Ch.6 International Trade and Specialization

6.1 International Specialization

What is Globalization?

• Globalization can be defined as the changes that are taking place in various sectors of the economy such as social, cultural, technological and political.
• All those changes that are increasing interdependencies amongst people all around the world. The pace of globalization is increasing at a fast pace due to several reasons:

1. Population explosion in multiple countries.
2. Expansion of economies such as China and India. This has increased consumer spending as well.
3. Vast improvement in technology, communication and transportation channels.
4. Easier movement of workers from one place to another.
5. Approach to become more open economies, exchanging goods, services and labor.

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What is International Specialization?

• As globalization has taken the world by storm, this has given rise to the concept of international specialization.
• International Specialization can be described as when an economy concentrates in producing goods and services that they can most efficiently produce. For example, Swiss watches, Belgian chocolates etc.

Advantages of International Specialization

• Efficient use of resources, this means lower cost of production and increased output.
• Higher levels of employment and income, increased output means more opportunities for businesses, and this means they will want to hire more staff.
• Economic Growth, increased output, increased employment means increased standard of living and thus leading an economy to economic growth.
• Maximizing chances for international trade, access to the world market.

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Disadvantages of International Trade

• Increase in structural unemployment, this means producing limited number resources will result in employees losing jobs in other industries in the long run.
• Over-Specialization, concentrating on producing a limited number of products would mean that employment, out and the economy may suffer if the demand for those product declines.
• Limited Consumer Choices, producing fewer goods and services would mean less choice for consumers unless economies trade internationally.
• Over dependency on other countries to provide goods and services a country may require.

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6.2.1 The Role of Multinational Companies

What is a multinational company?

• One of the impacts of globalization has been the development of multinational companies.
• A multinational business is a type of company that has its headquarters in one specific country while its operations or branches can be located in other countries. For example, Apple has its head office in the USA, its operations are located in China and its support staff in India.

Advantages of becoming a multinational

• Maximum consumer reach.

• By locating outlet in another country, the company can avoid trade barriers.

• By locating themselves in other countries, they can minimize their costs.

• Gain advantage from lower employment wage cost by locating in such countries where wage cost is low.

• Ability to raise capital for various purposes.

• Ability to achieve economies of scale much faster, that is, lower the average cost of per unit of output.

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How can Multinationals benefit their host countries?

• Creation of jobs in the country the MNC is situated in.
• Foreign Direct Investment (FDI) is received from overseas, which is then invested in the host country. This inward investment within the host country allows improve its productive capabilities and move towards economic growth.
• More variety of goods and services within the local market.
• Introduction of new technology, ideas and skills that host country can learn from.
• As MNC are located in the host country, they pay taxes there as well, this increases revenue for the government which can used for public spending.
• Output produced maybe exported, increasing export earnings for the host country.

How Multinationals create Problems for the host countries?

• Multinationals are big and powerful; they can force local firm out of business.
• They can escape themselves from paying taxes by transferring their profit overseas.
• MNCs are powerful and are encouraged by government of various economies. They may utilize this power to get relief from taxes and receive subsidies.
• MNCs prefer setting in developing countries so that they are able to exploit workers by offering them low wages.
• These companies may not take care of the environment and exploit natural resources of the host country.

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