Globalization: Concepts and resource guide

Globalization changes the business environment and presents new opportunities as well as pose new challenges to organisations operating in a global business. This resource guide helps understand globalization and key related concepts.

What is Globalisation

‘New’ vs. ‘Old’ Forms of Integration

Globalization refers to the increasing integration of economies around the world, particularly through trade and business.

• Integration of economies happened hundreds of years ago as well but that was more in the form of International trade and Migration of people.
• The ‘New’ forms of integration includes recent international relations such as Capital flows, Foreign Direct Investments (FDI), and Global production, in addition to International trade and Migration of people.

Integration between national economies now occur in ‘Goods markets’ through increased ‘Trade’, happens in Capital markets through Investment, in Labour markets through Migration, in Intellectual property markets through Sharing and Trading Ideas, and through Policy coordination in Regional and Global Environmental Policies.

Globalisation: Definitions

Globalisation refers to growth in international flows of goods, services and especially capital that has taken place between countries.

It is a process by which people and activities in one part of the world get increasingly linked to people and activities in the rest of the world.

Globalization is the outcome of development in new technologies in the areas of communication and transportation. These technologies enable people to rapidly traverse the globe physically, transmit information instantly and send goods around the globe in hours or days (Carter and Lee, 2009).

The aim of globalization is to benefit individual economies around the world by making markets more efficient, increasing competition, limiting military conflicts, and spreading wealth more equally.

International business is known to facilitate the globalization process.

Waves of Globalization

First wave (1870-1914)

There was massive migration from Europe to the New World. There were fewer trade barriers and reduced transportation costs, and there was possibility for a productive use of land and flow of goods, capital and people.

Second wave (1950-1980)

Integration of industrial countries by restoring trade relations, economic growth and stability after WWII. Europe, North America, Japan erected a series of trade liberalizations. OECD was founded after WWII. OECD lead to huge growth rates of OECD countries.

Third wave (1980s onwards)

This wave has been driven by advances in (a) computing, (b) transportation, and (c) telecommunications, and by multinational companies looking for: (a) new markets, (b) cheaper resources, and (c) skilled labor. This wave is also known as the golden age for developing countries.

(Lee and Carter, 2012)

How Globalization Provides Opportunities for Companies

• Access to markets
• Financial integration (through available crossborder financial flows)
• Cost reductions in communication and transportation (more accessible customers)
• Sourcing, purchasing and producing globally (in response to differences in law, climate, tax rates)

Ways to Globalise

Here are a few ways in which firms globalise.

Foreign Direct Investment: Foreign direct investment (FDI) tends to increase at a much greater rate than the growth in world trade, helping boost technology transfer, industrial restructuring, and the growth of global companies.

Technological Innovation: Increased competition from globalization helps stimulate new technology development, particularly with the growth in FDI, which helps improve economic output by making processes more efficient.

Economies of Scale: Globalization enables large companies to realize economies of scale that reduce costs and prices, which in turn supports further economic growth. However, this can hurt many small businesses attempting to compete domestically.

The Forces Behind Globalization

• Increased expansion and technological improvements in transportation and communications networks
• Liberalization of cross-border trade and resource movements
• Development of services that support international business activities
• Growing consumer demand for foreign products
• Increased global competition
• Changing political and economic situations
• Expanded cross-national treaties and agreements

Macro-economic Reasons for Globalisation

• Exploitation of comparative cost advantages: Absolute advantage, Comparative advantage
• Removal of tariff barriers
• Increasing incomes
• Technology Accessibility.
• Homogenisation of market segments
• Rise in consumer demand
• Capital Mobility
• Increase in economies of scale

Perspectives on Globalization

Economic Globalization

Globalization is an economic phenomenon: Economic globalization refers to global business presences, financial integration, international competition.

Western capitalism is at the heart of economic globalization. There is plenty of evidence of the existence of globalization in the so called global marketplace (see the giant multinational cooperations such as Coca Cola, Mc Donald’s, Nike, Starbucks).

Globalization of markets is due to reduction of transportation costs, reduction communication costs, breaking down of trade barriers to the flows of goods, services, capital, knowledge, and people across borders (trade liberations).

These trends have been facilitated and accompanied by three main institutions: IMF, (international monetary fund), the world bank, and the world trade organization (WTO).

International Trade and Exchange Rate

Determined by the interaction of supply and demand due to: Changes in the current account, Changes in investment flows, Speculation in the foreign exchange markets.

It is caused due to: An increase in exports, An increase in imports, Change in demand for foreign currencies, Individuals’ confidence about future levels for the currency.

Political Globalization

Globalization is not just an economic phenomenon; it is also a powerful force that radically changes the political reality of the world.

At the level of global politics, we observe a redistribution of economic power which will lead to a new global political architecture. Power is shifting away from the developed towards the developing countries.

With their enormous populations and economic potentials, countries such as China and India are set to become major economic power.

At the level of domestic politics, globalization changes the power relations between government, business and civil society. Governments lose influence on national politics and multinational corporations gain relevance in this power game. This is due to the increasing significance of a global economy.

Government perspective on International trade

• Political influences
• Economic concern: Promoting industrialisation, Protecting employment, Protecting consumers: horse meat scandal, Protecting national culture

Technological Globalization

Technological globalization refers to the accelerating technological changes through new communication and transportation technologies.

The development of new technologies has been responsible for many changes in our global environment, especially in the 19th and 20th century.

The invention of digital technology is central to the third wave of globalization. Computer, internet, video conferencing makes information and people travelling fast.

Cultural Globalization

Globalization can be understood as an increasing exchange of cultures (through travel, television, communication technologies).

People from all corners of the world can relate thanks to digital technologies, instant communication, and reduction of transportation costs.

Globalization increases homogeneity of culture. For example, due to a convergence of global media whose ownership is concentrated in a few western media conglomerates (e.g. Hollywood).

Globalization increases social diversity. Many foreign cultures enter and coexist with a local culture (e.g. food culture in London: Italian pizza, Japanese sushi, Indian curries coexist with fish and chips).

Threats Against Global Companies

• Volatile macroeconomic environment (easy spread of crisis)
• Changing nature of emerging economies (more consumpion-based, less import, more homegrown consumption)
• Increasing protectionism via legislations, tradebarriers, exclusive “weonly” clubs
• Shortening & domestication of supplychains
• Fast & fragmented communication channels
• Globalisation of competition
• Growing antiglobalisation sentiments

Criticisms of Globalization

• Pros: Essential to growing integration of national economies around the world which is key to the rapid economic growth and poverty reduction in developed and developing countries.

• Cons: Fosters poverty and inequality between rich and poor (between and within countries). It makes indigenous cultures disappear and helps the spread of diseases and global terrorism, and global warming and environmental degradation.

• Profits over societal wellbeing & the environment
• Domination over world’s resources
• Too much political power. Threats to national sovereignty
• Negative costs of economic growth
• Increasing income inequality
• Unfair competitive practices
• Cultural Pollution & Homogenization

Globalization and Inequality: Theories & Concepts

Gini Index (Gini coefficient): It is a measure of inequality in a distribution and is commonly used to assess income inequality, but it can be applied to any situation to measure disparity among different parts of a population. The Gini Index takes values from 0 to 1, where 0 represents perfect equality and 1 represents perfect inequality.

Theil Index (Theil inequality index or Theil’s entropy index): It is another measure of inequality in a distribution, and is commonly used to assess economic inequality, income inequality, or to measure disparity among different parts of a population. Theil Index takes values between 0 and l, where 0 indicates perfect equality, and higher values represent higher levels of inequality.

Heckscher-Ohlin Theorem: The Heckscher-Ohlin Theorem suggests that countries tend to export goods that use factors of production that are abundant and cheap in that country and import goods that use factors that are scarce in that country. The theorem makes assumptions such as perfect competition, identical technologies, and the immobility of factors of production between countries. So, the theorem simplifies things and may not fully capture real-world complexities, such as variations in factor qualities and technological differences.

The Stolper-Samuelson theorem is an extension of the Heckscher-Ohlin theorem and states that when there is an increase in the relative price of a good that depends heavily on few factors, those owning those factors tend to gain while those who own the other factors tend to lose. It basically suggests that trade can have winners and losers among different factors of production. So if prices of goods that are less dependent on manual labour increase, labour-intensive work will pay lesser wages, whereas those who own capital or technology are likely to benefit more.

Neo-classical Growth Theory: It suggests that countries that open up their economy tend to experience income convergence among countries due to free movement of capital.

Endogenous Growth Theory: It suggests that when countries open up their economy, those that are well-positioned to leverage new technology benefit whereas other countries tend to lose.

Dependency Theory: It suggests that poorer countries fail to benefit from globalization as the have fewer products to offer and do not have adequate access to markets.

According to analysts, globalization has significant impact on inequality among and within countries. The gap between the average income per capita levels of the poorest and the richest nations has increased during the recent eras of globalization as the MNCs and richer nations are taking the benefits of trade and commerce.Through the modern trend of globalization and liberalization, the developed countries has been able to increase their wealth rapidly while the developing countries are complaining of unfair trade practices by rich nations. According to a report titled Globalization with a Human Face submitted in 1999 by the United Nations Human Development, the global markets, global technology, global ideas and global solidarity can enrich the lives of people everywhere, if and only if the benefits are shared equally.

While the present phase of globalization is regulated by the competition in the global markets having focused on profits. It states that these markets are discouraging the nonmarket activities that are vital for human development.

The highly skilled professional elite corporate executives are getting high wages, while the market is very insecure for unskilled labour. The best example of increasing inequality within country is China, where disproportion is rising between the export-oriented regions of the coast and the interior.

According to a report, the income gap between the fifth of the world’s people living in the richest countries and the fifth in the poorest was increased to 74 to 1 in 1997, from 60 to 1 in 1990 and 30 to 1 in 1960.

The decade of 1990s showed increasing concentration of income, resources and wealth among people of various countries Thus, globalization has increase the magnitude of price and/or technology shocks for integration to increase individual economic insecurity in terms of riskier employment and/or wage outcomes.

Impact of Globalization on Society

It is important to understand the activities of MNEs, evaluate the major economic impacts of MNEs on home and host countries, to establish the foundations for responsible behavior, to discuss some key issues of globalization and society—ethics and bribery, the environ-ment, pharmaceuticals, and labor issues, and to examine corporate responses to globalization.

Multinational enterprises (MNEs) have their greatest impact on countries when they engage in foreign direct investment (FDI) via wholly-owned subsidiaries and/or joint ventures. Although not all MNEs are huge, the sheer size of many such companies troubles their critics. The global orientation of MNEs also causes many to believe that they are insensitive to national (local) concerns.

There are some who argue that managers are best equipped to serve the interests of their shareholders and that governments should deal with social issues and externalities. Advocates of corporate social responsibility (CSR) believe that capitalism fails to serve the public interest and that managers must be pressured to act responsibly.

Balance-of-Payments Effects of FDI

This is calculated using the formula:

B = (m –m1) + (x – x1) + (c – c1) where B = balance-of-payments effect, m = import displacement, m1 = import stimulus, x = export stimulus, x1 = export reduction, c = capital inflow for other than import, and export payments, c1 = capital outflow for other than import and export payments.

One country’s deficit is another country’s surplus. A country must compensate for a long-term trade deficit by: reducing its capital reserves, attracting an influx of capital via the receipt of foreign direct investment, the purchase of public or private debt by foreign governments or individuals, the receipt of unilateral transfers (e.g., foreign aid).

Host Country BOP Effects

The net import effect (m – m1) is positive if the FDI results in the substitution of local production for imported products and is negative if it results in an increase in imports. The marginal propensity to import represents the fraction of an increase in imports that are due to an increase in income.

The net export effect (x – x1) is positive if the FDI results in the generation of exports but negative if it results in a decline. FDI may also stimulate home country exports of complementary products to the host country.

Net capital flows (c – c1) are usually difficult to assess because of the time lag between (i) the outward flow of investment funds and (ii) the subsequent inward flow of remitted earnings from that investment. Although initial capital flows to the host country are positive, they may be negative in the long run if capital outflows eventually exceed the value of the investment.

Selected Economic Growth and Employment Effects of FDI

Losses to Home Country: FDI outflows may create jobs abroad at the expense of jobs in the home country.

Gains to Host Country: FDI inflows may result in the transfer of capital, technology, and/or managerial expertise, and well as the creation of new jobs.

Losses to Host Country: FDI inflows may deplete premium resources, drive up local labor costs, displace domestic investment, disadvantage local competitors, destroy local entrepreneurship.

Cultural Foundations of Ethical Corporate Behavior

Cultural relativism holds that ethical truths depend upon the groups subscribing to them; thus, intervention in local issues and traditions by outsiders is clearly unethical.

Cultural normativism holds that there are universal standards of behavior that everyone should follow; thus, non-intervention in local violations of global standards is clearly unethical.

While many actions elicit universal agreement on what is clearly right and wrong, others are less clear.

The Effects of NGOs and Multilateral Agreements on Corporate Behavior

Non-governmental organizations (NGOs) actively monitor and publicize corporate practices in order to: educate managers about the environmental and economic consequences of corporate operations and practices, and increase shareholder value.

Multilateral agreements aid in ethical decision-making by dealing with: employment practices, consumer protection, environmental protection, political activity, human rights in the workplace.

However, no set of workable corporate guidelines is universally accepted and observed.

Legal Foundations of Ethical Corporate Behavior

Ethics teaches that people have a responsibility to do what is right and to avoid doing what is wrong. The appropriateness of behavior can be measured in the sense that individuals and organizations must seek justification for their behavior, and that justification is a function of both cultural values and legal principles.

Most civil law countries tend to have a large body of law dealing with business operations; common law countries rely more on precedent than statutory regulations.

The Insufficiency of the Legal Argument: Everything that is legal is not necessarily ethical. The law is slow to develop in emerging areas of concern. The law is often based on moral concepts that cannot be separated from legal concepts. The law may need to be tested by the courts. The law is inefficient in terms of achieving ethical behavior at a minimum cost.

Other Legal Issues:

Extraterritoriality: the extension by a govern-ment of the application of its laws to the foreign operations of its domestic firms. In cases of health and safety standards, differences may not be insurmountable, but in other instances, differences in home- and host-country laws may pose challenging conflicts.

Externalities: the by-products of activities that affect the well-being of people and/or the environment. Although externalities are not reflected in standard cost accounting practices, they must be included in the determination of stakeholder value.

Ethics and Bribery

Bribery consists of payments, or promises to pay cash or something else of value, to public officials and/or other people of influence (foreign officials, political parties, party officials, party candidates).

Bribery affects the performance of countries and companies alike.

Multilateral Efforts to Confront Bribery: Transparency International’s Business Principles for Confronting Bribery (2003). The OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997). The revised OECD Guidelines for Multinationals. The ICC’s Rules of Combat to Combat Extortion and Bribery (1999). The UN Convention Against Corruption (2003).

Ethical Behavior and Environmental Issues

Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs, while taking into account what is best for people and for the environment.

The Kyoto Protocol: signed in 1997, the Protocol is an extension of the UN Framework Convention on Climate Change that obligates signatory countries to reduce their greenhouse gas emissions to 5.2 percent below 1990 levels between 2008 and 2012.

Global warming results from the release of greenhouse gases that trap heat in the atmosphere, rather than allowing the heat to escape.

Ethical Dilemmas and Pharmaceutical Sales

Research-based pharmaceutical firms sell products at high prices so long as their products are covered by patents. Legal generic products comply with patents while allowing for the purchase of drugs at lower costs; unauthorized (illegal) generic products may or may not be reliable. The WTO Agreement on Trade-Related Aspects of Intel-lectual Property (TRIPs) provides a mechanism for poor countries facing health crises to either produce or import generic products. Governments and private foundations enable countries to issue bonds to generate funds needed to purchase vaccines via the International Finance Facility for Immunization.

Tiered pricing: consumers in industrial countries pay market prices for products, while consumers in developing countries pay lower (subsidized) prices.

Ethical Dimensions of Labor Conditions

International labor issues that firms, governments, trade unions, and NGOs must deal with include: fair wages, child labor, working conditions, working hours, freedom of association.

The Ethical Trading Initiative Base Code focuses upon the employment practices of MNEs by getting them to first adopt ethical employment policies and then monitor compliance with their foreign suppliers.

Child Labor Issues: According to the International Labor Organization (ILO), lot of children are working in ways that endanger their health or well-being because of hazards, sexual exploitation, trafficking, and/or debt bondage. Those who argue in favor of child labor claim that in many instances, children are better suited to perform certain tasks than adults, and that if the children were not employed, they would in fact be worse off. While some firms simply avoid operating in countries where child labor is used, other firms work to establish responsible operating policies in those locales.

Ethical Trading Initiative Base Code: ETI is a British-based organization (members include representatives from companies and trade union organizations) that focuses on the ethical employment practices of MNEs.

Corporate Codes of Ethics

In creating its code of corporate conduct a firm should: set global policies that must be complied with wherever the firm operates, communicate the code to all employees within the organization, and to all suppliers, subcontractors, and customers, ensure that its policies are carried out in all instances, report results to its stakeholders.

To sum it up, while FDI is a major source of capital and expertise, it is also a center of controversy regarding its costs and benefits to home and host countries and other stakeholders. Major challenges facing MNEs include the globalization of the supply chain, human rights, employment practices, environmental protection, and consistent standards of ethical conduct. Whereas the legal approach to responsible behavior says that firms can operate according to local laws, the ethical approach says that firms should do whatever is necessary and economically feasible to maximize stakeholder value. Management is charged with maximizing the long-term value of the assets of the share-holders, but it is the role of government to deal with the externalities associated with corporate behavior.

Useful Resources/Links

Historian John Green explains globalization by taking the production of a T-Shirt as an example to illustrate the economic aspects of globalization. He has more videos where he discusses different consequences of globalization – good and bad.

International Trade Impact on United Kingdom-Smartphone Industry