Globalisation

Key Terms
Globalisation: The worldwide growth of multinational companies, international integration,the spread of the free market and policies of liberalisation and free trade.

“The whole pace of business is moving faster. Globalisation is forcing companies to do things in new ways” – Bill Gates
Theory

What is Globalisation?


1) Free movement of goods and services

More trade takes place between countries


2) Free movement of labour

People are increasingly free to move around the world both for leisure and work purposes. This is especially true for highly skilled labour markets e.g. Executives (CEOs).


3) Free movement of economic capital

Large companies are now more likely to be multinational corporations. Rather than being based in one country, multinationals have production facilities outside their country of origin.


4) Free movement if financial capital

Financial capital is increasingly mobile and its owners can move capital around the world in search of the highest rate of return.


5) Cultural factors

There is a greater degree of cultural exchange between countries. For example, brands such as McDonalds and Coca Cola can be found in many countries where cultural values have traditionally been opposed to capitalism.


Measurement


The KOF Index of Globalisation measures the three main dimensions of globalisation.

1) Economic
2) Social
3) Political


Reasons for growth of Globalisation?

1) Multi-lateral trade agreements

Brokered by international organisations, notably the World Trade Organisation. These agreements have reduced tariff barriers and other protectionist measures that previously restricted trade among countries.

2) Cheaper Transportation

Most forms of transportation have become cheaper over the past decade. Notably the shipping industry has lowered its transportation costs.


3) Technological Advances

Social networks and e-mail have helped facilitate global business links. The Internet has made it easier for consumers in one country to purchase goods directly from foreign firms.


4) The Collapse of Communism

The collaspe of communist nations such as Soviet Union has led to greater economic integration. Former communist countries were largely closed economies. Nowadays, the former Soviet states and countries of Eastern Europe fully participate in the global economy.


5) Increased Openness

Some of the world’s largest developing economies to trade, notably India and China, are increasingly open. Their plentiful labour forces and low wages have made them extremely competitive in the international market and stimulated trade.
Advantages of Globalisation
1) Free Trade / Comparative Advantage

This means countries can specialise in producing goods where they have a comparative advantage (this means they can produce goods at a lower opportunity cost). When countries specialise there will be several gains from trade:

  • Greater competition

  • Wider choice of goods

  • Bigger export markets for domestic manufacturers


    • 2) Free movement of labour

    Increased labour migration gives advantages to both workers and recipient countries:

  • Increased opportunities to look for work elsewhere

  • Reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers migrating west.

  • New / more efficient management styles can be created


    • However jobs in advanced economies may drain away to developing countries as firms switch their production to countries with comparative advantage.

    Moreover skilled workers in developing economies may drain away to advanced economies with the incentive of higher pay.


    3) Increased Investment

    Globalisation has made it easier for countries to attract short term and long term investment. Investment by multinational companies can play a big role in improving the economies of developing countries.

    Benefit to investors → Higher returns
    Benfit to recipient → Economic growth
    Disadvantages of Globalisation
    1) Costs of interdependance

    Globalisation has mean't that trade between countries has increased, which has also mean't that interdepedence has increased. The disadvantage of this is that issues arising in one country are more likely to spread to other countries.

    For example, if a recession hits the USA, then the impacts of recession are likely to hit the U.K. How?

  • Recession results in lower foreign direct investment (FDI)
  • Lower investment = lower or even a fall in growth
  • A sustained period of lower rate of growth = recession

    • A major example of this was the financial crash of 2008.

    This means that due to globalisation, the macro economic performance performance of the U.K. depends to a large extent on the performance of countries that trade with the U.K.


    2) Controversial activities of multinationals

    Tax Avoidance

    Multinational companies like Amazon and Apple, have set up offices in countries such as Ireland and Luxembourg with very low rates of corporation tax. This means they pay very little tax in the countries where they do most of their business.

    Governments are then compelled to increase taxes on VAT and income tax. This hurts the domestic population as well as domestic business owners.


    Un-ethical Behaviour

    Many people regard the activities of multinational corporations as un-ethical. For example in countries such as Indonesia, companies exploit the lack of regulation by offering very low wages, dangerous working conditions and long hours.

    However it is often argued by multinationals that living standards in developing countries would be lower without the investment in capital provided by the company.


    Diseconomies of Scale

    Multinational companies can also suffer from diseconomies of scale, because of difficulties associated with coordinating the activities of subsidiaries based in numberous countries. This results in higher average costs, perhaps passed onto consumers in the form of higher prices.


    3) Environmental costs

    Rapid growth and development have long lasting impacts on the environment:

  • Damage to ecosystems

  • Land degradation

  • Deforestation

    • In China, regions such as Bejing, Shanghai and Wuhan are currently suffering the environmental costs of globalisation.









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