Globalization of the Economy, Unemployment and Innovation

The globalization of the economy is one major challenge at the end of the 20^th century. While it is true that free trade and high capital flows a century ago already brought about a high level of international economic dependency, the high growth rate of foreign direct investment and the global internet have established a new type of interdependency among OECD countries and many newly industrializing countries. Diffusion of technological progress will gain importance as the telecommunication networks and the internet, respectively, provide new opportunities for spatial diffusion of knowledge.

The globalization of the economy means that international trade and investment are rising in a world economy characterized by falling transportation and communication costs as well as a larger number of countries which are open to world markets. The economic opening up of the PR China in the 1980s and the former socialist eastern Europe, including the Soviet Union, has created a set of new players, which are gradually also becoming active members in international organizations. The larger number of open countries and rapid growth in foreign direct investment are leading to more intensive competition in world markets. In the face of declining profit margins in markets for standardized goods, firms in countries and NICs are turning towards more product differentiation and intensified process innovations. R&D expenditures are thus increasing worldwide. At the same time the end of the Cold War has led to a slight reduction in public R&D in the largest countries - mainly at the expense of military R&D.

The past decades saw intensified international competition as well as a rising R&D-GDP ratio in OECD countries. While labor productivity growth in the U.S. was low it was relatively high in EU countries which, however, suffered from high sustained unemployment rates after 1974. The US enjoyed high economic growth and was able to attract massive FDI inflows in the 1980s. At the same time US multinational companies (MNCs) were also increasingly active in western Europe and Asia, including Japan where EU firms faced problems in setting up subsidiaries. Foreign subsidiaries allow parent companies to observe new technologies in leading OECD countries and to tap the global innovation pool. Hence EU firms’ weak presence with foreign direct investment (FDI) in Japan and elsewhere in Asia could undermine EU competitiveness in the long term. This holds the more the presence of MNCs facilitates exports from the parent company.

After a short period of wage restraint some observers have argued in the press that rising wage increases would be appropriate both for Germany and the EU. In brief the argument says that higher wage rates will lead to rising aggregate demand and higher investment plus productivity improvements which could even reinforce the current account position. The counterposition emphasizes that in Germany and other EU countries labor costs are too high for full employment. In a post-1999 “Euro region” wage costs relative to the US and other third countries could be too high to achieve the improvement in the net export position that is necessary for a rise in employment in Europe; wage costs could also be too high to stimulate employment growth in the EU nontradables sector.

The legal basis for supranational research and technology policy in the Community is laid down in specific articles of the ECSC Treaty (steal and coal union), the EAEC Treaty (nuclear research) and the EC Treaty, the Single European Act and the Treaty of Maastricht on European Union. According to the latter there are framework programs for R&D policy which have to be adopted unanimously by the Council (Art. 130i) and specific programs which require a qualified majority. The main objectives of the common R&D policy is to provide impulses for welfareincreasing progress in important technological fields (e.g. energy saving, new technologies, environment) and to stimulate the diffusion of new technologies. The idea is to develop coordinated national policies as well as supranational research activities, where the concrete aims are (PALINKAS, 1994):