Archived — Discussion Paper Number 2: Technological Change and International Economic Institutions

by Sylvia Ostry, Centre for International Studies, University of Toronto, December 1995


Economic interdependence has increased sharply since the end of World War 2 when the architecture of international economic co-operation was constructed. The term "globalization" which became au courant during the 1980s, while never precisely defined, is meant to convey the increasing linkages among countries or the deeper integration of the world economy by trade, finance, direct investment and technology. Interdependence also involves an increasing interrelationship among major influences on the world economic system, with monetary policy affecting trade policy, feeding back into monetary and fiscal policy. This continuing force of globalization and, of course, the end of the Cold War, capture the essential yet stark contrast between the environment that generated the impetus for the institutions and the world of the 1990s. A rethinking of their raison d'être becomes necessary.

There has been a great outpouring of analysis on proposed reforms to the Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank. There is considerable irony in the fact that the new World Trade Organization (WTO), a descendant of the ill-fated International Trade Organization (ITO) which was never born, is the first construct in a new post-Cold-War architecture of international co-operation. Indeed, the Uruguay Round itself reflected — in the inclusion of "new issues" such as trade in services, intellectual property and aspects of investment — the impact of globalization on the agenda of trade policy. The deeper integration of the world economy is pushing trade policy more and more inside the border, blurring the lines between international and domestic policies, and blurring the lines among the three engines of globalization: trade, investment and technology.

The GATT reflected the postwar world inherited from the disastrous tariff wars of the 1930s: the prime focus of GATT negotiations was to reduce border barriers. The WTO's major focus will be on "domestic" policies such as:

  • domestic regulatory regimes;
  • competition policy;
  • structural impediments to mergers created by different models of corporate governances; and
  • high-technology industrial policies.

Further, these policies of deeper integration will be high on the agenda of new regional arrangements such as NAFTA and possibly APEC. And of course, Europe 1992, or the completion of the internal market of the (then) European Community, was the world's first experiment in a particular form of deeper integration.

As noted, there are three interrelated forces of globalization: trade, investment and technology. The interrelations among the globalization engines are complex and not fully understood. The revolution in information and communication technology is both an enabling factor and a driver. It fosters innovation in products and production processes, and also in organization at the level of the firm and of the industry.

The multinational enterprise (MNE) is the main vehicle for transmission — not only of investment but also of trade and technology. While the history of the MNE goes back to the mid-nineteenth century, and foreign direct investment (FDI) increased markedly after World War 2, an unprecedented surge took place in the second half of the 1980s, significantly intensifying the globalization trends of previous decades and marking the onset of a new phase of deeper integration.

Why a new phase? First, there were new actors, especially the MNEs from Japan. While U.S. dominance in FDI was steadily reduced after World War 2, the Japanese were "late multinationalizers". Further, an increasing proportion of investment was in technology-intensive manufacturing and technologically sophisticated services. These industries are dominated by a few large firms, i.e., they are oligopolistic in structure. International rivalry intensified as corporations sought to:

  • capture economies of scale and scope;
  • customize products to satisfy consumer tastes;
  • gain access to sophisticated, high-quality networks; and
  • gain access to knowledge both technological and "tacit".

While somewhat oversimplified, it could be argued that continuous innovation (broadly defined) increasingly became the basic determinant of competitiveness.

This paper highlights policy issues stemming from these developments. No new institution is needed to deal with the ongoing impact of technological change, but the agendas of existing institutions should be adapted to reflect the importance of this change. Before turning to some suggestions for change, it is useful to review the main features of the intensification of globalization and the deeper integration as they emerged in the 1980s.

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