Introduction

Two waves stand out in the history of globalization. The first wave took place in between 1850–1913, and the second wave started after World War Two and continues until this day (see Bordo et al. 2003); moreover, Baldwin (2006) characterizes globalization in terms of two great unbundlings. In his view, during the first wave and much of the second, the fall in transportation costs and the removal of trade barriers spatially unbundled production from consumption, which enabled international specialization. With the second unbundling, the start of which Baldwin (2006) dates at around 1980–90, production itself is increasingly geographically separated; that is, it is no longer the case that production takes place under a single roof. In this light, new technologies enable firms to relocate certain stages of the production process to other countries.

As Figure 11.1 shows, throughout the past fifteen years the growth rate of FDI has surpassed those of both world GDP and world trade. This increased importance of FDI has led to an enthralling and relatively new research agenda that tries to explain the existence of multinational enterprises or MNEs (see for example Markusen 2002; Barba Navaretti and Venables 2004; Helpman 2006; and Brakman and Garretsen 2008). A key feature of these models is the role of trade barriers or, in general, economic distance in determining FDI, since distance-related variables are crucial for understanding FDI patterns.