Normally I wouldn’t review a technical book on this blog, but I think it’s worth flagging up an excellent set of lectures by John Sutton, just published as [amazon_link id=”0199274533″ target=”_blank” ]Competing in Capabilities: The Globalization Process[/amazon_link]. I’ve always been an admirer of Professor Sutton’s research, bringing the rigour of empirical industrial economics to questions of development and globalisation. He also wrote the excellent [amazon_link id=”0262692791″ target=”_blank” ]Marshall’s Tendencies: What Can Economists Know?[/amazon_link], arguing for the careful intertwining of theory and evidence in economics – if only economists would pay attention.

This new book, based on the Clarendon Lectures, sets out a model of how firms compete with each other in global markets when they have different ‘capabilities’ or sets of competitive advantages and disadvantages and compete on quality. As he argues in the introduction, globalization has gone through different phases, with theory catching up belatedly with the reality. In the 19th century, different factor endowments of land and capital drove trade based on comparative advantage, drawing on Ricardo but codified by Heckscher and Ohlin in the 1920s. Post-World War 2, the growth in trade was intra-industry and clearly not driven by different factor intensities. Paul Krugman and his successors described this in ‘monopolistic competition’ models of horizontally-differentiated goods in the 1980s.

Prof Sutton argues that the current, third, phase of globalisation has seen a growing range of products (including components) traded on international markets and, with the entry of China and similar countries, a transformation of levels of productivity and quality. He links competition on quality to the idea of the ‘capabilities’ of firms. The model is built gradually over the book, each chapter working out the implications of successive assumptions. These are: the high quality product is never driven out of the market completely; scarce capabilities are geographically clustered in specific countries; and there are some costs that are no labour costs eg materials. In later chapters he turns to the question of what determines the capabilities of firms.

Given these assumptions, a simple model generates trade that looks much like real life: some markets have a small number of very large firms; there are variations in the quality of goods traded; there is a catch-up process that is a kind of arms race between competitors. In other work, Prof Sutton has tested his models empirically.

I must add the warning that this is an equation-heavy book, so for professional economists only, but it’s exciting to see the merger of a number of separate literatures: trade theory, industrial organisation, and management. And to see them applied to developing and developed economies alike, rather than the convention that developing economies need a different kind of economics.

The book also reminded me of the excellent recent papers by Richard Baldwin on trade and supply chains – these are less technical, and there is a useful VoxEU summary with links – because he too makes the point that the character of globalisation has changed. Prof Baldwin describes it as successive ‘unbundlings’, the first in the 19th and early 20th centuries as the separation of production and consumption, the second from the second half of the 20th century onwards as the separation geographically of different stages of production. His models introduce a balance between forces of agglomeration and forces of dispersion, and offer insight into the process of offshoring and reshoring – as in this recent example of garment manufacture reviving the US.

All exciting stuff intellectually, and with some rather profound policy implications, I’d have thought, when these are worked through. After all, trade policy is still geared to the economics of trade in the 20th rather than the 21st century.

[amazon_image id=”0199274533″ link=”true” target=”_blank” size=”medium” ]Competing in Capabilities: The Globalization Process (Clarendon Lectures in Economics)[/amazon_image]