that markets become bigger, globalization implies that production efficiency will increase.
To some extent, the potential for increased economies of scale from globalization will be limited by the fact that the number of competitors will increase. For example, while Swedish car makers Volvo and Saab can expand their production capacity through exports, their domestic market is seemingly undercut by the imports of cars. And as Swedish imports of cars are nearly as great as Swedish exports of cars, it might appear to some that there won’t be any significant gains from globalization. After all, if both exports and imports of cars are stopped, then they would be able to produce almost as many cars as they are producing now.
Yet this overlooks two key points. First of all, even if we don’t gain very much from increased economies of scale we would gain from increased competitive pressure. As was noted in the first chapter, a higher level of competitive pressures will produce economic gains by reducing the gap between marginal revenue and price and by increasing the pressure to improve productivity. A study by the Dutch statistical authority found a positive correlation between the extent of foreign competition (as measured by the share of imports) and productivity growth in that sector6.
So in other words, globalization will either mean increased economies of scale or increased competitive pressures or a combination of the two. Whatever the case, globalization will mean higher economic efficiency.
Moreover, by both importing and exporting cars, Swedes and others get a greater variety of brands allowing greater satisfaction of different preferences. Some consumers want luxurious cars and can so choose to buy cars like Maserati and Porsche. Others, like large families, want big cars, like SUV’s and so they can buy for example Hyundai Santa Fe or Toyota RAV4. Other consumers value safety most, and so choose for example larger Volvo cars. Other consumers want cars with minimum carbon emissions so they can buy for example Toyota Prius. Yet for others a low price is most important so they can buy for example Skoda cars.