A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Rose, Jim; Stevens, Wayne Working Paper Global Connectedness and Bilateral Economic Linkages - Which Countries? New Zealand Treasury Working Paper, No. 04/09 Provided in Cooperation with: The Treasury, New Zealand Government Suggested Citation: Rose, Jim; Stevens, Wayne (2004) : Global Connectedness and Bilateral Economic Linkages - Which Countries?, New Zealand Treasury Working Paper, No. 04/09, New Zealand Government, The Treasury, Wellington This Version is available at: http://hdl.handle.net/10419/205549 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Jim Rose and Wayne Stevens N EW Z EALAND T REASURY W ORKING P APER 04/09 J UNE 2004 NZ TREASURY Global Connectedness and Bilateral Economic Linkages–Which WORKING PAPER Countries? 04/09 MONTH/ YEAR June 2004 AUTHORS Jim Rose The Treasury PO Box 3724 Wellington 6015 New Zealand Email [email protected] Telephone 64 4 471 5150 Fax 64 4 473 3447 Wayne Stevens The Treasury PO Box 3724 Wellington 6015 New Zealand Email [email protected] Telephone 64 4 471 5190 Fax 64 4 473 3447 ACKNOWLEDGEMENTS We are grateful for comments on earlier drafts of this paper from Brook Barrington, Tim Blackmore, John Bryant, Bob Buckle, Steve Cantwell, Gareth Chaplin, Nick Hurley, David Law, Struan Little, Geoff Lewis, Michele Lloyd, Yvonne Lucas, Meredith Stokdijk, and Vangelis Vitalis, and to seminar participants at The Treasury, Trade and Enterprise New Zealand, the Department of the Prime Minister and Cabinet, the Ministries of Economic Development, Foreign Affairs and Trade, Research, Science and Technology, and Agriculture and Forestry, and the Immigration Service. The usual disclaimer applies. NZ TREASURY New Zealand Treasury PO Box 3724 Wellington 6015 NEW ZEALAND Email [email protected] Telephone 64-4-472 2733 Website www.treasury.govt.nz DISCLAIMER The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury. The New Zealand Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in this Working Paper. The paper is presented not as policy, but to inform and stimulate wider debate. Treasury:639917v2 Abstract Access to off-shore markets, technology, and ideas are important to greater productivity and higher living standards in New Zealand. Global connectedness requires deep and rich links with other countries. However, as a small country, we only have the resources to focus on a handful of countries. Are there a key set of countries with which New Zealand should be seeking to form deeper bilateral economic relationships? This paper reviews the benefits from deeper external bilateral economic engagements using the insights from the new literature on economic growth, which places great importance on trade, international integration, human capital, and local and cross-border knowledge spillovers from research and development (R&D) and foreign direct investment (FDI). This paper will then use insights from the new literature on economic growth to develop criteria for selecting countries as partners for deeper bilateral economic linkages across six global connectedness dimensions: FDI, R&D links, trade in goods, inbound tourism, education exports, and people linkages. To account for the growing role of a number of economies in global trade, the partner selection criteria will identify two groupings of target countries. The first grouping is focus countries: those countries that are of immediate interest for deeper bilateral linkages. The second country grouping is horizon countries: countries that are likely to grow in their importance to New Zealand over the next 10 to 20 years. The key message of this paper is a greater bilateral economic focus by New Zealand on the major economies along the Asia-Pacific Rim (and the UK). When external initiatives come before decision-makers, they should be seen through a lens that places greater confidence in proposals for deeper relationships with the Asia-Pacific Rim countries (or the UK), and greater scrutiny of proposals that emphasise other regions and countries. JEL CLASSIFICATION F15 - Economic Integration F21 - International Investment; Long-Term Capital Movements F22 - International Migration F43 - Economic Growth of Open Economies O33 - Technological Change: Choices and Consequences; Diffusion Processes O4 - Economic Growth and Aggregate Productivity KEYWORDS economic growth; trade; economic integration; migration; technology diffusion; New Zealand WP 04/09 | GLOBAL CONNECTEDNESS AND EXTERNAL BILATERAL i ECONOMIC LINKAGES – WHICH COUNTRIES? Table of Contents Abstract ...............................................................................................................................i Table of Contents ..............................................................................................................ii List of Tables......................................................................................................................ii List of Figures...................................................................................................................iii 1 Introduction ..............................................................................................................1 2 Economic growth and global connectedness .......................................................2 2.1 The old and new theories of economic growth...............................................................2 2.2 Technology transfer and technology spillovers ..............................................................3 2.3 Trade and technology transfer........................................................................................4 2.4 Knowledge capital and human capital ............................................................................4 2.5 Active and passive technology transfer ..........................................................................5 3 Why are country selection criteria needed? ..........................................................6 3.1 Developing focus without losing flexibility.......................................................................6 3.2 Designing a partner selection criteria for deeper bilateral economic relationships........7 4 Developing country selection criteria ....................................................................8 4.1 The six dimensions of global connectedness.................................................................8 4.2 The partner selection criteria must be dynamic..............................................................8 4.3 There are strong non-economic reasons for deeper bilateral relationships...................9 5 Applying the country selection criteria ..................................................................9 5.1 Speeding up technology diffusion by deepening R&D links with the global leaders ............................................................................................................................9 5.2 Deepening FDI links with the global technological leaders ..........................................13 5.3 Developing criteria for selecting CEP partners—some are better than others ............16 5.4 Deepening relationships short of CEPs........................................................................18 5.5 Promoting the services trade........................................................................................19 5.6 Increased people-to-people linkages............................................................................22 5.7 Migration and trade.......................................................................................................24 5.8 The Kiwi diaspora .........................................................................................................26 6 Summary and next steps.......................................................................................27 References .......................................................................................................................29 List of Tables Table 1 – Percentage of patents applications with