DP4692 Policies Facilitating Firm Adjustment to Globalization

Author(s): Bernard Hoekman , Beata Smarzynska-Javorcik

Publication Date: October 2004

Keyword(s): globalization , adjustment , government policies

JEL(s): F02 , F13 , O19

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP4692.asp

This Paper focuses on policies facilitating firm adjustment to globalization. We briefly review the effects of trade and investment liberalization on firms, focusing on within- industry effects. We postulate that governments’ role in supporting the process is to: (i) ensure that firms face ‘right’ incentives to adjust, and (ii) intervene in areas where market failures are present. The main message of the Paper is that while many policies could be adopted to address market failures, they need to be carefully designed and implemented in a stable macroeconomic environment. An institutional infrastructure that supports the functioning of modern markets is most important. Pro-active support policies of whatever stripe should be subject to cost benefit analysis, based on the existence of an identified market failure and monitored for performance and cost effectiveness. Transparency and accountability are critical in ensuring that interventions accomplish their intended objectives rather than being vehicles for rent seeking.