Effects of globalisation

Benefits of globalisation

• Increased economic growth

• Increased tax revenue

• Economies of scale

• Lower prices and higher consumer surplus

• More choice

• Higher living standards
  
  

Increased economic growth:

(Greenfield FDI)

 is when a firm in one country creates a completely new firm in another country, or extends the capacity of another firm (rather than just buying an existing firm and continuing to run it in the same way)

• Greenfield FDI creates new jobs in a country, creating the multiplier effect and leading to further economic growth (new jobs creates induced spending after autonomous investment)

• Increase in human capital as local workers are trained in new techniques, managers more skilled

• Physical capital improved from introduction of new equipment

• Increases productivity and potential growth + new competition = efficiency

Increased tax revenue:

• Presence of overseas firms may increase tax revenue, allowing spending on infrastructure

• Increased employment and productivity widens tax base (collect more tax from more people)

• Increased standard of living decreased gov. Spending on public services

Economies of scale:

• Firms can course factors of production from wider ranges of places, allowing lower costs from buying in bulk (external economies of scale)

• Specialisation(can import and focus on strengths) and access to more efficient technology allows internal economies of scale

Increasing profits and allowing investment into R&D

• Firms can move elements of production offshore (moving IT departments overseas)

• Globalisation creates interdependence, reducing conflict

Lower prices and higher consumer surplus:

• Footloose capitalism: MNCs can move from country and base themselves where production costs are lower to minimise costs, reducing prices

• Increased employment(due to higher job availability) may increase disposable income and consumer surplus

• Potential increased income from larger market size and increased demand for skills

• Economies of scale decreases production costs

More choice

• Consumers benefit from wider variety of products and lower prices

• Producers gain access to larger consumer markets

Higher living standards

• Consumers have more choice and variety of higher quality goods for cheaper

• Can create job opportunities for higher pay to increase disposable income

Drawbacks of globalisation:

• Displaced workers

• Exploitation of labour

• Environmental impact of increased trade

• Loss of tax revenue from transfer pricing

• Increased income inequality within countries

• Influence of TNCs on domestic economic policy

Displaced workers

• May only hire high skilled workers, locals lose job opportunities (import skilled labour)

Exploitation of labour

• Labour standard concerns

Environmental impact of increased trade

• Increased resource extraction and pollution

Loss of tax revenue from transfer pricing

• By enabling MNCs to easily move goods and services between international borders (companies exploit national tax laws and shift profits from high-tax to low-tax), reducing global tax

Increased income inequality within countries

• Locals may only get low level jobs, importing for high skilled and earning jobs - no human capital formation

• May not use local suppliers

Influence of TNCs on domestic economic policy

• May gain too much power over local government, leading to corruption and reduce amount of tax revenue

• May force deregulation of local gov. To allow pollution of environment