Globalization: mini story part-1

On the way to Jakarta again. Outbound from Chicago O'Hare to Tokyo, I sat next to an ordinary looking American guy. By looking at his appearance, you can tell he's from the heartland (Midwest states): thick brown hair - combed just like '77 Saturday Night Fever, blue sweater with Ohio State University logo (apparently his daughter went there), slightly baggy jeans and a white tennis shoes. Indeed he is from Ohio, from a small town (I forgot the name) one hour from Columbus.

Americans love to chat. So does he. He said that this was his first trip to Japan in the last 8 years (this is my 2nd in the last 2 months). I asked him about what he does. Then we chat over several cans of Sapporo beer. He explained and for me the rest is a story of globalization, a story about falling trade and investment barriers, and an example for intra-industry trade theory.

The guy works for a glass factory, a Japanese owned one, Asahi Glass Corporation, with headquarter in Nagoya. They opened a plant in Ohio, nearly 15 years ago as a Foreign Direct Investment to supply car windows for Honda automobile plants in the US. Now, Asahi Glass also supplies car windows for the General Motor and Ford.

In 1989, Gene Grosman and Elhanan Helpman wrote a paper (in J. of Political Econ.) describing how technological innovation drives specialization and induce trade. The paper is a prologue to their 1991 seminal paper (in Review of Econ. Studies) on quality ladder and endogenous economic growth. One of their main predictions, or perhaps illuminations, is that countries with abundant high-skilled labor have the incentive to be the leader in the quality ladder. In a world with a free-entry, imitating is almost costless, therefore leader can not afford to loose and will push their research and development (R&D) to maintain their position. As a result, these countries tend to specialize in a high quality, research intensive, products (high definition TV, digital technology, high end textile fabrics), while the rest specialize in products with lower quality that requires less research (ember plastik or plastic bucket, tooth brushes, low end textile fabrics). However, if barriers for trade and investment fall, then there is nothing to stop a country - or its multinationals- to fragmentise their production: doing R&D in the home country while manufacturing in countries where labor is relatively cheaper.

Asahi Glass and Honda fit their story very well. Honda came in to the US to be closer to its market, reduce manufacturing costs, but mantain most of their R&D in Japan. Similarly for Asahi Glass, it came to the US to follow its customer (Honda) and mantain its R&D in Japan and manufacturing their glass in Ohio. They also continue to innovate. Both Asahi and Honda started to do R&D in the US, employing US' engineers, and as a result, they found new customers: GM and Ford.

Globalization