Trade competition from China and India spurs technological innovation globally

Globalization and Technological Change

Globalization and Trade Competition Spurs Technological Innovation

This paper investigates the connection between high trade competition in an increasingly globalized marketplace with the presence of increased levels of innovation within technology. The primary research question asks whether or not there is a strong enough relationship between the two factors in order to be able to use them as a way to better structure business strategies in a globalized environment. The investigation confirmed that there is a relation, with high competition from exporters like China and India, nations have to increase their innovative qualities in order to stay competitive.

Introduction

It is clear that "globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position" (Gorodnicheno & Svejnar, 2010). With so many countries are working together in international markets, there are new factors of competition they continue to evolve the international marketplace as we know it. One of those factors is the presence of low production cost models in developing nations like China, which allow them to export in massive quantities. This increasing level of competition has spurred other nations who cannot compete on production prices to invest rather in strategies for increasing innovation as a way to stay competitive in the market. This is an investigation into the economic environment in order to better understand competitive factors that positively influence keeping a stronger position in international trade economics.

Research Question

The primary research question here is the following: how does international trade impact domestic and foreign levels of innovation and technological change? This examination helps shed light on the idea that foreign competition increasing from regions like China, clearly has an impact on the innovation and technological changes that occur around the globe. As countries like China have become more competitive in pumping out massive numbers of exports, other countries have had to rely on their intellectual capital as a way to develop further growth to stay competitive in lieu of the fact that they cannot physically match the number of exports being pumped out by China (Bloom et al., 2012).

The investigations which are present in the current research all point to similar conclusions that more reliable and practical indicators of technological change should be developed around the notion of how countries react to international competition in an increasingly globalized market. Here the research suggests that "many economists have traditionally argued that competition is good for an economy by providing incentives for efficient organization of production, putting downward pressure on costs, and motivating innovation" (Gorodnicheno & Svejnar, 2010). Thus, the predicted result the question is an affirmative account, where increasing trade competition does have a strong correlated relationship with levels of technological innovation in domestic and foreign firms.

Observations

One study reviewed in this analysis was conducted by Bloom et al. (2012), which reviewed changes in technology being developed in Europe from of seven years from 2000 to 2007. This study looked at the development of technological change in both developed and developing nations, in regards to how increases in competitive environments lead to higher expectations that evolved previous technologies used in production in order to account for new demands. Bloom reviewed patent filings, popular management strategies, and other sources of innovation development in comparison to trade barriers and the cost of trying to compete with Chinese exporters pumping the market full of cheap goods.

This has an impact on more developed nations, whose production costs cannot compete with the cheap labor found in China. In nations around Europe and North America, this high intensity to increase competitive abilities has led to organizations pushing the boundaries of innovation and progressing towards greater and more efficient technological change. According to Bloom (2012), "firms facing higher levels of Chinese import competition create more patents, spend more on R&D, raise their IT intensity, adopt more modern management practices, and increase their overall level of TFP." When firms in Europe and North America cannot compete with price points from producers over in China, they can rely more on their intellectual capital as a source to keep them competitive and ever-changing marketplace. As China continues to pump out cheaper and cheaper exports, nations who would otherwise suffer can begin to look at different operational practice models that highlight the importance of innovation and progress in technology as a way to stay competitive. Firms and organizations that fail to see the need to adapt their technology is dramatically with the flow of the environment are often quickly weeded out of the equation completely. Firms that spend little on technology or R&D innovation find themselves in nets to compete with the low production costs of Chinese goods and thus are more rapidly exiting the market environment. Essentially, "Chinese imports reduce the relative profitability of making low tech products that since firms cannot easily disposed of their trapped Labor and capital, the shadow cost of innovating has fallen. Hence, by reducing the profitability of current low tech products and freeing up input to innovate, Chinese trade reduces the opportunity cost of innovation" (Bloom, 2012).

The need to find new ways to compete with major exporters like China and India have led to reinvestments in strategies for provoking innovation. In one model, "the basic assumption is that firms can allocate a factor of production either to produce old goods or innovate and produce new goods" (Bloom, 2012). Such changes also have a clear impact in regards to the socioeconomic statuses of the workers within foreign and domestic firms. Slaughter and Swagel (1997) explore how "changes in technology have led to a pervasive shift in demand for labor that has favored skilled workers to the detriment of less skilled workers." In environment which constantly demands higher innovation as a way to stay competitive within the market, the gap between skilled and unskilled workers is widening in developed nations, such as the United States. As such, trade competition also has a clear impact not only on innovation levels but also how that demand for increasing innovation restructures economic classes in a domestic context. Thus, there is the assumption that "broader competition can stimulate innovation," (Lerman & Schmidt, 2010).

Other interesting facts this investigation by Bloom (2012) uncovered explored how China itself was not benefiting from as intense innovative development being spurred by exposure to new technologies and production methods as much as more developed counties. Due to the nation having such extremely low wage production costs, it is actually cheaper for China to produce old goods with older and possibly more outdated technologies because they have a greater labor source at much less expensive costs than workers in more developed nations. What the country is lacking, however, is free capital from investors to structure strategies for producing future innovation. Investing in innovation creates the need to pay more skilled workers and tie up capital in projects that will not produce immediate results. This currently goes against China's basic export model, which is to produce cheap goods in massive quantities in order to flood the market as soon as possible. Thus, "China can produce old goods, but cannot as easily innovate and produce new goods" (Bloom, 2012). China itself benefits more from relying on older technologies to produce well in a cheaper fashion; however, this hinders its ability to spend time, effort, and funding in structures for future innovation.

Yet, this is not entirely a bad situation for China. As it continues to produce more and more foreign goods, it itself absorbs some of the older technological changes that work generated in foreign countries. As technologies evolve and then start to become more standard, they are introduced into China thus allowing for some level of technological change. This change is not based on internal innovation and discovery, but rather the assimilation of foreign tested production practices being adopted within the Chinese production force. Still, Coe (2007) also reminds of the situation that "OCED countries are also important since countries with flexible labor and product markets, with good educational institutions and training systems, and with effective employment and innovation policies will more easily and rapidly adapt to the challenges and opportunities from increased trade and off shoring." From this perspective, even nations which are using their low cost production to stay competitive can themselves also benefit from investing in innovation. When investments are made in increasing innovation, this only strengthens their competitive position within the international marketplace. As such, nations like China and India have recognized a need to reinvest into innovation policies and practices for future evolutions that will allow them to continuously stay on top of the market. Essentially, "there are different channels through which skilled biased innovation spillover from foreign to local firms" (Lee & Vivarelli, 2006).

Additionally, Gorodnicheno and Svejnar (2010) conducted another similar study in which the relationship between competition over trade and technological innovation was investigated. The study focused on 27 individual emerging markets, best looking at developing nations rather than nations that had already been considered developed. Yet, developed nations like United States were also used in the analysis as a secondary source of investigation. The study itself provides "robust evidence of a positive relationship between foreign competition and innovation and show that the supply chain of multinational enterprises and international trade are also important channels" (Gorodnicheno & Svejnar, 2010). Yet, Gorodnicheno & Svejnar (2010) go a step further than other investigations in order to differentiate the levels of innovation seen in service vs. manufacturing industries. Essentially, bursts of innovation are more common in manufacturing in relation to increasing competition and trade and service industries.

Conclusions

Looking at the literature which has been focused on trade competition and innovation, it is clear that there is a strong connection between the two. Developed nations which cannot compete with the low production costs of nations like China and India can use innovation as a way to restructure their attempt to stay competitive within the market. Additionally, nations that you have cheap production practices can also benefit from the innovative spirit coming from foreign firms in order to combine a new approach to old methods.