Globalization II: The Great Arbitrage

John Sutton

in Competing in Capabilities

Published in print October 2012 | ISBN: 9780199274536
Published online January 2013 | e-ISBN: 9780191746123 | DOI:

Series: Clarendon Lectures in Economics

Globalization II: The Great Arbitrage

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The outcome of the process considered in Chapter 3 involves a liberalized trading environment, in which high capabilities in some parts of the world coexist with low wages in other areas. This provides a massive arbitrage opportunity for firms that can bring together high capabilities with low wages — and it is the exploitation of this opportunity that has been the main driver of change in the global economy over the past twenty years. This chapter first looks at the consequences of this process, and then considers the underlying mechanisms that generate the transfer of capabilities across firms and countries. The central result developed in this chapter relates to the change in the terms of trade suffered by Country A as it faces rising prices for raw materials when Country B's capabilities rise. The second half of the chapter turns to the question of how the rise in Country B's capability is achieved. It looks at one industry in particular in which the pace of change has been extremely fast — the car industry. Asking why this process has advanced so quickly in this industry provides some clues as to what factors determine the speed of effectiveness of capability transfer.

Keywords: liberalized trade; high capabilities; low wages; global economy; car industry; capability transfer

Chapter.  8187 words.  Illustrated.

Subjects: Economic Development and Growth

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