An increase in capital flows in the form of foreign direct investments (and especially the establishment of branches of multinational corporations) and international trade liberalisation favour fragmentation of the production process, consisting in its division into parts located in different countries. Fragmentation of production is also enabled by enhanced transport and information transfer as well as their lower costs (i.e. the decrease in transaction costs). The fragmentation of production is grounded in international differences in the endowments of factors of production and - as a result - in prices of these factors. Multinational corporations divide their production among many different countries in order to minimise costs and make use of advantages of local markets, such as inexpensive labour force or a favourable location. Research and development, on the other hand, and the part of the production process that requires the use of the most advanced technologies and with the highest value added, are often located in the home country, also due to poor protection of the proprietary rights in developing countries. Such a conduct allows the company to benefit from comparative advantages related to different production locations. Moreover, it enables the use of international differences in exchange rates, interest rates, and government subsidies supporting selected types of economic activity, as well as of different structures of customs tariff rates and varying features of internal markets in particular countries, for the purpose of maximising profits. Research 22  17  Based on the data of UNCTAD.
In the economic literature of recent years most of the references to the problem of global imbalances concern the phenomena described above. Therefore, for the purposes of this speech, I shall assume that whenever global imbalances are mentioned, the term will mean a joint occurrence of the following factors:  2  Ricardo Husmann, Federico Sturzenegger “Global imbalances or bad accounting? The missing dark matter in the wealth of nations”, Harvard University working paper, January 2006. 3  W. Buiter “Dark Matter or Cold Fusion”, Goldman Sachs Global Economics Paper, January 2006. 4  K.Lansing “Spendthrift Nation”, Federal Reserve Bank San Francisco Economic Letter, November 2005. 5  According to World Economic Outlook published by the IMF in September 2005, the forecasted US current account deficit will amount to USD 759 billion in 2005 and will increase to USD 805 billion in 2006. Both values correspond to 6.1% of the forecasted GDP. Some forecasts by investments banks, however, indicate an increase in the forecasted current account deficit to 6.5% of the GDP in 2005 and to 7-8% of the GDP in 2006 and 2007. 6  An extensive discussion of the real property market can be found in A. Ahearne et al. „House Prices and Monetary Policy: A Cross Country Study”, Fed Board of Governors, International Finance Discussion Papers, September 2005.