Regionalism, and the new economic geography

William F. Miller, Chairman of the Board, Borland Software Corporation, Scotts Valley, California

The economic geography of the world is undergoing rapid and profound changes. There are various obvious symptoms of this. The current slowdown not withstanding, we have had accelerated economic growth in new areas, particularly in major portions of Asia and more recently in South America. The World GDP per capita continues to grow, trade growth is even greater than world GDP growth, and foreign direct investment grows even faster than trade. There are and will continue to be growing pains but let us look beyond them.

Fundamentally there are three ways to attain economic growth: through improving the factor inputs, through trade and comparative advantage, and through innovation and entrepreneurship. Of course these are not mutually exclusive, but for developing policies and practices it is convenient to address each separately.

Whereas most nations of the world are still achieving economic growth through improving the amounts and quality of factor inputs of production (capital, labor and technology) and through trade and comparative advantage, the developed nations and the emerging economies are increasingly turning to innovation and entrepreneurship as drivers of economic growth.

Especially in Asia we see increasing emphasis on research and the teaching of science and technology. Science parks and incubators are "all the rage" today after countries have seen the success of the Hsinshu Science Based Industrial Park in Taiwan and entrepreneurial regions such as Silicon Valley, Austin, Texas and Boston, Massachusetts. (China has established over 600 Science-Industrial Parks).

Technology, the embodiment of knowledge, is driving most of the changes in the world economy, and, either directly or indirectly, will be the center of political concerns. Global economic data show that the per capita use of basic materials is declining or growing more slowly than the per capita growth of GDP while the per capita growth of knowledge intensive business and services exceeds the average per capita growth of GDP worldwide.

This lesson has not been lost on developing countries. Whereas it was important to improve and develop their agriculture it order to have a well fed healthy population, and for some countries their natural resources are their main source of wealth, it is essential that these countries participate in some way in the growth of the knowledge intensive industries in order to be a participant in the growth of the world economy.

The countries that have pursued market-based export-oriented grown in manufacturing and other knowledge intensive areas have experienced job creation, rapid growth in demand for labor, and rapid grown in real wages. The global share of manufactured goods in developing countries rose from 20 percent in 1960 to 60 percent in l990. Today for countries such as China and India, manufactured goods accounts for more than 50 percent of all exports.

New technologies provide for the creation of new products and the improvement of old products. As a consequence, acquiring new technologies, acquiring knowledge, and educating the workforce to be able to utilize the new technologies Comes the high priority for all governments to a greater or lesser degree depending on their stage of economic development. Technology plays two roles. It is one of the forces driving business to globalism and also it provides the foals for response to globalism.

A recent study by the McKinsey Global Institute of productivity in the United States between 1995 and 2000 concluded that there was an unusually large jump in productivity during that period and that some of it was real and will continue. It was one of the drivers of productivity growth, but it per se was not the major driver. The jump in productivity was concentrated in six sectors: Retail, wholesale, securities, telecom, semiconductor and computer manufacturing.

Micro forces are leading to a new "world business paradigm", global sourcing and distributing of components of new products (that are themselves complex systems)-automobiles, aircraft, computers, consumer electronics, new compound materials, etc.

The first major change of the last two decades is the pronounced shift to knowledge intensive industries. Even rather basic products such as glass and steel employ sophisticated high tech production processes and specialty glass and specialty steel are complex high tech products. Since the mid 1970's the aggregate per capita growth of the world economy has largely come from the knowledge intensive industries and services (which are also knowledge intensive).

Increasing knowledge intensity means research is more important and increasing pace of change is causing research to become more expensive. The semiconductor industry spends about 20 percent of sales on R&D and the computer industry spends about 15 percent, of sales on R&D. Increasing costs of R&D is creating a search for lower cost technologies i.e. a global sourcing of R&D.

Also because R&D costs are sunk costs, i.e. up front costs they can be recovered only by spreading these Costs over large market scale hence the drive for market scale and global distribution of products.

This then is the new "world business paradigm" -- global sourcing of system components and global distribution of products. Perhaps the most apt description of this resew paradigm wits given by Jack Welsh, Chairman of the General Electric Company, in a speech to the National Academy of Engineering in 1987 when he said, "The winners in the global games will be those who can put together the world's best in design, manufacturing, research, execution and marketing on the largest scale. Rarely are all of these elements located in one country, or even on one continent. Scale will be dominant factor".

This is the new "world business paradigm" in its purest form. Not every company does or even will function this way. But companies are tending in that direction and even small niche companies become international very quickly and move toward global sourcing and distributing.

The consequence of these micro forces is that investment now leads trade. For several decades global trade has grown faster than global GDP. Today foreign direct investment globally is growing faster than global trade this trend increases global economic interdependence. Thus the new World Business Paradigm is characterized by: (1) global sourcing and distributing, (2) extensive foreign direct investment, and (3) the development of technology and industry clusters.

The new "world business paradigm" calls for new government to government relationships. It calls for fewer barriers, tariff and non-tariff to work efficiently. Business now leads governments in developing global interdependence. Case studies of countries show bow openness to foreign trade and investment, coupled with complementary reforms, typically leads to faster growth

Not only has business become more transnational, but governments have recognized that many social issues can be solved only at a transnational level. For example, environmental problems, health and disease, water supply problems, drugs, terrorism, and regional conflict do not know national boundaries. Governments have moved to greater cooperation and agreements to solve these problems.

Economically globalism is essentially. based on comparative advantage which means specialization. But specialization today is not based on single products or single industries but on clusters of industries mutually supporting each other as has been so well articulated by Michael Porter. Clusters still mean locales or regions. Networks may diffuse some of the effects of regional clusters but much of the economic dynamics of a cluster occurs in specific regions.

As the economies of the world become more interdependent and as governments move to more and deeper transnational agreements to solve social problems, there is an inevitable loss of sovereignty. As transnational companies engage in global sourcing and distributing they move out from under the sovereignty of their "home" country with a de facto loss of sovereignty over the economy of the home country. As governments become signatories to more transnational agreements there is de jure a loss of sovereignty. Not only is sovereignty devolving upward and outward away from the nation state but also there is, a devolution of authority downward from the nation state to subregions within the nation. This is especially evident in geographically large countries.

This article is condensed from the writer's presentation at the opening of the Executive Center for Global Leadership in Denpasar, Bali on Feb. 2.