Globalism, Regionalism, and the New Economic Geography

I see globalization as a force that is and will continue to be a driving force for some time. Though, I see some challenges to globalization. There are two major challenges: one is that some countries may not feel that they are benefiting from globalization and may close their economies. This would be a mistake on their part but it could happen. The probability is not high but not zero either. For the most part, leaders of developing countries know that their countries are benefiting from globalization.

The second challenge could be more serious; that is developed countries would observe that some countries with which they have been dealing are not reliable and that perhaps the investors in developed countries would stop investing in developing economies, such as Argentina. I think this is would be a mistake too. I believe we should increase our interdependence and help these countries.

The second point is about the increasing importance of regional (small regions) local processes as the main source of innovation and business practices. The last point I will talk about is the advent of the knowledge-based economy.

Why does globalism foster more regionalism or localism? Globalism depends on comparative advantage and specialization, and specialization occurs not at a national level but occurs at local levels or economic clusters. But today's economic clusters are different in that they have entered into the global economy. Businesses have to pick out the best-the best components, the best services-at different locales to put together the most competitive products or services.

I think about this in the context of what I call the new economic geography. The economics courses that I took, before World War II, were on economic geography. What we studied at that time included rainfall, natural resources, ports, and other physical assets. Today, people study the creative assets such as research and intellectual property. This is the new economic geography, and countries have control over these things: countries can create these assets.

Innovation and entrepreneurship are two different things. You may have innovation in a region without much entrepreneurship; Singapore is an example of this. Or you can have entrepreneurship without innovation; Taiwan is an example of a place that was very entrepreneurial, while most of the innovations came from somewhere else. These are problems for these regions. The key is that you get something powerful when you have innovation and entrepreneurship together.

The three ways to get net growth include the following. One is to improve factor inputs, or increase the amounts of quality of labor and capital, which improves productivity and increase GDP. Another is trade and comparative advantage, which is to say a reduction in import substitution rules and an increase in exports, thereby increasing world market share and raising GDP growth.

Finally, there is innovation and entrepreneurship; the idea is to create a favorable habitat for innovation and entrepreneurship, which would create new businesses. This is how you get new industries. There is evidence that shows that there is an effect on GDP growth from entrepreneurship, but it is long term. So countries that want to develop these creative assets should not expect a quick return. The catch is that entrepreneurial regions are more subject to boom and bust cycles. The good news is that each new wave leads to something higher than the previous one.

Technology bubbles are not new. They have been occurring for hundreds of years and will continue to do so. There are three aspects to these cycles: there is a boom, a bust, and a build cycle. The building is what takes you higher. People over invest, but the knowledge and technology levels are raised by the boom period. And companies capitalize on this raised knowledge level. Internet traffic, for example, is still doubling every six months. Boom and bust cycles are not only inevitable, but they are also necessary to bring up the knowledge level to create these technologies. If we try to smooth the cycle out, we may make it flat.

The main features of an entrepreneurial habitat include the following. The first is to have favorable rules of the game: good security laws, property laws, etc. This is the role of government that is especially important. Second, there must be strong value-added business services; these are services specialized in helping start up companies and give financial and legal advice. It is more than just giving money. Third is the free flow of capital to the most effective uses. Fourth is the free flow of capital of people to the best application of talent. Fifth is the free flow of ideas to enhance collective learning. And, finally, global linkages to other industrial clusters are necessary.

Patent applications are going up very rapidly, by US investors as well as by foreign investors. This suggests a fundamental shift in the pace of innovation. As a consequence, we will see boom, bust and build cycles more frequently than before. And the cycles will be more volatile because they will be coming more quickly and there will be amplification due to the attention created by the press. The press tends to tell you all the good stories during good times and all the bad stories during bad times, thus amplifying cycles.

Q: I am interested in the externalities of the bust stage of your story. What happens to public goods? What role does the government have?

First, during the bust, you get more unemployment. Silicon Valley has lost 65,000 jobs in the last 18 months. That is more than one year's growth over the decade, when we were growing at 45,000 jobs a year. Job loss seems to have stabilized and still only at about six percent, which is not high. Then you get withdrawal of investment since there was over investment. What is the role of government? Not a lot. At the national level, it is hard to formulate policy that is applicable to local areas. One role, though, is retraining and making sure people have information about retraining.

Q: What is your view on the contribution of universities to the US or global community through teaching in the management area? We do not have management programs at schools in Japan; is this a weakness?

Stanford's management school started in 1925; and the school has since gone through several cycles. In the 1960s, we started quantifying business and we now do a lot of case teaching too. We have a lot of industry speakers coming in and there is a strong interaction between the school and industry. What I find interesting is that industry people are more interested in speaking with students than they are in attending conferences. So, that plays a very important role. There have been recent studies on how valuable an MBA is; I think students find them valuable. There are several ways Japan could go about teaching management. I think it would be an advantage to have this kind of school.

Q: I have a question on the role of defense expenditure. Since the end of the Cold War, there has been a release of human resources into the civilian sector. This seems to be a main cause of the Silicon Valley phenomenon. Are we now facing the reverse of this history? Now the US is preparing for a war with Iraq and a military build up is taking place. And the war on terror will be protracted. Will this affect the future of the civilian sector?

The military everywhere, in every country, has been an early adopter of technologies. This has been true in the US, since the advent of rifle technologies. The military played an important role on the demand side in Silicon Valley. The space program and the military had effects on Silicon Valley. There were negative elements as well as positive. The role of government was small in Silicon Valley except in the demand side. The build up for the war on Iraq is already having some impact. There is a lot of effort being made in the security and reliability of networks, which is good for the civilian side too. There is a lot of emphasis on stable systems. The build up may create a demand for personnel, but it will also create a demand on the purchasing. There was a lot of attention on defense conversion in the 1960s, but it failed. What happens is that people leave and find a new job. A lot of these people, who were designers, went to work for Hollywood.

Q: Will US productivity gains last? Will the Internet play a role in productivity?

The major reports on productivity, for example by Dale Jorgenson, all said about the same thing. The big question was this: was the large jump in productivity between 1995 and 2000 real or not? The reports concluded that the productivity growth was real. It is anticipated that we will see more growth in the third quarter, though some will come from lay offs. Most of the gains in productivity have occurred in retailing, wholesaling, securities, telecommunications, computer manufacturing, and semiconductors. A lot of it was in the old industries; and they attribute this to companies that used IT to change their business models. Wal-Mart and Dell are examples. External events can have huge impacts on expectations. For example, there was a large gain the US stock market simply because Iraq said it would allow inspections.

Q: How can Japan get the features of an entrepreneurial habitat, when the features seem to be based on an Anglo-American socioeconomic system?

Often people give cultural interpretations to these phenomenons; I am not a strong believer in this interpretation. In France, for example, in industries where there is little government involvement, you have great international competitors. But the people that run these companies come from the same towns as the people that run uncompetitive companies. It is the habitat or environment that makes the difference, not the culture. As well as the habitat developing organically, it also has to do with education and with having national heroes. Non-profit organizations also play a role.

Q: I think the crucial stage is what happens during the bust. It is in Japan. What do you think is the most important factor for making the bust stage a breeding stage for new developments?

Being linked to the global economy is important. If the bust period lasts too long and assets disperse from the region, it can be a real problem. The longer the bust stage, the harder it will take to get out. In the US, it was not until 1996 that you started to get venture investment after the 1980s bust because you had to go out and raise the capital before it could be invested. If the delay is shorter, the funds will remain intact and will be ready to be invested.