2.2.1 Globalisation

Definition of globalisation

Globalisation is the increased integration and interdependence between global economies. 

This means that events in one economy are likely to affect other economies. For example, the financial crisis in the USA in 2008 had an impact in many economies all over the world.

Reasons for globalisation

• Fewer tariffs and quotas - A tariff is a tax on imports. A quota is a physical limit on the number of imports.  These are known as protectionist measures or restrictions on free trade or trade barriers. They reduce the number of imports from abroad. They are often put in place to protect the firms in the domestic country. In recent years, a lot of trade barriers have been dropped. An increasing number of economies are more open and many countries have stopped protecting domestic industries. Many countries have also simplified their monetary and legal systems to make international trading easier

• Reduced cost of transport - International transport networks have improved in recent years. In particular, the cost of flying has fallen and the number of flights and destinations has increased. This means that people can travel to business meetings more easily and goods can be transported more cheaply.

• Reduced cost of communication - Developments in technology have helped globalisation to accelerate. Modern computing allows firms to transfer complex data instantly to any part of the world. It also means that more people can work at home, or any other location that they choose. This makes it easier for firms to have operations all over the world. The internet also allows consumers to buy goods online from firms located in different parts of the world

• Increased significance of MNCs - Many firms want to sell abroad. An MNC is a firm that operates in many different countries. Large multinational corporations (MNCs), which have a global reach, dominate some markets. They benefit from having international markets and producing goods anywhere in the world where costs can be minimised 

Impacts of globalisation

• Rising living standards - Some countries benefit from globalisation from improved living standards. E.g. If an MNC is operating in a country, this can provide jobs. The home nation of the MNC may also benefit from the MNC as It can generate large amounts of profits, which can be taxed. MNC production contributes towards economic growth. 

• Greater choice - The ability to import results in greater choice from abroad. Also, improved and cheaper transport communications have opened up huge numbers of new destinations for tourists. Another example is the cuisine available in restaurants today. Enormously wide-ranges are available in most towns and cities in the West.

• Lower prices - If a multinational can produce goods more cheaply in foreign factories, prices are likely to be lower. One of the main benefits of the movement of some manufacturing from the West to countries like China and India is that many goods are cheaper for consumers.

• Closing of traditional industries - As a result of foreign imports, many domestically owned businesses close due to competition. Also, globalisation helps businesses access technology from abroad. This means there may be less demand for “traditional” industries.

• Environmental impact -Many environmentalists oppose globalisation because global economic growth usually means more environmental damage. For example, as economies grow, more cars are purchased and more flights are taken. Both car and air transport increase greenhouse gases that cause global warming. Also, global economic growth will use up resources. Some of these resources such as oil, gas, gold and iron ore are non-renewable so once used they cannot be replaced.

Definition of MNC

A multinational corporation is a company that operates in more than one country. 

Definition of FDI

FDI, or inward investment, occurs when a company makes an investment in a foreign country. This may involve the construction of a factory or a store. Another part of FDI is the purchase of shares in a foreign business (10 per cent or more). Most FDI comes from MNCs.

Reasons for the emergence of MNCs/FDI

• To benefit from economies of scale - In some industries, firms that exploit economies of scale can reduce costs. MNCs will be in a better position to exploit economies of scale because they are so large. Firms that sell to global markets will produce more than those who just sell to domestic markets. They can therefore lower costs. Such firms are so powerful they can place a lot of pressure on suppliers to lower their prices

• To access natural resources/cheap materials - Many large companies are happy to invest overseas because they need to buy huge quantities of resources.

• Lower transport and communication costs - Developments in transport and communications have helped to drive the growth in MNC/FDI activity. Transportation costs have come down and the speed with which goods can be delivered has gone up. This makes distribution in overseas markets much more attractive. Communication has also significantly improved so now  in certain jobs, people can work from home anywhere in the world!

• To access customers in different regions - One of the main reasons why MNCs have developed successfully is because they can sell far more goods and services in global markets than they can in domestic markets. C

Advantages and disadvantages of MNCs/FDI

• Creating jobs - One of the main benefits of FDI is the employment created when MNCs arrive and establish factories, warehouses, shops and other business facilities. When MNCs set up operations overseas, income in those countries rises

• Investing in infrastructure - Countries with poor infrastructure often struggle to attract FDI. If a country has inadequate road networks, ports, railway networks, bridges, power distribution, airports, telecommunications, industrial parks and other facilities, it is more difficult to do business in that country. Consequently, owing to the attractiveness of MNCs/FDI, governments are more likely to invest in infrastructure in order to attract the attention of investors.

• Developing skills - MNCs provide training and work experience for workers when they locate operations in foreign countries. Also, governments in less developed countries often spend more on education to help attract MNCs

• Developing capital - The arrival of MNCs will help to boost the stock of capital in host countries. One reason is because when a business sets up a new facility, such as a factory, it is likely to install up-to-date technology.

• Contributing to taxes - The profits made by MNCs are taxed by the host nation. This increases tax revenue for the government that can be used to improve government services.

• Avoiding paying taxes - Tax avoidance, particularly by powerful MNCs, has attracted the attention of the world’s media in recent years. Also, political leaders, particularly in the USA and EU, have accused MNCs, such as Apple and Google, of failing to pay their fair share

• Environmental damage - Many environmentalists are suspicious of MNCs because they may cause environmental damage.

• Moving profits abroad -The profits made by MNCs abroad are often subject to repatriation. This means that profits are returned to the country where the MNC is based. As a result, the host country loses out.