Globalisation
What is Globalisation:
It is the geographic dispersion of industrial and service activities, for example, research and development, sourcing of factor inputs, production and distribution, and the cross-border networking of companies, for example through joint ventures and the sharing of assets
Key Terms for Business:
Globalisation is a process in which economies have become increasingly integrated and inter-dependent
Globalisation is dynamic rather than an end-state
Globalisation is not inevitable – it can reverse, indeed the growth of world trade in goods and services slowed in recent years following the global financial crisis
What are the Key Characteristics of Globalisation:
Greater trade across borders in goods and services
An increase in transfers of capital including the expansion of foreign direct investment (FDI) by transnational companies (TNCs) and the rising influence of sovereign wealth funds. Fifty-one of the largest economies in the world are corporations. The top 500 TNCs account for nearly 70% of world trade.
The development of global brands that serve markets in lower, middle and higher-income countries
Greater use of outsourcing and offshoring of production. The classic example is the iPhone which is part of a complex global supply chain. The product was conceived and designed in Silicon Valley in the USA and the software was enhanced by engineers working in India. Most iPhones are assembled in China and Taiwan.
High levels of labour migration both within and between countries
New nations joining the trading system, for example, Russia joined the World Trade Organisation (WTO) in 2012. The latest countries to join the WTO are Yemen (2014), Seychelles (2015), Kazakhstan (2015) and Afghanistan (2016)
A shift in the balance of economic and financial power from developed to emerging economies and markets – i.e. a change in the centre of gravity in the world economy
Increasing spending on capital investment, innovation and infrastructure across large parts of the world
Globalisation is a process of making the world economy more connected and inter-dependent
Many industrialising (emerging) countries are winning a rising share of world trade and their economies are growing faster than developed nations. Emerging and developing countries now account for more than 57% of global GDP adjusted for purchasing power according to 2015 data published by the IMF. The 28-nation European Union has a share of global GDP of less than 17%.
Benefits/Gains from Globalisation:
Encourages producers and consumers to benefit from deeper division of labour and economies of scale
Competitive markets reduce monopoly profits and incentivise businesses to seek cost-reducing innovations
Enhanced growth has led to higher per capita incomes – and helped many of the poorest countries to achieve faster economic growth and reduce extreme poverty measured as incomes < $1.90 per day (PPP adjusted)
Advantages of the freer movement of labour between countries
Gains from the sharing of ideas/skills/technologies across national borders
Opening up of capital markets allows developing countries to borrow money to cover a domestic savings gap
Increased awareness among consumers of challenges from climate change and wealth/income inequality
Competitive pressures of globalisation may prompt improved governance and better labour protection
Drawbacks/Risks of Globalisation:
1. Inequality: Globalisation has been linked to rising inequalities in income and wealth. Evidence for this is the growing rural-urban divide in countries such as China, India and Brazil. This leads to political and social tensions and financial instability that will constrain growth. Many of the world’s poorest people do not have access to basic technologies and public goods. They are excluded from the benefits.
2. Inflation: Strong demand for food and energy has caused a steep rise in commodity prices. Food price inflation (known as agflation) has placed millions of the world’s poorest people at great risk.
3. Vulnerability to external economic shocks – national economies are more connected and interdependent; this increases the risk of contagion i.e. an external event somewhere else in the world coming back to affect you has risen/making a country more vulnerable to macro-economic problems elsewhere
4. Threats to the Global Commons: Irreversible damage to ecosystems, land degradation, deforestation, loss of biodiversity and the fears of a permanent shortage of water afflict millions of the world’s most vulnerable
5. Race to the bottom – nations desperate to attract inward investment may be tempted to lower corporate taxes, allow lax health and safety laws and limit basic welfare safety nets with damaging social consequences
6. Trade Imbalances: Global trade has grown but so too have trade imbalances. Some countries are running big trade surpluses and these imbalances are creating tensions and pressures to introduce protectionist policies such as new forms of import control. Many developing countries fall victim to export dumping by producers in advanced nations (dumping is selling excess output at a price below the unit cost of supply.)
7. Unemployment: Concern has been expressed by some that capital investment and jobs in advanced economies will drain away to developing countries as firms switch their production to countries with lower unit labour costs. This can lead to higher levels of structural unemployment.
8. Standardisation: Some critics of globalisation point to a loss of economic and cultural diversity as giant firms and global multinational brands dominate domestic markets in many countries.
9. Dominant global brands – globalisation might stifle competition if global businesses with dominant brands and superior technologies take charge of key markets be it telecommunications, motor vehicles and so on.
A selection of Key Aspects of Globalisation:
Trade-to-GDP ratios are increasing for most countries
Expansion of Financial Capital Flows between countries
Foreign Direct Investment and Cross Border M&A
Rising number of global brands- including from emerging countries
Deeper specialisation of labour- components come from many nations
Global supply chains and new trade and investment routes e.g. South-South trade
Increasing levels of international labour migration and migration within countries
Increasing connectivity of people and businesses through mobile and Wi-Fi networks
Factors that have contributed to Globalisation:
Containerisation:
The costs of ocean shipping have come down, due to containerisation, bulk shipping, and other efficiencies. The lower unit cost of shipping products around the global economy helps to bring prices in the country of manufacture closer to those in export markets.
Technological change:
Rapid and sustained technological change has reduced the cost of transmitting and communicating information – sometimes known as “the death of distance” – a key factor behind trade in knowledge products using web technology
Economies of scale:
Many economists believe that there has been an increase in the minimum efficient scale (MES) associated with some industries. If the MES is rising, a domestic market may be regarded as too small to satisfy the selling needs of these industries
Differences in tax systems:
The desire of businesses to benefit from lower unit labour costs and other favourable production factors abroad has encouraged countries to adjust their tax systems to attract foreign direct investment (FDI)
Less protectionism:
Old forms of non-tariff protection such as import licensing and foreign exchange controls have gradually been dismantled. Borders have opened and average import tariff levels have fallen
Growth strategies of transactional and multinational companies:
In their pursuit of revenue and profit growth, increasingly global businesses and brands have invested significantly in expanding internationally. This is particularly the case for businesses owning brands that have proved they have the potential to be successful globally