Page 223 - Global Political Economy_Understanding The International Economic Order

CHA PTER E IGHT
ment—for example, the establishment of a production facility by a
firm ofone nationality within another economy—became an increas-
ingly important feature of the international economy, economists as-
sumed that FDI, like portfolio investment, was due to differences in
interest rates and that exports and foreign production were, in es-
sence, perfect substitutes for one another. This acceptance of the
Mundell equivalency continues to pervade economists’ attitudes to-
ward FDI. Recently, a number ofeconomists have begun to rethink
the nature and significance offoreign direct investment and have ap-
plied industrial organization theory to the behavior ofmultinational
firms and the determination ofinternational trade patterns.
The increasingly important role ofthe MNC in the world economy
has resulted in a significant movement toward internationalization
ofboth services and industrial production. Organization ofservice
industries and ofmanufacturing on a regional or global basis has
greatly affected the trading system. A substantial proportion of world
trade now takes place as intrafirm transfers at prices set by the firms
and as part ofglobal corporate strategies. By the 1990s, this type of
managed trade had become a prominent feature in the international
economy. In the late 1990s, over 50 percent ofAmerican and Japa-
nese trade was intrafirm trade. The resulting trade patterns frequently
do not conform to conventional trade theory based on traditional
concepts ofcomparative advantage.
There is intense disagreement on the implications ofFDI’s increas-
ing importance for international trade and for the international distri-
bution ofwealth and economic activities. Assuming that investment
and its trade effects are just another application of the law of compar-
ative advantage, many ifnot most economists believe that FDI has
only marginal implications for patterns of trade and that its distribu-
tive effects are primarily domestic. Many noneconomists, however,
believe that FDI and the activities ofmultinational corporations have
an immense impact on patterns ofinternational trade and on the dis-
tribution ofwealth—and, I shall add—power. In addition, whereas
most business economists believe that the MNC is above politics and
facilitates the rational organization and utilization of the world’s
scarce resources to everyone’s benefit, critics believe that MNCs pur-
sue their own private interests (and/or those oftheir home countries)
to the detriment ofeveryone else.

From Comparative to Competitive Advantage
Another important intellectual development that has undermined the
H-O theory of international trade is a shift among economists from
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