FDI, Polarized Globalization, and the Current Crisis

Even though the current crisis is clearly global, much of the analysis and many of the policy proposals have a single country viewpoint, particularly in the case of the United States. Explanations concentrate, for example on the financial system and on population-wide indebtment. Here we examine the polarized impact of globalization on economic growth, which arises from the intense interaction between developed and underdeveloped countries, for example between the United States and China. We construct a Schumpeterian model of economic growth including the main features of globalization: capital accumulation, technological change, trade, and cheap-factor-seeking foreign direct investment (FDI), to analyze the period of globalization from 1980 to 2012. By including innovation externalities between sectors in each country, the two-country model can explain development, underdevelopment and miracle growth. Combining advanced technologies with low costs, FDI yields extraordinary profits that generate asymmetric innovation incentives which explain the following stylized facts. Globalization (a) increases capital accumulation; (b) increases inequality in leading countries; (c) reduces incentives for technological change, (d) generates a two-stage transition path consisting first of FDI expansion to many new sectors and second of balanced or divergent growth of domestic and FDI sectors, and (e) through the flow of extraordinary profits reaches a steady state with a lower interest rate. This transition path linked to globalization leads to an accumulation of savings that served as background to the current financial crisis, and also has important investment turning points.