an important position for China’s development of strategic emerging industries, committed to solving problems such as industrial structure convergence and chain fragmentation, and relies on diversified industrial structures (strategic emerging industries) to accelerate the rational allocation of industrial structures and regions to enhance the synergy between the secondary industry (manufacturing) and tertiary industry (productive services), improve the correlation and cohesion between industries within the region, promote the spillover of knowledge and innovation between departments, accelerate the formation of regional industrial economies of scale, and achieve long-term and robust urban economic resilience. On the other hand, the central region has adjusted its industrial structure through specific plans such as urban renewal, accelerating the circulation of key technological elements between different industries, improving the efficiency of regional resource allocation, increasing the size of the regional economy, and taking the lead in entering the post-industrialization stage, which, to a certain extent, serves to improve urban economic resilience.

Industrial structure rationalization exerted a single threshold effect on urban economic resilience in the northeastern region. When globalization occurred below the threshold value of 6.63, the regression coefficient of industrial structure rationalization was −0.003, which is not significant. When globalization exceeded the threshold value of 6.63, the impact of industrial structure rationalization on urban economic resilience remained inhibitory, with a regression coefficient of −0.021. The reason for this may be that, as an old industrial base in China, the northeastern region exhibits a heavy industrial structure and relatively slow development, which is less favored by foreign direct investment. During the sample period, with the promotion of the Northeast Revitalization strategy and the implementation of a series of supporting measures, the evolution of the industrial structure also showed a continuous trend of improvement. However, due to the failure to achieve the ideal goal of upgrading traditional industries, they often do not exhibit market competitiveness, so the promotion effect on urban economic resilience is relatively limited.

The western region differs from other regions and did not show a threshold effect. We believe that the reason for this may be that the Western region implemented only the Western Development strategy during the early 21st century. Transportation, communication, and other infrastructure in the western region are relatively outdated, and the opportunities for foreign direct investment are lower than those in the eastern, central, and northeastern regions. As a result, the industrial spillover effect and positive externality effect in the western region are not significant. Therefore, even at the advanced stage of globalization, industrial structure rationalization and upgrading in the Western region do not significantly impact urban economic resilience.

Conclusions and policy recommendations

In this study, 267 prefecture-level cities and above in China were adopted as the research object, and globalization was considered a threshold variable to couple industrial structure upgrading globalization and urban economic resilience. We empirically assessed the nonlinear impact of industrial structure upgrading on urban economic resilience. The results indicated that, from a national perspective, the impact of industrial structure rationalization and upgrading on urban economic resilience exhibited a nonlinear relationship, and both showed a double threshold effect. At the initial stage of globalization, industrial structure rationalization promotes urban economic resilience, while industrial structure upgrading negatively impacts urban economic resilience. After globalization crosses the first threshold and enters the intermediate stage, industrial structure rationalization and upgrading exert a positive promoting effect on urban economic resilience, and industrial structure upgrading shifts from a negative to a positive promoting effect, which is significant. When urban economic resilience crosses the second threshold and enters the advanced stage, industrial structure rationalization and upgrading exert a significant positive effect on urban economic resilience. By removing extreme values from the sample, controlling for time and individual interaction terms, including control variables, and then modeling again, it was found that the above conclusion still holds and passes the robustness test. To empirically analyze regional heterogeneity, we divided the sample into eastern, central, northeastern, and western regions. We found that industrial structure upgrading still imposes a dual threshold effect on urban economic resilience in the eastern and central regions with globalization as the threshold variable, but the performance varied among the different regions. The threshold effect of industrial structure upgrading (including rationalization and upgrading) in the eastern and northeastern regions on urban economic resilience was characterized by an inverted U-shaped trend. In particular, the northeastern region still occurred on the left side of the inverted U-shaped curve, with only a single threshold effect. No threshold effect was observed for the western region.

Based on the research findings presented here, the following policy recommendations are proposed: firstly, we should continue to accelerate industrial transformation and upgrading, thus promoting high-quality development of urban economic resilience. We should actively promote regional industrial structure upgrading and, through the development of high value-added new economy sectors, we should embark on accelerated internal economic structure optimization, thereby enhancing urban economic resilience. Consequently, to improve the rationalization of the regional industrial structure, reasonable leading industries and strategic industries should be selected for driving economic development to support the development of leading industries, extend the industrial chain of products and enhance their added value, achieve differentiated competition and gradient transfer of industries, construct a circular economic development model, optimize the layout and management of the entire industrial chain, and establish a reasonable distribution of upstream, midstream, and downstream resources in the industry. Secondly, we should increase openness and innovation efforts to promote high-quality development through high-level openness. We should make good use of the national independent innovation demonstration zone platform, highlight open innovation, enhance innovation capabilities, promote independent innovation through open innovation, and continuously improve our competitiveness in opening up to the outside world. This would allow for increased efforts to “bring in and go out,” i.e., cultivating more market entities that are open to the outside world. We should continuously optimize the export structure, encourage and support local enterprises to “go global”, attract high-quality foreign investment, and promote the “optimal entry and exit” of opening up to the outside world. Thirdly, regional governments should implement differentiated measures based on the actual situation in their respective regions to avoid one-size-fits-all measures. The level of globalization in the eastern and central regions is already high, and it is necessary to focus on accelerating the development of high-tech industries, especially the updating and development of industries such as those in information, biology, new materials, aerospace, and ocean fields. The industrial structure and globalization levels in the northeastern and western regions are relatively low. As such, it is necessary to accelerate the replacement of new and old industries, vigorously promote the integration of informatization and industrialization, and thereby improve urban economic resilience. In the western region, it is necessary to continue industrial transfer from the eastern and central regions, optimize the regional industrial structure layout, create high-quality service platforms, focus on cultivating leading enterprises, fully leverage the siphon effect to drive industrial agglomeration, and create a bridgehead for opening up to the west, leveraging the advantages of large ports, channels, logistics, hubs, and trade. In Northeast China, efforts should be made to consolidate inventories, achieve incremental expansion, extend the industrial chain, and increase the added value. The digital, networked, and intelligent transformation of traditional manufacturing industries should be accelerated, promoting the extension of the industrial chain both upstream and downstream and finally creating a relatively complete industrial chain and cluster.

Further discussion

Industrial structure upgrading is an effective way to improve the urban economy, while globalization is an important driving force for regulating the correlation between urban industrial structure upgrading and urban economic resilience (Cheng et al. 2022 ). Although scholars have explored the coupling relationship between industrial structure upgrading and economic resilience, there is still insufficient research on the relationship between industrial structure upgrading, globalization, and urban economic resilience using globalization as a threshold. Compared with existing research, the similarity with previous studies lies in the fact that both have validated the nonlinear relationship between industrial structure upgrading and urban economic resilience. The difference from previous research lies in that, from a research perspective, we have taken the lead in placing industrial structure upgrading, globalization, and urban economic resilience within the same framework, and systematically elaborated on the relationship between the three, Fully considering the impact of industrial structure upgrading on urban economic resilience under the regulation of globalization is a beneficial supplement to existing theoretical research. From the perspective of research content, further subdividing the upgrading of industrial structure, using globalization as a threshold variable, exploring the threshold effect of industrial structure upgrading and industrial structure rationalization on urban economic elasticity, revealing the nonlinear relationship and stage characteristics between industrial structure upgrading and urban economic elasticity, is a strong challenge to the traditional research conclusion that there is a coupling relationship between the two. From the empirical results, although it cannot be said that the framework constructed in this article solves the “black box” problem of urban economic elasticity, it can indeed indicate that there is a linear relationship between the advancement and rationalization of industrial structure and urban economic elasticity, and it has a significant dual threshold effect and regional heterogeneity.

For developing countries, globalization is a double-edged sword. On the one hand, globalization can accelerate the development of international trade and close the global wealth gap (Xuan et al. 2023 ). On the other hand, globalization can create a more stimulating environment of international market competition (Shang, 2022 ). Research has also shown that some developing countries have deviated from their actual problems and needs, are blindly integrated into the global development system, and are constrained by factors such as industrial technology, product quality, and talent, becoming the weakest link in the global industrial chain (Carlos et al. 2022 ). The invasion of Western cross-border capital and industries has undoubtedly enormously impacted the economic and social development of developing countries, leading to issues such as the fragility of urban economic resilience and limited defense capabilities. Since China’s integration into the global economic system, it has adhered to a mutually beneficial and win-win strategy of opening up to the outside world. While fully leveraging its own endowments, it is adept at innovative integration of foreign and local technologies. Based on the advanced and rational industrial structure, it has increased investment in intelligent manufacturing and digital transformation, achieving the transformation from traditional manufacturing to intelligent manufacturing in China. At the same time, it enriches the content of the urban industrial system, improves industrial production efficiency and quality, expands international market competitiveness advantages, and promotes the formation of urban economic resilience. In addition, in recent years, China has also actively promoted the the Belt and Road Initiative, aiming to optimize the industrial structure system of countries along the Belt and Road through infrastructure construction, trade and investment, financial cooperation, and other means, while increasing the economic closeness of countries along the Belt and Road, so as to promote high-quality economic development of cities along the Belt and Road. This is also the main reason why China’s economy is still able to recover and maintain rapid growth under the impact of the financial crisis in 2008 and the COVID-19 epidemic. Although China still has a long way to go in enhancing urban economic resilience, it can undoubtedly provide important experiences for other developing countries to achieve the same goals.

It should be noted that this study has certain limitations. Firstly, regarding the measurement of urban economic resilience indicators, in existing research, the core variable method and the comprehensive indicator method have mostly been used to measure urban economic resilience, but no consensus has been reached thus far. The measurement indicator method selected in this study focused more notably on the representativeness and continuity of the core variable method, while the output method was used to measure urban economic resilience. Should periodicity be considered? This question may yield a direction for future research. Secondly, there may be certain shortcomings in the measurement of indicators for industrial structure advancement and rationalization, which cannot restore the comprehensiveness of industrial structure upgrading. Can industrial structure upgrading be further classified? This issue must be improved upon in the future. Finally, there were certain missing values for the research area considered in this article (especially in the western region of China). If further consideration is given to all prefecture-level cities and above, it cannot be ruled out that this may impact the conclusions of this article, which may also provide a direction for future research.

Data availability

The original data for this article is included in the supplementary material of the article, and further inquiries can be directed to the corresponding author.

It should be noted that our measurement of the technology investment level is based on the government’s perspective, confirming whether the technology investment level of the government impacts urban economic resilience. Therefore, private investment and foreign direct investment are not included in the measurement of the technology investment level.

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Acknowledgements

This work was supported by the National Natural Science Foundation of China [42271284;41801205;71974071;42171286].Fundamental Scientific Research Business Expense for Higher School of Central Government[CCNU23ZZ009].

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Zhang, L., Lin, G., Lyu, X. et al. Suppression or promotion: research on the impact of industrial structure upgrading on urban economic resilience. Humanit Soc Sci Commun 11 , 843 (2024). https://doi.org/10.1057/s41599-024-03329-2

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Globalization, fractionalized governments and expansionary fiscal policy

International Trade, Politics and Development

ISSN : 2586-3932

Article publication date: 5 July 2024

• Supplementary Material

As a response to challenges that globalization poses, governments often utilize an expansionary fiscal policy, a mix of increased compensation spending and capital tax cuts. To account for these policy measures that are consistent with neither the compensation nor the efficiency hypothesis, this study examines government fractionalization as the key conditional factor.

Design/methodology/approach

We test our hypothesis with a country-year data covering 24 OECD countries from 1980 to 2011. To examine how a single country juggles compensation spending and capital taxation policies jointly, we employ a research strategy that classifies governments into four categories based on their implementation of the two policies and examine the link between imports and fiscal policy choices conditioned on government fractionalization.

This study shows that highly fractionalized governments are more likely to implement an expansionary fiscal policy than marginally fractionalized governments as a policy response to economic globalization and import shock.

Social implications

Our findings imply that fractionalized governments are likely to face budget deficits and debt crises, as the expansionary fiscal policy persists over time.

Originality/value

By examining government fractionalization as one of the critical factors that constrain the fiscal policy choice, this study enhances our understanding of the relationship between economic globalization and compensation or efficiency policies. The arguments and findings in this study explain why governments utilize the seeming incompatible policy preferences over increased compensation spending and reduced capital tax burdens as a response to globalization, potentially subsuming both hypotheses.

• Globalization
• Government fractionalization
• Compensation
• Capital taxation

Hwang, W. , Lee, H. and Lee, S.-H. (2024), "Globalization, fractionalized governments and expansionary fiscal policy", International Trade, Politics and Development , Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/ITPD-05-2024-0023

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Copyright © 2024, Wonjae Hwang, Hoon Lee and Sang-Hwan Lee

Published in International Trade, Politics and Development . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at http://creativecommons.org/licences/by/4.0/ legalcode

Introduction

As the level of economic globalization deepens and challenges it poses to national economies are intensified, scholars have actively debated whether governments focus on the compensation of losers of globalization or the promotion of competitiveness of their economies as a primary response to globalization. A puzzling observation is that governments often implement a policy of compensation spending and capital taxation that is not fully consistent with either the compensation hypothesis or the efficiency hypothesis, the two main arguments for governments’ responses to globalization.

The compensation hypothesis posits that governments increase social spending to compensate losers and minimize negative consequences globalization incurs to them ( Avelino et al ., 2005 ; Hays et al ., 2005 ; Hwang and Lee, 2014 ). The efficiency hypothesis, on the other hand, explains that governments’ key focus lies in the promotion of international competitiveness of their domestic firms and thus favor business-friendly capital taxation policy. A fiscal policy that is designed to achieve these two goals simultaneously can result in a mismatch between revenues and expenses. Therefore, this expansionary fiscal policy may induce unbalanced budget problems and debt crises for countries that heavily engage in international trade and economic globalization ( Avi-Yonah, 2019 ; Genschel, 2002 ). Despite the seeming incompatible policy preferences over compensation spending and capital taxation and its threat to fiscal risk, it is not clear under what conditions governments are likely to implement this expansionary fiscal policy.

In this regard, this study contributes to the related literature in two ways. First, it examines how a country puts compensation spending and capital taxation policy measures together and whether the policy implementation is consistent with either the compensation or the efficiency hypothesis. By categorizing countries with multiple combinations of these two policy measures, this study explores how governments use different fiscal policy responses to globalization. Second, as a key factor that explains the adoption of an expansionary fiscal policy, this study examines government fractionalization. When governments are highly fractionalized, due to the need to satisfy broad audience and multiple veto-players, they are likely to favor an expansionary fiscal policy with limited concerns about its negative impact on the economy and fiscal risk. The theoretical argument and empirical findings in this study potentially subsume both hypotheses and implicitly provide an explanation for why debt crises occur in some countries in the era of globalization.

Globalization, compensation spending and capital taxation

The compensation hypothesis postulates that governments establish various compensation programs that target losers of globalization for the purpose of maintaining support for open economy policies and/or reduce their discontent and complaints with globalization policies ( Adserà and Boix, 2002 ; Menendez, 2016 ). For example, Rodrik (1998) reports that high levels of international trade induce increased government spending. Avelino et al . (2005) find that trade integration is positively associated with an expansion of education and social security programs. Similarly, Hays and his colleagues (2005) demonstrate that increases in imports promote government-administered programs including unemployment insurance and various labor market programs, which aim to shield those adversely affected by global integration. Furthering this line of inquiry, Cao et al . (2007) and Hwang and Lee (2014) argue that both industrial subsidies and welfare spending can be used as compensation tools and examine how government ideology is associated with their policy choice. Tax policies and programs can also be used for the compensatory purpose. When most capital owners are winners of economic integration, for example, governments may strengthen progressive taxation systems that promote redistribution of wealth, and shift taxation burdens from labor to capital owners ( Garrett and Mitchell, 2001 ).

On the other hand, the efficiency hypothesis states that global market integration compels governments to opt for more market-oriented policies to remain competitive in international markets ( Cerny, 1995 ; Swank, 2006 ). Due to growing international competition, governments are under pressure to improve domestic firms’ competitiveness in international markets and thus reduce social spending programs to cut labor costs ( Rudra, 2002 ; Swank, 1998 ) or transfer tax burdens from capital to labor or consumers ( Wibbels and Ahlquist, 2011 ). Trade openness and capital mobility combined with heightened exit threats by multinational corporations and investors may constrain governments’ efforts of social welfare spending, particularly if high labor costs are the main driver of offshore outsourcing. Under this pressure, governments may lose tax autonomy and cut tax rates especially on mobile factors such as capital ( Leibrecht and Hochgatterer, 2012 ), which can lead to a race to the bottom in taxation ( Bretschger and Hettich, 2002 ; Genschel, 2002 ) [1] .

To test the arguments, scholars have examined competition-related factors such as the level of import or trade openness ( Hays et al ., 2005 ), economic crises ( Lammers et al ., 2018 ) and types of government spending ( Heimberger, 2021 ), supply-side factors such as regime types, government partisanship and fiscal needs ( Avelino et al ., 2005 ; Betz and Pond, 2023 ; Rudra and Haggard, 2005 ), and demand-side factors such as geographical concentration of losers ( Menendez, 2016 ), public preferences ( Beesley, 2020 ; Hellwig, 2014 ), the power of political left and organized labor ( Rudra, 2002 ; Engler, 2021 ) and factor mobility ( Hwang and Lee, 2014 ).

Empirical evidence is largely mixed. In fact, despite the clear theoretical distinction between the two hypotheses, governments often employ mixed policy tools that do not serve only one policy end. Notably, the key instrument of efficiency politics, capital tax reduction, has been frequently used along with the key instrument of compensation politics, increased compensation spending. In our sample of country year observations, only 44.5% of governments used spending and taxation policies consistently with either the compensation (19.2%) or the efficiency (25.3%) hypothesis. In 22% of the sample, government employed an expansionary fiscal policy (i.e. increased compensation spending and reduced corporate tax burdens). This observation implies that the efficiency and compensation hypotheses may be complementary in some situations. An interesting question is then under what conditions governments utilize the expansionary fiscal policy.

Government fractionalization and expansionary fiscal policy

An expansionary fiscal policy can arise from diverse contexts. For instance, although governments care about domestic competitiveness in international markets and thus have an incentive to reduce capital tax burdens, they may view increased compensation spending does not necessarily hurt the economy. Since social spending can promote national economic competitiveness in global markets by enhancing labor productivity and skills ( Kaufman and Segura-Ubiergo, 2001 ), even capital owners who rely heavily on high-skilled workers in production may not oppose the expansion of welfare programs ( Iversen and Stephens, 2008 ).

Unless economic openness is carefully managed, the backlash against economic globalization can arise anytime especially when losers of globalization are politically powerful ( Scheve and Slaughter, 2004 ; Engler, 2021 ). Thus, even though increased compensation spending causes financial distress and budget deficit to governments, they are incentivized to promote social welfare spending for the sake of a long-term open economic policy. This view is consistent with the political-economy argument that social programs are functional to the long-term success of the capitalist system, even if these programs place short-term costs and burdens on private businessmen ( Berkowitz and McQuaid, 1992 ). In this regard, Meinhard and Potrafke (2012) claim that, although globalization can cause a reduction in tax revenues, it does not necessarily end up with a welfare state retrenchment. This is because compensation spending may nonetheless rise due to the higher demand for social insurance.

In addition, increased compensation spending does not necessarily require governments to raise burdens on capital and business owners ( Genschel, 2002 ; Swank, 1998 ). Thanks to high economic growth and increased overall revenues, governments may be able to raise enough funds to support increased compensation spending without driving up tax rates and burden on business and capital owners. For example, although the share of tax revenues out of GDP increased by approximately 8% from 1970 to 1998 in 16 OECD countries on average, social security contributions rather than corporate taxes were the main driver of the increase ( Genschel, 2002 ). Swank (1998) similarly reports that business tax burden was relatively stable in OECD countries during the period. Relatedly, governments may finance increased compensation expenditures by cutting spending on other items such as public investment instead of raising capital tax burdens ( Genschel, 2002 ).

To account for the adoption of an expansionary fiscal policy, this study focuses on government fractionalization, which is conceptualized as the degree of division of a government. This concept, often measured by the number and size of parties in a government, is strongly associated with “the support that governments enjoy in the legislature and among voters” ( Grilli et al ., 1991 , p. 350). For two main reasons, we argue that highly fractionalized governments (characterized as coalition, minority or fragmented governments) are more likely to support the expansionary fiscal policy than marginally fractionalized governments. First, we find the reason in the “diverse interests” of fractionalized governments. Unlike in governments with strong domestic political support and concentrated power, fractionalized governments require large minimum winning coalitions that include multiple political agents, such as political parties or veto players, in the fiscal policy decision-making process. Since members of the coalitions try to benefit their own constituencies, they are likely to engage in intense political conflict among themselves. Therefore, it is difficult for fractionalized governments to change the status quo or enact controversial policies ( Grilli et al ., 1991 ). The diverse interests may put fractionalized governments in the ‘war of attrition,’ making it difficult to enforce a fiscal policy consistent with either the compensation or the efficiency hypothesis ( Alesina and Drazen, 1991 ). Members in fractionalized governments, though agreed upon the overall direction of fiscal policies, attempt to shift the costs of adjustments (the costs their constituents pay due to compensation spending cuts or capital tax increases) to other parties or agents. The higher the costs are, the longer the fight. Until “one group concedes and bears a disproportionate share of the burden,” therefore, agreements about unpopular fiscal policies tend to be delayed ( Alesina and Drazen, 1991 , p. 1170).

Instead, fractionalized governments pursue popular policies that satisfy coalition members broadly, which may lead to increased government expenditures and tax cuts ( Perotti and Kontopoulos, 2002 ). As Li and Smith (2002) imply, in the era of economic globalization, fractionalized governments are likely to be under high pressure to meet diverse economic interests from multiple coalition members and their constituencies that potentially include both winners and losers of globalization. At the same time, unpopular policy proposals like a decrease in compensation spending or an increase in capital tax burdens can be vetoed easily in fractionalized governments ( Roubini and Sachs, 1989 ) [2] .

Broadly, this argument is in accord with the previous literature on the weak government thesis ( Perotti and Kontopoulos, 2002 ; Roubini and Sachs, 1989 ). Weak governments invite multiple agents and veto-players in the decision-making process of fiscal policy. The larger the number of agents is, the higher the chance of disagreement among agents ( Tsebelis, 1995 ), and thus the harder to maintain a fiscal policy consistent with either the compensation or the efficiency hypothesis. Therefore, fractionalized weak governments are likely to face budget deficits and debt growth ( Ashworth et al. , 2005 ; Perotti and Kontopoulos, 2002 ). For similar reasons, Haggard and Kaufman (1995) argue that weak governments respond poorly to economic crises and often fail to initiate economic reforms.

Second, government fractionalization can induce collective myopia. Disagreements among different political actors in highly fractionalized governments drive policymakers to weigh the future less but behave more myopically ( Grilli et al ., 1991 ). Due to the inability to secure agreements among coalition members within a government ( Roubini and Sachs, 1989 ) and frequent power alternation between competing political actors, fractionalized governments have incentives to pursue short-sighted policies, focusing on immediate benefits rather than long-term future effects. In this regard, the expansionary fiscal policy may be a rational strategy for myopic policymakers in fractionalized governments expecting next elections. Scholars in political economy point out the ‘fiscal illusion’ that voters may have. Since voters are not well informed of intertemporal budgetary constraints of the government, they tend to overestimate the benefits of current spending and underestimate the future tax burden ( Buchanan and Wagner, 1977 ; Shi and Svensson, 2006 ). Accordingly, voters under fiscal illusion favor policymakers who offer an expansionary fiscal policy. As demand for compensation for losses or assistance for competition arises as consequences of globalization, highly fractionalized governments are likely to discount the future in favor of short-sighted expansionary fiscal policies for electoral reasons.

This idea is also related to the political business cycle literature that posits that voters reward politicians who support expansionary budgetary policies in election years ( Alesina  et al ., 1992 ). We do not claim that expansionary budgetary policies entirely result from opportunistic behavior of policymakers before elections [3] . Under right circumstances, however, the possibility that fractionalized governments seek an expansionary fiscal policy can be high. Eslava (2011 , p. 647) argues that, concerning the occurrence of fiscal deficits driven by opportunistic behavior, policymakers are “interested in garnering votes for themselves or their parties” with changing economic policy and voters are “assumed to value public spending” and its benefits. Rogoff (1990) also contends that an expansionary fiscal policy can be a rational election strategy. Having limited information about politicians’ competence levels, voters may give weight to expansionary fiscal policies in their competence assessment. If this is the case, politicians in fractionalized governments may be strongly in favor of an expansionary fiscal policy.

Ceteris paribus, as a response to globalization, highly fractionalized governments are more likely to utilize an expansionary fiscal policy that involves an increase in compensation spending and a decrease in capital tax burdens than marginally fractionalized governments.

Research design

We test our hypothesis with a country-year data covering 24 OECD countries from 1980 to 2011. To examine how a single country juggles compensation spending and capital taxation policies jointly, we employ a research strategy that classifies governments into four categories based on their implementation of the two policies. The first group is ‘the efficiency-promoter” (25.3% in our sample). They are the governments that use the policies in accordance with the efficiency hypothesis: decreases in both compensation spending and capital tax burdens [5] . The second group of governments is ‘the compensator” (19.2%). They are the governments that use the policies in accordance with the compensation hypothesis: increases in both compensation spending and (at least no decreases in) capital tax burdens. The third group is ‘the expansionary” (22.2%). They increase compensation spending but decrease capital tax burdens. Examples include Switzerland in 2002 and 2003. In these years, Switzerland’s economy was struggling, and its unemployment rate increased from 1.9% in 2000 to 3.7% in 2003. Government compensation spending increased from 4.87% in 2001 to 5.97% of its GDP in 2003. Capital tax burden decreased from 22% in 2001 to 20.3% of its total government taxation in 2003. The total vote share of the government parties then was 58.2%, which was lowest in Switzerland during the analysis period [6] . Finally, the last group is ‘the contractionary” (33.3%): they decrease compensation spending but increase (at least does not reduce) capital tax burdens. This tight or contractionary fiscal policy can be designed to restrain the economy particularly during or in anticipation of an inflation-inducing business-cycle expansion. This type of fiscal policy is often observed when a country is in a financial crisis, economic recession or recovery. Examples include several Asian economies such as South Korea or Indonesia right after 1997 financial crisis.

Variables and data

By taking first differences in compensation spending and capital taxation burdens, we identify each country-year observation based on the four categories. The dependent variable, Government Response , has four values: 0 (the contractionary), 1 (the efficiency-promoter), 2 (the compensator) and 3 (the expansionary). To examine the difference between the expansionary and the other types of fiscal policies, we also create a binary dependent variable, Government Response II , which is coded as 1 for the expansionary and 0 for the others. To estimate our models, we use multinomial logit regression for Government Response with country fixed effects, and logit regression with country random effects for Government Response II .

To measure compensation spending, we use data on welfare spending and industrial subsidies. Welfare spending includes unemployment benefits and active labor market programs (ALMPs) as two main categories [7] Industrial subsidies are direct grants that governments make to enterprises. The sum of these expenditures is measured as % of GDP [8] The data come from the OECD (2023) . Alternatively, we measure these expenditures as % of total government spending. This is because they may show government spending priorities better and measure the allocation of resources under the government direct control ( Wibbels and Ahlquist, 2011 ). To measure capital tax burdens, we use data on corporate income taxes and employers’ social security contributions for capital taxes ( OECD, 2023 ). The sum of these two items, measured as % of total government taxation, effectively shows financial burdens capital and business owners carry.

The explanatory variables in our analysis are Globalization and Government Fractionalization . We measure globalization using changes in imports ( ∆Import ) as a share of GDP between time t -1 and time t . Short-term changes in imports are well connected to heightened economic insecurity and dislocation caused by global competition and thus have significant implications to domestic politics ( Cao et al ., 2007 ). To control for the long-term static effects of international competition, we also include the level of imports as % of GDP ( Import_1 ) in the models. The data comes from the World Bank (2023) .

Government Fractionalization is measured by the total seat share of all non-government parties in parliament. As the seat share of government parties decreases, the government is likely to face stronger opposition from other parties, veto-players and the public over fiscal policy. This measure can appropriately indicate the level of constraints on government power and policy autonomy ( Li and Smith, 2002 ). As an alternative measure, we also use the total vote share of all non-government parties in parliament [9] The data come from the World Bank’s Database of Political Institutions (DPI) ( Beck et al ., 2001 ). By creating an interaction term between government fractionalization and import variables, we evaluate whether the effects of import on government fiscal policy response is conditioned on government fractionalization.

There are several political and economic controls in our models. Existing studies find that right- and left-wing parties cater to distinct constituencies by articulating competing policy packages. Broadly defined, governments on the right are expected to cater to capital owners and thus associated with the formation of policies which aim to promote the market, its efficiency and low taxation. Governments on the left, by contrast, are linked to the greater development of state-led compensation programs. Partisanship is coded as 3 for left-government, 2 for central- and 1 for right-governments. The number of years the chief executive has been in office, Years (in office) and whether the party of the executive has a majority of the houses that have lawmaking powers, Undivided Gov’t, are associated with both government fractionalization and fiscal policy preferences. We control for these factors using data from DPI. We expect that the longer the chief executive has been in office, the less the government is likely to become the expansionary. Similarly, undivided governments are less likely to become the expansionary than divided governments.

As economic controls, exports, FDI, GDP growth, GDP per capita, inflation, unemployment and external debt size are included. It is generally expected that good economic conditions reduce the necessity of employing an expansionary fiscal policy. For example, export increases are likely to minimize disruptions caused by increased imports and thus reduce the demand for compensation. High GDP growth and GDP per capita are also believed to reduce backlash against import competition. While governments carrying a huge amount of debt are not likely to implement an expansionary fiscal policy, high unemployment rates could be a driving factor of such fiscal policy. As these economic conditions become positive, we expect that governments are less likely to employ an expansionary fiscal policy. By using first-differenced values, we capture the dynamic aspects of these economic variables. The data on economic controls come from the World Bank (2023) . For descriptive statistics, refer to Table 4 in online appendices .

To test the hypothesis, we first examined the differences between the expansionary and the other types of governments. The results in Table 1 show that as the size of import increases, a highly fractionalized government is likely to utilize increased compensation spending and decreased capital taxation policies. However, when the government is marginally fractionalized, import has a negative impact on the probability of choosing the expansionary fiscal policy, which supports our claim.

Figure 1 generated from Model 1.1 visually clarifies the conditional effects of government fractionalization on the relationship between import and the expansionary fiscal policy. The results remain consistent when we measure compensation spending as a percentage of total government spending in Model 1.2.

As another way to test the hypothesis, we examined the differences among four types of governments. As Table 2 shows, import and its interaction term with government fractionalization have significant effects on the fiscal policy choices. When governments are highly fractionalized, as the size of import increases, they are likely to utilize the expansionary rather than the contractionary or efficiency-promoting fiscal policy. Meanwhile, the conditional effect of government fractionalization on the difference between the expansionary and the compensatory fiscal policies is relatively weak as shown in Model 2.3. This implies that when governments are highly fractionalized, they tend to increase compensatory spending, but their preferences over capital taxation are uncertain. The substantive results remain virtually the same when we use the total vote share of all government parties in parliament as reported in Table 5 in Appendices [10] .

When we measure compensation spending as % of total government spending, the results, as reported in Table 3 , corroborate our claims that fractionalized governments are likely to implement the expansionary fiscal policy rather than contractionary, efficiency-promoting or compensatory fiscal policy.

To evaluate substantive effects of import, government fractionalization and their interaction on fiscal policy choices, we create two figures of predicted probabilities using Models 2.1 and 3.1. To this end, we used Clarify simulation program ( Tomz et al ., 2001 ).

As the figures show, when governments are highly fractionalized (e.g. government parties have 25–40% of the seat share) and the import level is relatively high, the probabilities that governments use the expansionary fiscal policy are high (27–34% in Figure 2 and 34–48% in Figure 3 ). As the level of government fractionalization decreases (e.g. government parties have 60–85% of the seat share), however, the probability of using the expansionary fiscal policy decreases (9–18% in Figure 2 and 7–20% in Figure 3 ). Overall, these findings strongly support our hypothesis and show that the effects of import on the expansionary fiscal policy is conditioned on government fractionalization.

The results in Tables 2 and 3 also show that governments are likely to take the expansionary fiscal policy when unemployment rate is high but unlikely to do so when export or growth rate is high, which is consistent with our expectation. Similar results are found in Table 1 . Other control variables, in general, do not have statistically significant effects on the choice of expansionary fiscal policy over other types of fiscal policy options. For example, government partisanship, whether it is a left or right-wing government, the number of years the chief executive has been in office, or changes in the debt size do not explain the choice of fiscal policy significantly, potentially implying that governments’ fiscal policy response to economic globalization are a complex decision that cannot be easily explained by their political orientation or budget conditions.

Various economic or political factors may account for governments’ diverse fiscal policy responses to globalization, thereby producing mixed empirical evidence that supports the compensation or the efficiency hypothesis. By examining government fractionalization as one of the critical factors that constrain the fiscal policy choice, this study enhances our understanding of the relationship between economic globalization and compensation or efficiency policies. In comparison with marginally fractionalized governments, highly fractionalized governments need to satisfy broad audience, invite more agents and veto-players in decision-making processes, look forward to short-term political gains rather than long-term plans for the economy and thus tend to maintain an expansionary fiscal policy. The arguments and findings in this study explain why governments utilize the seeming incompatible policy preferences over increased compensation spending and reduced capital tax burdens as a response to globalization, potentially subsuming both hypotheses.

In recent decades, we have observed frequent occurrence of debt crises in many countries. For example, in 2009, several countries in the EU system such as Ireland and Spain experienced increases in debt. Global public debt-to-GDP ratio tripled from the mid-1970s to 92% by 2022 ( Gaspar et al ., 2023 ). Since this is a rather systemic trend observed in many places worldwide, governments’ fiscal policy responses to globalization may be strongly relevant to debt crises. When governments increase compensation spending but reduce capital tax burdens for a long time, increased deficits can push up public debt-to-GDP ratios. Our findings suggest that fractionalized governments are likely to face budget deficits and debt crises, as the expansionary fiscal policy persists over time. In this regard, future studies will benefit by exploring the connection between the expansionary fiscal policy and debt crises across governments with different levels of government fractionalization. Relatedly, future studies will also benefit by exploring how domestic pressure from different societal groups such as labor or capital owners interacts with government fractionalization in explaining the employment of various compensation and capital taxation policies.

Marginal Effects of Import on Expansionary Fiscal Policy conditioned on Government Fractionalization

Predicted probability of expansionary fiscal policy (with 95% CIs)

Government fractionalization and expansionary fiscal policy (OECD, 1980–2011)