Unit 1.9: Globalization

In business, the competition will bite you if you keep running. If you stand still, they will swallow you.

-William Knusden (1879-1948, former president of General Motors.

What is Globalization?

• Globalization is the integration of the world’s economies in terms of economics, sociology and politics.

• It is an attempt by firms to produce and sell the same products or services simultaneously in different companies. i.e. McDonald’s and Pizza Hut

• Outcome: markets, cultures and tastes have converged at an accelerating pace.

Indicators of Globalization

1. Higher value of world trade over time2. Higher levels of foreign direct investment. i.e. Japanese car

manufacturing facilities in the US and Europe3. Multinational corporations (MNC) accounting for a higher share of world

GDP4. Greater cultural awareness and exchange, such as the export of cultural

foods5. Spreading of multiculturalism. i.e. Hollywood and Bollywood movies.6. Higher spending on international travel and tourism7. Information and communication technology spreading throughout the

world. i.e. increased usage of the internet.

Factors Contributing to the Growth of Globalization

• Liberalization of International Trade: removal of global trade barriers– Trade protection methods have stopped in World Trade Organization

Countries i.e. European Union introduced single currency• Technical Progress• Deregulation: Drop in the cost of transport and distribution

– i.e. China• Cultural Awareness and Recognition

– Consumers are more open to buying foreign products.• Language

– English has become the de-facto Lingua Franca (common language) for businesses.

Advantages of Globalization to Businesses

• They can exploit economies of scale.• They can move to a “new” market in a different

country selling the same product. • Decisions taken in one region of the world can

influence behaviour in another region of the world. (This can be a double-edged sword.)

• Cheaper production• MNCs can spread risks around their different

subsidiary countries• Avoid protectionist policies

Effects of Globalization on Business Activity

• Increases the level of competition in local markets for local stores, and foreign markets for other firms.

• Many different customer expectations and needs to be fulfilled• Benefits of economies of scale• Choice of location for MNC.• Mergers, acquisitions and joint ventures allow a business to

grow at a faster pace than if they were to grow organically• Increased customer base.

– E.g. India and China• Businesses have to adapt to their different customer bases in

each country

Potential Problems of Expansion Overseas

• A lack of knowledge and experience in new markets– Ex: marketing may be problematic due to lack of brand recognition

• Storage, transportation, and distribution costs will increase• External factors have a greater weighting in decision

making– Ex: Legal Restrictions, language barriers and cultural differences

• Political and Economic conditions in foreign countries may limit a firm’s prosperity overseas.

• Infrastructure may be less developed in overseas markets, thereby limiting the efficiency of operations of an MNC– Ex: Communications systems or roads

MNC’s effect on host countries• A host country is any nation that allows a MNC to set up in its

country.

– Ability to create jobs– Boost a country’s GDP– Technology Transfer– Creates competition in a host country– Environmentalists and anti-globalization groups are concerned about

social responsibility.– May create unemployment as well– Pose a threat to domestic business

Regional Trading Blocks• Regional economic blocks strive to eliminate trade barriers.

– Between two or more countries• Closer Economic Partnership Agreement• Free Trade Area

– Member states agree to trade freely with each other, but have separate trade barriers

• Common Market– Free trade and free movement of labour

• RTBs will impose barriers to international trade, such as external tariffs and quotas on the volume or value of foreign goods– Ex: Great Britain used to purchase some items cheaply from New

Zealand that it must now buy at higher prices from EU suppliers. That is the cost of belonging to a RTB

Examples Of Regional Trading Blocks

• European Union (EU)– Evolved from the European Free Trade Association

(EFTA)• North American Free Trade Agreement– NAFTA

• The Association of South East Asian Nations– ASEAN

• Closer Economic Partnership Agreement (CEPA)

Extra Knowledge Points!!!

• Trade Creation: takes place when a country switches from buying commodities from a high cost country to buying them from a lower cost country, following the formation of a RTB.

• Trade Diversion: results in losers in a trading bloc when a country switches from buying commodities from a low-cost country to buying them from a higher cost country

• Globalization: Firms must develop an international strategy to succeed, one for every country.

Key Terms • Common Market: refers to a customs union, such as the EU, that allows the free movement of factors of

production (land, labour, capital and enterprise) between member countries.

• Customs union: refers to a group of member countries that trade freely with each other but impose a common external tariff (CET) on imports from non-member states. This means that all members must enforce the same (common) trade barriers to non-member countries.

• Free trade: occurs when countries trade without any international trade barriers such as tariffs, quotas and bureaucratic procedures.

• Globalization: is the integration of economic, social, technical and cultural issues of the world’s economies. This has taken place largely due to the expansion of multinational corporations and governments advocating freer international trade.

• Multinational corporations (MNC): are companies that operate production or service facilities outside their home country.

• Regional Trading Bloc: refers to a group of countries that agree to freer international trade with each other, through the removal of trade barriers. Examples of trading blocs include the EU and the North American Free Trade Agreement (NAFTA).

• Protectionist measures: are the policies used by a government to guard the interest of its domestic industries from foreign competition. Examples of protectionist policies include the use of import taxes and imposing higher safety standards on foreign products.

Review Questions• 1. What is meant by ‘globalization’?• 2. State 5 indicators of globalization.• 3. Outline four factors that have led to globalization in the world economy.• 4. Explain how some businesses benefit from globalization, whilst others are

constrained by it.• 5. What is a ‘multi-national corporation’?• 6. What are the reasons for a business wanting to become a multinational?• 7. What are the advantages and limitations to a host country of multinationals?• 8. What is a ‘regional trading block’?• 9. How might a business benefit from being located in a regional trading block?• 10. Distinguish between ‘trade diversion’ and ‘trade creation’