Business & Economic Review: Vol. 10, No.1 2018 pp.

133-158 133
DOI: dx.doi.org/10.22547/BER/10.1.6

Driving Factors of Globalization: An Empirical

Analysis of the Developed and Developing Countries
Ayesha Naz1, Eatzaz Ahmad2
Abstract
There are several economic, political, social and technological factors that have contribut-
ed to globalization in recent decades. The literature has yet to come up with a comprehensive
analytical framework. Present study develops a formal framework, which highlights the sources
of globalization. Furthermore, the study also provides an empirical test for driving factors of
globalization in developed and developing countries. Results of dynamic ordinary least square
show human capital, capital, labor, transportation and communication and financial index
as the important drivers of globalization in both developed countries and full sample. However,
capital, labor and financial index appear to determine the process of globalization in develop-
ing countries. For robustness of the results, Generalized Method of Moments (GMM) is also
applied; the results in full panel and developing countries are similar. However, efficiency index
appears to be significant. In the panel of developed countries human capital, transportation
and communication and financial index are significant.

Key words: Globalization, human capital, efficiency index, financial index, GMM

1. Introduction
Economies around the world are becoming strongly integrated. The process of this
integration is not new, as historical data suggests that the very first wave of globalization
in the modern era occurred in 1870 (Mishkin, 2006). However, the interdependence
and interconnectivity has been increasing over the past few decades. Multi-dimensional
integration among countries around the world is a result of globalization in which
socio-cultural, political and economic relations are established across a geographic
distance. World has witnessed increase in the flows of trade, investment, capital and
information during the process of integration. Mobility of individuals across the globe
has also increased. Globalization not only increases economic and financial inter-
dependencies among countries but it also integrates the social and political aspects.

1 Assistant Professor, International Islamic University, Islamabad. Email: ayeshanaz44@yahoo.com

2 Professor, University of Peshawar, Peshawar.

ARTICLE HISTORY
19 Dec, 2017 Submission Received 19 Jan, 2018 First Review
20 Feb, 2018 Revised Version Received 12 Mar, 2018 Second Review
15 Mar, 2018 Revised Version Received 20 Mar, 2018 Accepted
134 Ayesha Naz, Eatzaz Ahmad

The current shape and pace of globalization is driven by several factors. Broadly
speaking, economic, financial, political, technological and social factors have paved
the way to globalization. Economic factors mainly include lower trade and investment
barriers. Expansion of financial sector is also considered an important force of glo-
balization. Integration and unification of financial markets around the globe through
financial liberalization and deregulation has increased the mutual dependencies of
the economies. According to Stiglitz and Greenwald (2003), capital account liberal-
ization is elimination of rigid rule and regulations in developing countries that could
advance the flow of money.

Political factors can be defined in term of government policies that are designed
to facilitate trade and commerce in view of globalization. Moreover, these polices are
instrumental in channelizing the flow of finance and capital. The process of global-
ization is led by a number of national and international institutes and countries in
formulating policies. Earlier surge of globalization seems to be highly concentrated
among developed nations (Maddison, 2001). However, the contribution of emerging
market economies in international trade has been increasing significantly in past few
years.

Technology plays an important role in expediting the process of globalization. It

is conceived as a major facilitator and a driving force in the globalization processes.
Technological improvement has allowed companies to rapidly globalize their products.
Multinational food chains are able to reproduce and standardized their products across
globe through fine connectivity coordinated by technology. The development of con-
tainerized ships and air freight is considered to be a key technological advancement in
trade and commerce. Similarly, the introduction of universal bar code has increased
the movement and flow of goods worldwide. The creation of personal computers and
internet created electronic business (E-Business) and electronic commerce (E-Com-
merce), which are used as a justification of recent techno-globalism. Financial sector
is also benefitted from technology through electronic banking. Electronic transfer
of funds is considered to be the first operating form of global electronic financial
system. The modern era of globalization is now experiencing ‘internet economies’
due to advancement in technology. Internet growth is a key factor for developing
interpersonal relationship across the globe. It is one of the necessary components for
social globalization, and without the invention of internet it would be incomplete.

Social factors bring cultural convergence, that is, increasing similarity throughout
the world, through significant reduction in transport and communication cost. Now-
a-days the cost of transmitting information is almost negligible, shrinking the world
to one single market. Individuals and societies are taking advantage of this enormous
reduction in cost by using standard brands and services worldwide. As a result, societies
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 135

are moving towards convergence of taste, which is increasing homogeneity across globe.

The above-mentioned factors have contributed to shaping globalization. These

factors are responsible for flattening the world. It is essential to know the potential
sources of globalization because the contribution of these factors is not uniform
across globe. The extent and intensity of globalization is found to be different among
countries and regions. This indicates that the factors which drive the process of glo-
balization may affect differently across developed and developing economies owing
to the structural condition of one’s country. However, there is a lack of empirical
evidence in this regard. Hence, the current study has attempted to address this issue.

The aim of current study is to examine the driving factors of globalization.

Growing literature on the causes of globalization reveals several factors that have
contributed to the process of globalization. Therefore, in the era of globalization,
where it is considered to be irresistible for almost all the developing and developed
nations, there is a need to develop some systematic link to its drivers. Hence, this
study develops the theoretical and analytical framework that creates a connection of
globalization to its driving forces. Furthermore, the empirical investigation of the
contribution of each factor of globalization in developed and developing countries
will enlighten the role of significant factors.

This study has several contributions to the existing literature of globalization. First,
the study develops an analytical framework for the driving factors of globalization.
All the available studies only describe the driving factors of globalization. Second, it
provides an empirical test for the large panel of 92 countries. Third, the empirical
analysis is carried out separately for the developed and developing countries. Lastly,
this study develops several new indices which are used in the empirical investigation.
For instance, efficiency index, macroeconomic instability index and transportation
and communication indices are constructed by adding new variables and applying
the statistical technique of principal components analysis (PCA). Moreover, these
indices are also checked for the goodness of fit.

1.1 Objectives of the study

The targeted milestones of the study are as follows,

1. To establish an analytical framework that creates a link of globalization to its

driving factors.

2. To provide the empirical test for the causes of globalization.

3. To examine the effect of driving factors in developed and developing countries.

136 Ayesha Naz, Eatzaz Ahmad

2. Driving Factors of Globalization Noted in Literature

There are many factors that are expected to have contributed in the process of
globalization. In this section we will describe all the factors, their importance and
relevance in driving globalization.

Advancement in technology is considered to be one of the major divers of glo-

balization (Bang & Markeset, 2011; Bauernfeind, 2006; Garrett, 2000; Harris, 1993;
Masson, 2001; Mussa, 2000; Obadan, 2008). Technological improvement in the area
of transportation and communication has accelerated globalization in recent years. The
new era of shipping was begun with the creation of the world’s first container ship in
1956 (Ritzer, 2011). Containerization has significantly reduced the transportation cost,
which in turn has increased the pace of globalization. Introduction of commercial jet
aircraft in the 1970s was the great progress that accelerated the transportation of goods
among different regions of the globe. Another major technological development in
the 1970s was the advancement in microprocessors and telecommunication and then
later on the growth of internet (Ritzer, 2011). The main purpose of internet is access
to information, business, entertainment and awareness. This source of globalization
provides the easy access to everything on a single click. These are few examples of
technological improvement. Numerous other technological innovations have affected
the process of globalization.

Although reduction in the cost of transportation and communication is associated

with technological advancement but only few studies explicitly considered lower cost
as a determinant of globalization (Bang & Markeset, 2011; Bauernfeind, 2006; Ritzer,
2011; World Bank, 2002). Moreover, cost driver shows the variation in cost and effi-
ciency across countries that push national firms to become global (Bauernfeind, 2006).

Another major cause of globalization which is attached to lower transportation and

communication cost is the taste of individuals and societies (Mussa, 2000; Obadan,
2008). According to Krugman (1980), individuals have same taste in different coun-
tries whereas wide variety of products leads to mutual trade. Taste diversity develop
basis for international trade under increasing returns to scale. Economic integration
which depends on taste diversification has become possible through cheaper means
of transportation.

Lower transport and communication cost can only be exploited through lower
trade barriers. Policies aimed at reduction in trade barriers lead to trade liberaliza-
tion. In addition, deregulation and outward looking reforms are considered to be
an important source of globalization. In this context several studies, e.g., Bang and
Markeset (2011), Bauernfeind (2006), Fofack (2009), Garrett (2000), Harris (1993),
Masson (2001), Mussa (2000), Obadan (2008), Ritzer (2011) and World Bank (2002)
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 137

pointed out government policies as a driving factor of globalization.

Policies directed to financial sector liberalization increase not only capital mobility
but also financial integration among different countries. Financial globalization is
attributed to capital account liberalization, financial deregulation and financial in-
novations. Financial globalization creates the mutual borrowing relationship among
countries. It can be seen clearly that even the smallest item available in the market has
price tags in two types of currency; one local and other is in dollar. Advancements in
financial sector increase capital flows around the globe, which is a significant factor
of globalization (Lane & Ferretti, 2008; Fofack , 2009; World Bank, 2002).

The process of industrialization in LDCs is also an important source of global-

ization. According to Harris (1993), significant output growth in Asian countries
between the years 1965 to 1988 has not only increased the share of world GDP, but
also increased the global capacity of production. Hence, the output growth of LDCs
can be taken as a cause of globalization.

Market and competitive drivers are some other related factors of globalization.
Markets provide opportunity to national economy to become global economy through
common customer need and optimum utilization of resources with the help of global
channels. Interdependencies of countries through trade and FDI and the existence
of global competition support competitive drivers.

3. Theoretical Framework
It is important to highlight the qualitative contribution of some influential the-
ories of globalization. These theories describe the evolution and emergence of global
systems, networks and culture. The contribution of Wallerstein (1974) is thought to
be a landmark to devise a theory of world-system. In this system, intellectual par-
ticipation requires the understanding of whole system. Hence, knowledge creation
unveils the structures and provides opportunity for its transformation. World-system
is closely related to dependence theory, which is described through core-periphery
relationship. It refers to power hierarchy in the world-system, where developed ‘core’
societies exploit the ‘peripheral’ societies. Therefore, it is also termed as unequal
exchange with organized transfer of surplus from periphery to core. The division of
core and periphery societies is critically dependent on technology. The system is a
global class struggle; tension between the efforts of domination and resistance to this
domination. Therefore, the world system is the economic and political interdependent
of core-periphery societies, which is positioned by technology.

The idea of wired or network society is related to the role of information and
communication in the society. It emphasizes on the social implications of globaliza-
138 Ayesha Naz, Eatzaz Ahmad

tion. Martin (1978), Dijk (1991) and Castells (1996) defined network society, where
social, cultural, economic and political relations of the societies are diversified by the
spread of microelectronic based information and communication technology. These
relations are less bounded by time and spatial location. Media and social networks
link individuals, organization and society at all levels. Therefore, the network society
is termed as ‘glocal’ as its scale is global and local. The outcome of network society
is seen in production, power, culture and experience. The network society allows the
process of globalization through the channel of modern information and communi-
cation technology.

The theory of global capitalism is another important contribution to describe

the phenomenon of transnational world. In this theory, Robinson (2004) character-
ized the current period in the fourth stage of capitalism; the age of information and
technology. The new era of capitalism is different from other social systems due to
commodification and marketization of social relationships. It deepens the capital
impact on all the structures. This theory points out the rise of transnational capital as
a source of economic globalization. It allows the national units of production process
to transform into global units. Hence, trans-nationalization of production and capital
ownership derives the process of globalization.

Harvey (1990) argued that globalization shows ‘time-space compression’ which is

created by development of capitalism. Similarly, Giddens (1990) described the crux
of globalization as time-space distanciation. In the theories of time and space, social
relations are lifted from local to global scale and restructured across space and time.
Sassen (1991) theory of global cities proposed dynamic spatial order of global cities.
In this theory, major cities (New York, London and Tokyo) redefine their spatial
and social relations to access peripheralzed labor markets. The idea of global cities is
taken up by the theories of trans-nationality and transnationalism but on larger scale.
Transnationalism defines multiple transformations (economic, political, social and
cultural) and interactions (individuals, communities and institutions) at local and
global level. Transnational migration theorist highlights the intense relations among
individuals and groups due to inexpensive and speedy modes of communication.

Classical theories of globalization mostly show technology as an important driver

of globalization while some other theories highlight the role capital in determining
the process of globalization.

4. Analytical Framework and Methodology

We have selected three factors of globalization which are output, technology and
financial sector development in line with available literature and theoretical frame-
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 139

work. These three factors are comprehensive in nature. However, several other factors
that are highlighted by the literature are also considered as driving forces since the
functions of these three variables directly or indirectly link other factors to globaliza-
tion. Furthermore, these factors cover all the four major aspects of globalization i.e.
economic, financial, political, social and technological.

In the light of above discussion we can start with a functional relationship of

globalization with its three main drivers. Since this basic relationship is to be linked
up further to a number of socioeconomic and political variables, we make the matter
simple by assuming the simple Cobb-Douglas form that considers the three drivers of
globalization as imperfect substitutes. Thus, for example, a country can become more
globalized by establishing better economic or political links with rest of the world
but it cannot gain globalization just by considering one aspect and ignoring others.
This functional form also implies that the three drivers complement each other in
the sense that marginal return to any one driver is positively related to the levels of
other drivers. This functional relationship is given by:

(4.1)

where Gt, Yt, Tt and Ft represent globalization, output, technology and finan-
cial sector development respectively and C is a constant that captures the causes of
globalization, which are not explained by output, technology and financial sector
development. The globalization variable is an index constructed on the basis of a
number of indicators of globalization.3

Growth of output depends upon production function, which is here specified

in cobb Douglas form:

(4.2)

At is the general level of technology/knowledge at period t. is the variable of

efficiency and kt and Lt are the amounts of capital and labor respectively devoted to
produce output in period t. The parameters θ, α, and β are the production elasticities
of efficiency, capital and labor respectively.

The stock of knowledge, At, is the accumulation of ideas that have been discovered
by researchers. Theoretically, the idea of knowledge creation for the development of
world-system is presented by Wallerstein (1974). However, formally the phenomenon
of knowledge creation is described in research and development (R&D) based growth
models (Romer, 1990; Grossman & Helpman, 1991a, 1991b, 1991c; Aghion &
Howitt, 1990; Jones, 1995). According to these models, creation of new knowledge

3 See section 5 for detail.

140 Ayesha Naz, Eatzaz Ahmad

is determined by the amount of researchers engaged in R&D and the existing stock
of knowledge available to researchers. At is the existing stock of knowledge available
at time period t while ∆At is the flow of new knowledge and ideas.

Following the traditional framework of R&D growth models, flow of knowledge

can be described as follows,

(4.3)

where is the average research productivity i.e. number of new ideas created per
researcher and Rt—1 is the number of researchers. The average research productivity
depends on the existing stock of knowledge, At—1 and the number of researchers, Rt—1.
It is defined as follows;

(4.4)

where δ, φ, and λ are parameters. Aφ shows the dependence of current research

productivity on past discoveries and ideas. Past discoveries and inventions are helpful
for the creation of new knowledge. Current research productivity can be increased
or decreased in the stock of knowledge, depending upon the sign of φ. If φ>0, then
current research productivity is increasing in the stock of knowledge, known as
‘spillover of knowledge’. The idea of spillover of knowledge was first developed by
Alfered Marshall in 1890 and then later on it was extended by Arrow (1962) and
Romer (1986). In case, if φ<0, then the current research productivity is decreasing in
the stock of knowledge that has already been discovered. It is termed as ‘fishing out
effect’, which state that it is more difficult for the researchers to find new ideas and
dimensions because the obvious ideas have already been discovered. Current research
productivity will become independent of the stock of knowledge in case where φ=0.

Rλ —1 shows that research productivity depends on the numbers of researchers.

If large numbers of researchers are searching for new ideas, then there is possibility
of replication and overlap of research. It will decrease the total number of ideas by
the researchers at a point in time. In that case research productivity is decreasing in
so, 0<λ<1.

Substituting equation 4.4 in equation 4.3 yields:

(4.5)

Equation 4.5 presents the flow of ideas or knowledge. In order to get the stock
of knowledge at time period t, the equation will be as follows,

(4.6)
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 141

(4.7)

Equation 4.7 shows that the current stock of knowledge depends on past ideas
and the number of researchers engaged in creating new ideas with the help of already
discovered ideas.

The variable of efficiency ‘B’ depends on the performance and policies of the
government. It can be measured by using indicators on trade openness and macro-
economic conditions. Following Kneller and Steven (2002) and Fofack (2009), the
efficiency factor can represented as a composite index based on a number of factors,
namely economic diversification, index of reallocation of labor across sectors, degree
of competitiveness, macroeconomic instability and governance index.

We get equation 4.8 by substituting equation 4.7 in 4.2

(4.8)

Substituting 4.8 in 4.1, yields

(4.9)

It is already discussed that improvement in the technology of communication and

transportation played a critical role in globalization. Therefore, we define technology
as follows,

(4.10)

Where Tct and Tpt are communication and transportation technology respectively.

We reconsider equation 4.7 to find the value of At

(4.11)

Consider,

(4.12)

Backward Substitution from period t-1 to t-∞ leads to equation 4.13

(4.13)

Assuming |γ|<1 and applying standard formula for the sum of geometric series
in the power of δ, yields:

(4.14)
142 Ayesha Naz, Eatzaz Ahmad

Substituting equation 4.14 in 4.9, and assume c=1

(4.15)

Taking one period lag and power of equation 4.15 yields equation 4.16:

(4.16)

Dividing two sides of equation 4.15 by the corresponding sides of 4.16, results
in the following equation.

(4.17)

Or, applying logarithm on both sides:

(4.18)

Equation 4.18 can be expressed in linear form as the objective of this study is
to highlight the drivers of globalization and the contribution of each factor in its
advancement. For this purpose, we drive equation 4.19 by transforming all the coef-
ficients to β's as given below;

(4.19)

Equation 4.19 presents globalization index Gt, researchers Rt—1, efficiency index
Bt, capital stock Kt, labor force Lt, transportation & communication technologyTt
and financial development Ft as the main factors of globalization.

For panel data analysis equation 4.19 can be expressed as follows,

(4.20)

Equation 4.20 is the panel dynamic version that links globalization to its drivers.

5. Data and Variables

The present study uses balanced panel data of 92 developed and developing
countries over the period of 1995 to 20154. Limited availability of data, particularly

4 See appendix-I for list of countries

 Driving Factors of Globalization: An Empirical Analysis of the Developed... 143

on the variables of transportation in developing countries, restricted the sample size.

Annual data of selected variables are collected from various sources. Detail of each
variable used in the empirical model (equation 4.20) is provided below.

5.1. Globalization index (Git)

Globalization index is a composite index consisting of three main categories of
globalization namely economic, political and social globalization. It is a comprehen-
sive index and is constructed with the help of 23 variables. Economic globalization
includes trade, FDI, portfolio investment and income to foreign nationals, while
import barriers, tariff, taxes on trade and capital account restrictions are also taken
into consideration. Political globalization is considered as a diffusion of government
policies and measured by number of embassies, membership in international organi-
zations, participation in UN peace keeping missions and international treaties signed
between two or more states. Social globalization is characterized by spread of informa-
tion, ideas and people. Data on this index are collected from ETH Zurich database.

5.2. Human capital index (Proxy for researchers, Rit—1)

This index is used in place of researchers because the data on number of research-
ers are available only for a limited number of countries, especially developing countries.
The current study uses human capital index that is based on years of schooling and
returns to education and is taken from Penn World Table.

5.3. Efficiency index (Bit)

Efficiency index is constructed following the procedure given in Kneller and Ste-
ven (2002) and Fofack (2009). It has five components; economic diversification (d),
reallocation of labor across sectors (a), international competiveness (c), macroeconomic
instability (μ) and governance index (g). Each indicator is normalized to eliminate scale
biasness and then weights are assigned by applying the technique of PCA. Goodness
of fit of this index is measured by discrepancy, root mean square residual (RMSR) and
Bentler-Bonnet normed fit index (NFI). Smaller values of discrepancy and RMSR are
desirable while NFI should be 0.90 or greater. Therefore, the value of discrepancy,
RMSR and NFI are 0.0196, 0.0443 and 0.9478 respectively, which are adequate for
fit index. The efficiency index is constructed as follows,

Where wi is the weight assigned to component i. The details on each of the five
components of the index are given below.
144 Ayesha Naz, Eatzaz Ahmad

5.3.1. Economic diversification (d)

Economic diversification is a process of growing range of produced output. It is

also referred as a market diversification for exports or economic activities. Data on
this index are collected from UNCTAD. It ranges from zero to one. The index shows
greater divergence from world pattern, if the value is closer to one.

5.3.2. Reallocation of labor across sectors index (a)

This index shows the adjustment of labor from traditional to the modern devel-
oped sectors as a consequence of structural change of the economies. This index is
constructed by considering three sector namely, agriculture, industry and services.
Employment changes for each sector are calculated and then the values of these three
sectors are added to obtain the index of reallocation of labors across sector. Finally,
we normalize the index by following the traditional way. The construction of index
is given below,

where ∆La, ∆Li, ∆Ls show employment change in agriculture, industry and services
sector respectively. Data on employment in agriculture, industry and services as a
percentage of total employment are collected from World Bank database.

5.3.3. International competitiveness (c)

In this study degree of international competiveness is measured by real effective

exchange rate (REER). It is the weighted average of local currency against the index
of major foreign currencies, adjusted for inflation. Data are extracted from Bruegel
datasets and World Bank database with year 2010 as a base year.

5.3.4. Macroeconomic instability (μ)

Extending the methodology of Ali and Rehman (2015), present study uses five
indicators for the construction of macroeconomic instability index. It includes infla-
tion rate, budget deficit, current account deficit, unemployment and external debt.
Data on all these variables are collected from World Bank database. Each variable is
normalized before the construction of composite index. After normalization, weights
are derived through PCA. Some diagnostic tests are also performed on the index.
It shows that Discrepancy (0.0180), RMSR (0.0425) and NFI (0.9109) are in the fit
index range.
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 145

5.3.5. Governance index (g)

Governance index is measured with the help of six dimensions that are men-
tioned in worldwide governance indicators. These dimensions are as follows; control
of corruption, government effectiveness, political stability and absence of violence or
terrorism, regulatory quality, rule of law and voice & accountability. Each indicator is
normalized and weighted equally to construct governance index. The index is ranges
from zero to one. Values closer to one indicate good governance.

5.4. Capital stock (Kit)

Data on capital stock is generated by using a standard perpetual inventory model
of the following form,

(5.1)

The capital stock at period t, Kt, can be expressed as a function of capital stock
at period t-1, kt—1, gross investment in the preceding period,lt—1, and depreciation, δ,
of kt—1,

Solving equation 5.1 for the stock of capital in period t-1 yields equation 5.2,

(5.2)

The above equation is similar to the one solved by Harberger (1978) under the
framework of neoclassical growth theory. Where gk is the compound GDP growth
rate over the entire period, calculated separately for each country, while the rate of
depreciation is taken 5 percent as suggested by Reynolds (1971) and Looney (1985).
Data on capital formation are obtained from World Bank database.

5.5. Labor force (Lit)

Data on labor force are extracted from World Bank database.

5.6. Transportation and communication index (Tit)

This index has two dimensions, i.e. transportation and communication. The in-
dex is constructed by assigning equal weights to these dimensions as both are equally
146 Ayesha Naz, Eatzaz Ahmad

important. These two dimensions are explained below,

5.6.1. Transportation index

Three main categories of transportation i.e. air, railway and marine are considered
to drive composite index. To determine air connectivity, we have used air freight (mil-
lion ton-km), passengers carried and registered carrier departures worldwide. These
three variables are selected to show domestic and worldwide movement of goods and
passengers. In the railway category, goods transported (million ton-km) and passen-
gers carried (million passenger-km) have been chosen to indicate the domestic and
neighboring region connectivity via railway tracks.

Now-a-days, extensive roads networks are replacing the railway network because
of its low maintenance cost. However, limited data availability restricts this indicator
to become a part of transportation index. Data on air and railway transport are col-
lected from World Bank database and CIA World Fact Book. Whereas, merchant
marine (fleet) data, measured in deadweight ton are taken from UNCTAD. All the
variables are converted to per capita form to avoid the biasness which arises due to
country size. Each variable is normalized to eliminate scale biasness and then weights
are assigned through PCA. This index also passes the diagnostic test of good fit index
as the value of Discrepancy (0.0473), RMSR (0.0562), Bollen Relative Fit index, RFI
(0.9013) and NFI (0.9363) are in the suggested range.

5.6.2. Information and communication index (ICT)

ICT is the composite of internet users, telephone traffic, land line subscription
etc. These types of indicators are used in the measurement of globalization under the
dimension of technology, personal contact, information flows and social globalization.
We have tried to avoid all those variables which are used in its measurement. Hence,
we are using ICT imports (percentage of GDP) as a proxy for ICT index. The justifi-
cation for using ICT imports is that if a country is importing goods related to ICT,
then it means it is developing or improving the existing structure of information and
communication modes. Data is collected from World Bank data base and Econstat.

5.7. Financial development index (Fit)

Financial development index is collected from IMF database. It is a comprehen-
sive index which uses six indicators of financial institution and financial market to
construct financial development index. Depth, access and efficiency of financial in-
stitution and financial market are taken. It ranges from zero to one and higher value
of the index shows higher financial development.
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 147

6. Results and Discussion

Our estimable model given by equation 4.20 involves panel data. In order to
choose the right estimation procedure in panel data setting, it is essential to analyze
order of integration of the variables in this equation. Several panel units root test are
available to determine the stationarity of the series. Following the standard practice,
the present study applies tests proposed in Levin, Lin and Chu (2002), Im, Pesaran
and Shin (2003) and fisher type tests proposed by Maddala and Wu (1999) and Choi
(2001) under the null hypothesis of non-stationary. The alternative hypothesis of Levin
et al. (2002) has homogeneous autoregressive coefficient while Im et al. (2003) and

Table 1: Results of Unit Root Test

Levin, Lin & Im, Pesaran ADF - Fisher PP - Fisher Stationary

Chu t* and Shin Chi-square Chi-square
W-stat
Human capi- -13.7386 -6.50160 600.280 723.200 I(0)
tal(Rit-1) (0.000) (0.000) (0.000) (0.000)
Efficiency -31.6798 -14.6845 703.085 697.777 I(0)
Index (Bit) (0.000) (0.000) (0.000) (0.000)
Capital Stock -4.388 -3.066 247.141 207.949 I(1)
(Kit) (0.000) (0.001) (0.001) (0.108)
Labor Force -9.017 1.91332 262.333 325.730 I(0)
(Lit) (0.000) (0.972) (0.000) (0.000)
Transporta- -2.542 -2.324 256.050 251.763 I(0)
tion & Com- 0.005 (0.010) (0.000) (0.000)
munication
(Tit)
Financial -12.127 -6.781 394.430 1036.69 I(0)
Development (0.000) (0.000) (0.000) (0.000)
(Fit)
Globalization -20.318 -12.492 513.843 1229.38 I(0)
Index (Git) (0.000) (0.000) (0.000) (0.000)
Note: probability values are given in brackets.

fisher type tests consider heterogeneous autoregressive coefficient. Results of unit

root test are presented in Table 1.

Results of unit root test indicate that all the variables are stationary at level except
for the variable of capital which is found to be stationary at first difference. This result
 148

Table 2: Estimation Results of Equation 4.20 by Applying DOLS

Variables Full panel Developed Countries Developing Countries

Coeffi- ST. error Z test Prob. Coeffi- ST. error Z test Prob. Coeffi- ST. error Z test Prob.
cient cient cient
Rit-1 0.013*** 0.007 1.811 0.071 0.021** 0.009 2.35 0.014 0.008 0.015 0.55 0.582
Bit 0.003 0.009 0.40 0.692 0.006 0.032 0.17 0.867 0.006 0.010 0.61 0.541
Kit 0.029* 0.009 3.06 0.002 0.183* 0.012 15.09 0.000 0.019*** 0.011 1.68 0.093
Lit 0.046** 0.020 2.28 0.023 0.029*** 0.017 1.70 0.070 0.116* 0.024 4.80 0.00
Tit 0.011*** 0.006 1.64 0.071 0.017** 0.007 2.41 0.016 0.005 0.004 1.25 0.204
Fit 0.045* 0.008 5.42 0.000 0.025** 0.013 1.99 0.047 0.046* 0.009 4.76 0.00
Bit-1 0.030* 0.010 3.15 0.002 0.029 0.025 1.15 0.250 0.022** 0.011 1.99 0.046
Ayesha Naz, Eatzaz Ahmad

Kit-1 0.027* 0.003 8.39 0.00 0.182* 0.006 32.15 0.00 0.018* 0.004 4.90 0.00
Lit-1 0.046* 0.003 15.05 0.00 0.010*** 0.006 1.68 0.094 0.116* 0.004 32.91 0.00
Tit-1 0.004 0.003 1.44 0.151 0.003 0.005 0.66 0.510 0.002 0.002 0.81 0.416
Fit-1 0.042* 0.006 6.62 0.00 0.037* 0.009 3.86 0.00 0.041* 0.007 5.53 0.00
Git-1 0.930* 0.013 70.73 0.00 0.954* 0.024 40.16 0.00 0.915* 0.016 58.40 0.00
Note: The symbols *, ** and *** indicate significant at 1%, 5% and 10% levels respectively.
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 149

leads to the estimation of equation 4.20 through Dynamic Ordinary Least Square
(DOLS) method. It is important to note that this equation is dynamic in nature, con-
taining lagged dependent variable. Therefore, the results of ordinary least square, fixed
effect model and random effect model will be biased and inconsistent due to presence
of correlation of lag dependent variable with the error term (Holly & Raissi, 2009).

The results of estimated equation 4.20 are presented in Table 2. Estimation is

separately done for developed and developing countries to understand the sources
of globalization in these economies. Full panel case presents the combined result of
developed and developing countries.

The results show that human capital (Rit—1) is positively related to globalization
index in case of developed and full panel. It shows that the role of human capital is
influential in expediting the process of globalization in developed countries while it
appeared to be insignificant in case of developing countries.

Investment in human capital refers to knowledge based economy that is con-

sidered to be one of the most important drivers of globalization. Inventions and
innovations have created immense transformation in production, transportation
and communication. Today decisions regarding consumption, production and other
aspects progressively include transnational dimensions. The theory of world-system
also highlights the role of knowledge creation for the transformation of the structures.

The role of human resources is critical in complementing investment and policies

to boost efficiency and economic activities. It is the investment in human capital that
increases the efficiency of labor, which results in the surplus production of good and
services. These goods and services are not only enjoyed by the domestic population
but their worldwide flow increases economic integration and hence contributes in
shaping globalization.

In developing countries, particularly the low income or the poorest ones, the
challenges are complex. These countries have lower levels of educational attainment
than developed countries and countries with significant numbers of higher formal
qualifications works in the areas that under-utilize their skills or end up as unemployed.
This is clearly a misallocation and waste of resources in these countries. Therefore,
there is a need of new polices and strategies to establish link between investment in
skill development and productivity to drive the process of globalization smoothly
across globe which otherwise surpass these low income countries.

Efficiency (Bit), labor (Lit) and capital (Kit) are the components of output. In
this analysis labor and capital are positively effecting globalization while efficiency
is insignificant in developed, developing and full panel cases. However, the impact
150 Ayesha Naz, Eatzaz Ahmad

of lagged values of efficiency (Bit—1), labor (Lit—1) and capital (Kit—1) are significant on
globalization except for the value of (Bit—1) in developed countries. It highlights that
the current form of globalization is determined by previous stock of capital, labor
and the performance of the economy in terms of economic diversification, labor re-
allocation, international competitiveness, macroeconomic instability and governance.

The role of capital and labor can be explained by observing the returns of these
factors. The objective of producer is to maximize profits that can be realized by em-
ploying cheap factor of production. Therefore, producer sets its business in that region
where there is cheap availability of labor. It is termed as outsourcing that is the most
obvious and beneficial cost saving approach. Another explanation in context of factor
returns can be found from the traditional philosophy of self-interest. Labor migrates
to the area of better economic opportunities or where it can get better returns of
his labor work in the form of wages. Likewise, capital flow to the areas where it gets
higher returns in terms of interest. It clearly indicates that the motive of self-interest
moves labor and capital from one country to another, thereby contributing in the
process of global integration. These instances illustrate the way factor of production
contributes to globalization.

In context of the globalization theories, the theory of global capitalism states the
expansionary nature of capitalism, which requires cheap labor, raw material and mar-
ket for its survival. Hence, transnational capital derives the process of globalization.
Similarly, according to the theory of transnational and transnationalism, individuals/
labor creates transnational link which allow them to live in transnational space. It
shows that the movement of individuals/labors is not bounded to particular location.
Therefore, it allows globalization to take place.

In this study, the coefficient of transportation and communication index (Tit) is

found to be significant in full panel and developed countries whereas it is insignificant
in developing countries.

Technological improvement in telecommunication and transportation is perceived

as a major facilitator of globalization. The development of digital technology and
internet has made significant changes in information and telecommunication sector.
The World Wide Web (www) has enabled individuals to access information across
globe. Additionally, global media networks with its branches in various countries
bring news and information to individuals all over the globe.

Improvement in transportation has not only changed the way of businesses but
also tourism. Massive container ships and super tankers have taken the scale of trade
to higher level. Modern transport is able to carry large quantity of goods including
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 151

liquid such as oil. This has increased the international trade between countries.

The revolution in the industries of transportation, communication and infor-

mation has added new meaning to the process of globalization. It has significantly
improved the degree of connectivity among various regions of the globe and made
it a flat world. The theories of world-system, global capitalism, network society and
others also explain the role of technological improvement as an important factor for
the creation of global world.

Surprisingly, in developing countries the important coefficient of transportation

and communication turns out to be insignificant. It can be due to uneven access
of technology around the globe, especially in poor countries. The access and use
of broadband and internet is much lower in poor countries. Furthermore, lack of
supporting ICT applications and human capacity does not complement the required
sustenance to globalization. Weak infrastructure of the low income countries restricts
the process of globalization via transportation and communication. Lower degree of
globalization is an evidence of poor air, sea and land ways management of poorer
countries. In our sample countries like Albania, Algeria, Armenia, Bangladesh and
etc show lower value of transportation and communication index, thereby unable to
significantly affect the process of globalization through this channel. However, the
positive relationship is evident from this study.

The study reports that financial development (Fit) and the lagged value of financial
index (Fit-1 ) is significant and directly related to globalization in all three cases. It means
the financial institutions are stronger enough to derive the process the globalization
in developed as well as in developing countries. Capital account liberalization and
deregulation are the financial drivers of globalization. It is observed that international
transactions in liquid assets have been increased around the world over the last few
decades. Financial institutions and corporations including banks have expanded their
activities worldwide. The market products and instruments of financial sector facili-
tate borrower and lender all over the world to economize possible risks. Hence, the
higher degree of integration among countries seems to be driven by financial sector.

Technological progress and financial innovation played an important role in

determining the current shape of globalization. Cross boarder financial flow has
become easier and secure due to efficient and reliable global networks particularly
electronic banking. Strong financial institutions make it easier to move finances
globally in order to exploit its maximum gains. Hence the role of financial sectors is
significant in increasing the economic integration through financial globalization.

The contribution of financial index to globalization is high in developing countries

 Table 3: Estimation Results of Equation 4.20 by Applying GMM
152

Variable Full panel Developed Developing

Coeffi- ST. error Z test Prob. Coeffi- ST. error Z test Prob. Coeffi- ST. error Z test Prob.
cient cient cient
Rit-1 0.027*** 0.015 1.73 0.083 0.069*** 0.040 1.69 0.091 0.010 0.020 0.52 0.605
Bit 0.092* 0.024 3.79 0.000 0.025 0.024 1.06 0.288 0.064** 0.027 2.38 0.017
Kit 0.284** 0.136 2.09 0.036 0.029 0.178 0.16 0.872 0.315** 0.161 1.96 0.050
Lit 1.001 * 0.324 -3.09 0.002 0.034 0.062 0.54 0.589 0.850*** 0.489 1.74 0.082
Tit 0.027*** 0.015 1.813 0.073 0.021** 0.009 2.31 0.015 0.024 0.017 1.44 0.151
Fit 0.062* 0.018 3.37 0.001 0.020*** 0.011 1.75 0.080 0.048*** 0.028 1.70 0.090
Bit-1 0.009 0.015 -0.59 0.558 0.043** 0.022 1.90 0.058 0.007 0.011 0.63 0.528
Kit-1 0.283** 0.133 2.13 0.033 0.027 0.167 0.17 0.867 0.312** 0.159 1.97 0.049
Lit-1 0.999* 0.323 3.09 0.002 0.033 0.057 0.59 0.554 0.851*** 0.487 1.75 0.081
Tit-1 0.026*** 0.015 1.71 0.088 0.006 0.007 0.92 0.359 0.023 0.014 1.60 0.110
Fit-1 0.072* 0.024 -2.99 0.003 0.019*** 0.011 1.71 0.087 0.061 0.048 1.28 0.202
Git-1 0.885* 0.017 52.70 0.000 0.912* 0.049 18.53 0.000 0.887* 0.021 42.88 0.000
Ayesha Naz, Eatzaz Ahmad

Constant 0.331* 0.036 9.15 0.000 0.241** 0.102 2.34 0.019 0.303* 0.048 6.26 0.000
Diagnostic Test
No.of 1839 659 1179
Obs.
Instru- 244 222 244
ment
AR(1) Z= -3.26 (0.001) Z = -3.32 (0.00) Z=-2.85 (0.004)
AR(2) Z= 1.14 (0.253) Z = 0.37 (0.71) Z=0.99 (0.322)
Hansen 87.87 (1.000) 29.88 (1.00) 54.80 (1.000)
test
Note: The symbols *, ** and *** indicate significant at 1%, 5% and 10% levels respectively. Probability values are given in brackets.
 Driving Factors of Globalization: An Empirical Analysis of the Developed... 153

i.e. 0.04 than in developed countries. The reason for this high value can be the flow
of capital from advanced economies to developing countries in search of cheap labor.
Therefore this global movement of capital increases the financial connectivity which
later reflects in economic integration. This result indicates that the financial sectors
significantly drive the process of globalization in developing and emerging economies.

Lagged value of globalization (Git—1) appeared to be the most strongest to effect

current globalization. The dynamic mechanism of globalization creates pressure for
the harmonization of economic, political, cultural, social and financial systems across
boarder, which, in turn lead to more globalization. It simply referred as globalization
begets globalization.

7. Results of Generalized Methods of Moments (GMM) for Robustness

For robust check Equation 4.20 is also estimated by applying the technique of
system generalized methods of moments (GMM). The results are presented in Table 3.

The results of full panel case and developing countries are almost similar to the
one which have been derived from DOLS expect for the variable of efficiency. In this
analysis the coefficient of efficiency is significant in driving globalization. Efficiency
index represents the trade, macroeconomic and political efficiency of a country. It
obviously means that the efficient structure regulates international movement of goods
and services hence facilitate the process of integration among regions. It is noted
that results of GMM are stronger in determining globalization as the magnitude of
coefficients are greater.

In case of developed countries the index of human capital, transport and com-
munication and financial setup majorly drives the process of globalization.

The reliability and validity of the instruments are shown by the serial correlation
tests, mentioned as AR(1), AR(2) and the Hansen test in Table 3. Results indicate
the existence of serial correlation at first order AR(1), but not at second order AR(2).
However, the more relevant is AR(2) test of serial correlation5. P-value of the Hansen
test indicates exogeneity of the instruments which are used to estimate dynamic system
GMM since we are unable to reject the null hypothesis in all three cases.

8. Conclusion and Policy Recommendations

There are several economic, political, social and technological factors that have
contributed to globalization in recent decades. It includes lower trade and capital
restrictions that have increased the flow of international trade and capital across
5 The differenced in error term is likely to be serially correlated at first order even if the original error is not.
154 Ayesha Naz, Eatzaz Ahmad

globe. Market and cost drivers have also contributed in affecting the degree of in-
tegration among countries. The costs of transportation and communication have
fallen dramatically due to technological improvement that promotes the culture of
borderless economies.

The current study has developed a formal framework, which highlights the sourc-
es of globalization. Overall it is concluded that the results of DOLS shows human
capital, capital, labor, transportation and communication and financial index as the
important drivers of globalization in the combined panel and developed countries.

The panel of developing countries highlights capital, labor and financial index to
determine the process of globalization. The role of human capital and transportation
and communication is not significant; therefore, it is recommended that there is a
need of investment on human skills and infrastructure in developing countries to
keep pace with other countries.

Results of GMM estimation in full panel and developing countries are similar.
However, in this case efficiency index is appeared to be significant. In the panel of
developed countries human capital, transportation and communication and financial
index are significant. GMM estimation successfully passes all the diagnostic tests.

Integration of economies has developed a new culture of interdependence.

Therefore, it is required to integrate national economies to the rest of the world in
order to take advantage of modern technologies and innovation. Application of these
technologies is a challenge for most of the low income countries due to lack of invest-
ment on human capital. The role of human capital is not significant in determining
the process of globalization in developing countries. It is therefore recommended
that there is a need of investment on human skills in developing countries to keep
pace with other countries. Furthermore, development of infrastructure is required
to accelerate trade flow among countries.

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Appendix-I List of Developing Counties (By IMF Criterion)

1.Albania 21.Hungary 41.Russian

2.Algeria 22.India 42.Senegal
3.Argentina 23.Indonesia 43.South Africa
4.Armenia 24.Iran 44.Sri Lanka
5.Bangladesh 25.Jordan 45. Paraguay
6.Belize 26.Kazakhstan 46. ElSalvador
7.Benin 27.Kenya 47. Egypt
8.Bolivia 28.Madagascar 48. Guatemala
9.Brazil 29.Malaysia 49. Tanzania
10.Brunei 30.Mauritius 50. Thailand
11.Bulgaria 31.Mexico 51. Togo
12.Burkina 32.Mongolia 52. Trinidad&Tobago
13.Cambodia 33.Morocco 53. Tunisia
14.Cameroon 34.Namibia 54. Turkey
15.China 35.Nigeria 55. Uganda
16.Colombia 36.Pakistan 56. Ukraine
17.Sudan 37.Peru 57. Uruguay
18.Croatia 38.Philippines 58. Venezuela
19.Gabon 39.Poland 59. Vietnam
20.Ghana 40.Romania
List of Developed Countries
1.Australia 13.Ireland 25.Slovak
2.Austria 14.Israel 26.Slovenia
3.Belgium 15.Italy 27.Spain
4.Canada 16.Japan 28.Sweden
5.Chile 17.Korea 29.Switzerland
6.Czech Rep. 18.Latvia 30. Malta
7.Denmark 19.Lithuania 31.Iceland
8.Estonia 20.Luxembourg 32. UK
9.Finland 21.Netherlands 33.USA
10.France 22.NewZealand
11.Germany 23.Norway
12.Greece 24.Portugal