Does and How Does Globalization Matter?

In this paper we develop a new concept of globalization defined as the exposure of a productivity follower industry in one country to the productivity leader in another country. Globalization is measured by the intensity of contacts through trade and foreign direct investment. In a simple model and empirically we show that the exposure of a productivity follower to competition with the leader is highly correlated with the productivity gap of this industry. Competition restricted to one region such as Europe, or North America, or the Far East, is not sufficient to achieve highest productivity levels. Moreover, it turns out that FDI has a weight in the globalization index at least equal to trade. FDI can contribute directly to higher levels of domestic productivity by transferring the best production practices, and put pressur on other domestic producers to improve. The impact of trade on globalization can be weakened by tariffs and non-tariffs