The Cycle of Foreign Investment and the Spread of Industrialization

September 25, 2012 9:49 am

Since Britain’s industrialization by the mid 1800s, there has been an ongoing cycle of foreign investment by industrial powers in the economies of developing nations that has spread industrialization across the globe.  Very simply, as a nation would industrialize, it would experience a rise in the cost of labor and living.  This would force it to raise the prices of its goods to keep up with the cost of production, making it less competitive in international markets and even at home.  As their profit margins decline, businessmen start building industrial enterprises in non-industrial nations with cheap labor.  While the industrialists’ profits rise, the new nation where they are investing becomes industrialized, starting the cycle all over again.

We can see three major waves of this cycle happening, although it has been a continuous process with occasional breaks (such as the two world wars) interrupting it.  The first wave came after 1850, when industrialization spread to Western Europe, the United States, and Japan.  The next wave came after World War II, at first rebuilding the war ravaged industries of Western Europe and Japan.  Along with this came the development of the so-called “mini-dragons in East Asia (South Korea, Taiwan, Hong Kong, and Singapore).  The early development by smaller states can be seen as analogous to the early development of the North Italian city-states in the High Middle Ages, while it took larger nation states longer to organize their resources.

The most recent, and still ongoing, wave since the early 1990s has seen the emergence of China and India as new industrial giants in the twenty-first century.  Likewise, factories and jobs are being outsourced to South and South-East Asian nations such as Vietnam and Bangladesh. 

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