Spillover (economics): Difference between revisions

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Externalities in the supply and demand curve: Note the graph representing a negative externality below. To illustrate this concept the ‘marginal social cost’ (MSC) is used in comparison to the ‘marginal private cost’ (MPC). Marginal social cost is the line which includes all externalities including the social cost of pollution in addition to regular production costs. Alternatively, marginal private cost also considers the regular production costs used in a transaction.<ref>{{cite journal |last1=Hutchinson |first1=Emma |title=Principles of Microeconomics |url=https://pressbooks.bccampus.ca/uvicecon103/chapter/introduction-to-environmental-protection-and-negative-externalities/ |website=Pressbooks |date=16 November 2017 |publisher=University of Victoria |access-date=12 May 2022}}</ref>

[[2007–2008 financial crisis]] is an example of how spillover effects occur both in terms of the mechanisms of a system but also geographically. Academics have found a correlation between the impact of a shock to a system and its impacts on other systems which have dependency. In the wake of the Global Financial Crisis many spillover effects occurred including a strong correlation between the volatility of the United States stock markets and other global markets.<ref>{{cite journal |last1=Mensi |first1=Walid |last2=Hammoudeh |first2=Shawkat |last3=Nguyen |first3=Duc Khoung |last4=Kang |first4=Sang Hoon |title=Global financial crisis and spillover effects among the U.S. and BRICS stock markets |journal=International Review of Economics & Finance |date=March 2016 |volume=42 |pagepages=257-276257–276 |doi=10.1016/j.iref.2015.11.005 |url=https://www.sciencedirect.com/science/article/abs/pii/S1059056015002270}}</ref> This impact shows how high default rates on home loans in the US did not have isolated impacts. Rather it resulted in spillover effects into equity markets domestically as well as internationally.

Globalisation has been a prominent influence on the economic spillover effect in the global economy. Due to rising economic interactions including trade and investment between economies, the likelihood has risen that events impact one economy will in turn impact others who have economic ties and dependencies. Recent research<ref>{{cite journal |last1=Thomas |first1=Lina |url=https://ssrn.com/abstract=4474329 |access-date=3 August 2023| journal = SSRN - Preprint Finance Research Letters | title = Ripple Effect: Disentangling the Global Impact Web of US Monetary Policy | date = 2023 | doi = 10.2139/ssrn.4474329 }}</ref> suggests that even a small change in US monetary policy can have significant ripple effects on economies worldwide, particularly those that are financially open or trade open. This is due to the US' dominant role in the global economic system, impacting all other countries simultaneously and leading to cross-country effects which amplify the global impact. The extent of spillover effects can vary depending on the country from which the shock originates and the recipient country. For instance, China's spillovers impact mostly through trade, while the US impacts the rest of the world mostly through financial channels, and other major economies like the Euro area, UK, and Japan have more regional impacts.<ref>{{cite journal |last1=Thomas |first1=Lina |title=The Tale of Two Titans: Us and China's Distinct Impact on the Global Economy |journal= SSRN - Preprint Finance Research Letters |date= 2023 |doi = 10.2139/ssrn.4518123 |url=https://ssrn.com/abstract=4518123 |access-date=3 August 2023}}</ref> <ref>{{cite journal |last1=Thomas |first1=Lina |title=Global Pulse: How Major Economies Steer the Rhythm of World GDP |journal=SSRN |date= 2023 |doi = 10.2139/ssrn.4512405 |s2cid=260145097 |url=https://ssrn.com/abstract=4512405 |access-date=3 August 2023}}</ref>

Systems in society are built on relationships and interactions that create mutual value for a wide range of stakeholders. This has created circumstances where impacts to one or more of these entities can spillover to the other entities that depend on the system. This can be examined in the Global Financial Crisis example of 2008. As banks granted loans to borrowers with a high chance of default, banks suffered from liquidity risk which led to significant macroeconomic impacts including losses for shareholders across all markets, significantly increased unemployment, bailouts from the Government and low investor and consumer confidence.<ref>{{cite journal |last1=Edey |first1=Malcolm |title=The Global Financial Crisis and Its Effects |journal=Economic Papers |date=September 2009 |volume=28 |issue=3 |pagepages=186-195186–195 |doi=10.1111/j.1759-3441.2009.00032.x |url=https://onlinelibrary.wiley.com/doi/pdfdirect/10.1111/j.1759-3441.2009.00032.x}}</ref> Hence, entities like large banks can not operate in isolation, they are depended upon by many other entities in the financial system.

In the same way that Financial crises and recessions can cause negative spillover effects through increased dependency between nations, trade policy can create positive spillover effects. It has been observed that one of the main positive spillover effects occurs as developing economies trade more with advanced economies leading to technology, information and investment flows<ref>{{cite book |last1=Dixon |first1=Tim |last2=O'Mahony |first2=John |title=Australia in the Global Economy |date=2019 |publisher=Pearson Australia |isbn=9780655780731 |edition=11}}</ref> (Dixon & O’Mahony, 2019). Data shows that China trading with more advanced economies has increased its access to new technology and information leading to improved competitiveness in global markets. It has been shown that there is a correlation between China’s trade activity with OECD nations and improved domestic productivity.<ref>{{cite journal |last1=Chuang |first1=Yih-Chyi |last2=Hsu |first2=Pi-fum |title=FDI, trade, and spillover efficiency: evidence from China's manufacturing sector |journal=Applied Economics |date=21 August 2006 |volume=36 |issue=10 |pagepages=1103-11151103–1115|doi=10.1080/0003684042000246812 |s2cid=154518027 }}</ref>

Firms who seek to minimise costs in supply chains by using resources from overseas have been shown to invest in local infrastructure. This is classified as foreign direct investment. This dynamic is common as firms from advanced economies expand their production base overseas to take advantage of cheaper labor and capital costs. Studies have shown that foreign direct investment creates productivity gains as local infrastructure of a developing nation is invested into.<ref>{{cite journal |last1=Meyer |first1=Klaus |last2=Sinani |first2=Evis |title=When and where does foreign direct investment generate positive spillovers? A meta-analysis |journal=Journal of International Business Studies |date=26 February 2009 |volume=40 |issue=7 |pagepages=1075-10941075–1094 |doi=10.1057/jibs.2008.111 |s2cid=53583857 |url=https://link.springer.com/article/10.1057/jibs.2008.111}}</ref> Examples of how this may occur are a US corporation establishes a production site in Vietnam. Around this production site is the positive spillover of increased investment in local transport infrastructure as well as a food district for the workers.