Topic 4: GLOBALISATION Flashcards
DEFINITION OF GLOBALISATION
Globalisation is recognised to be a very broad term, with different connotations in different contexts.
Some of the definitions available for globalisation include:
• “the shift toward a more integrated and interdependent world economy” (Hill, 2009: 6).
• “the increasing integration between the markets for goods, services and capital and at the
same time the breakdown of borders” (Redding, cited in Hartungi, 2006: 729).
• “a process of increasing connectivity, where ideas, capital, goods, services and people are
transferred across country borders”
GLOBALISATION OF MARKETS
The globalisation of markets refers to the “merging of historically distinct and separate national
markets into one huge global marketplace” (Hill, 2014: 5). This is a result of the easing of cross-border
trade. Market globalization is the decline in barriers to selling in countries other than the home
country. This change will make it easier for your company to begin selling products internationally,
since lower tariffs keep consumer prices lower and fewer restrictions when crossing borders makes it
easier for a company to enter a foreign market. It also means that companies must consider other
cultures when developing their business strategies and potentially adjust the product and marketing
messages if they aren’t appropriate in the target country. This may not be an issue in the camera
industry, but a hamburger company entering India would definitely need to revisit their product and
strategies to be successful!
GLOBALISATION OF PRODUCTION
Globalization of production refers to the “sourcing of goods and services from locations around the
globe to take advantage of national differences in the cost and quality of factors of production like
land, labour, and capital”
4.4.1 The benefits of manufacturing globalisation
• Increased outward orientation: Foreign based affiliates tend to be more outward oriented.
As multi-nationally based operations themselves, they are often more aware of the
opportunities of foreign markets and therefore more likely to seek to export. This also helps
improve a nation’s balance of payments. In turn, this outward orientation often helps
domestic firms become more aware of international opportunities.
• Technology transfers: When companies build plants in foreign countries, they tend to bring
the same production techniques and technologies with them that they use in domestic
production. This helps raise the skill level of the workers employed in the new plants. The
economist Raymond Vernon has observed that direct investment possesses a “life cycle,”
starting with innovation in a firm’s home market, successful application of that new
knowledge or technology, and ending with the replication of that innovation in foreign
affiliates.
• Productivity spill overs: Productivity spill overs can spur growth and raise productivity in
industrialized countries as well as developing economies. For example,” just in time”
manufacturing allows firms to minimize their needs for inventory by receiving necessary
inputs immediately before they are needed. This reduces the need for warehousing and
inventory costs. This innovation was brought to the United States from Japanese firms. It was adopted by many domestic firms and helped improve the productivity of many American
businesses.
• Improved production processes: Companies can enjoy significant improvements in
productivity from economies of scale, which can be augmented by participating in global
operations. Foreign investment need not mean duplicating production and distribution
networks in new markets. Rather, foreign investment can make production more efficient by
purchasing elements of a final product in the country with a comparative advantage in making
that product. Globalization has produced an integration of production and marketing of goods
across national borders.
• Increased competitiveness in domestic industry: Competition from foreign corporations often
encourages domestic companies to become more efficient and globally competitive. These
improvements can result from the effect known as “backward linkages.” Backward linkages
are the long-term relationships that develop between a foreign investor and other firms in the
host country. For example, when a firm decides to build a plant that assembles electrical
appliances in a foreign country, the firm not only provides a certain number of people with
new jobs, but the location of the plant is also likely to encourage the development of new
local industries that can supply it with electric motors, fans, and other parts for its production.
THE BENEFITS OF GLOBALISATION
• New Revenue Potential. By taking your business global, you get access to a much larger base
of customers. If your product or service is a success, you can enjoy increased revenues from
these new customers even if you have saturated your markets domestically. Globalizing could
be exactly the shot of life your company needs to take its revenues to new heights.
• The Ability to Help More People The solutions your business offers undoubtedly has the
potential to help your customers improve their lives in some way. When you take your
business global, you can help an exponentially greater number of people find the answers to
the questions or challenges your company helps solve.
• Greater Access to Talent. Another excellent benefit of taking your business global is that you
get access to a new pool of potential employees with unique skills and mindsets. You may
even find that these potential hires have skills that are hard to find in your home country,
which gives you an edge on other organizations in your field that have not yet gone global.
• Learning a New Culture. Getting information about a new place can help make your
organization better-rounded. Having an understanding of people who are not from your
country will give you a new perspective on relations with customers, and may even help you
work better with domestic customers and business partners.
• Exposure to Foreign Investment Opportunities. Foreign investment can be extremely
valuable for your business as many companies already know. This may be the reason why in
1997, foreign investment was up to seven times the level it was in the 1970s. When you go
global, you can more easily learn about these investment opportunities and how beneficial
they can be for your company.
• Improving Your Company’s Reputation. Businesses that can successfully go global and market
their offerings to a totally different population will enjoy the prestige of calling themselves an
international company. It is not an easy feat to accomplish, meaning prospects and potential
business partners will instantly think more highly of your company when they know you have
an international presence.
• Diversifying Company Markets. If your business only has one or two areas where it can sell
services or products, what would happen if these markets experienced a dramatic shift
because of a natural disaster or other unforeseen circumstance? Taking your business global
allows you to diversify your markets so your revenue sources are more stable: even if your
domestic activity is slow, your business will not take as large of a hit since your global market
will make up the difference. Going global has a number of advantages, but they do not come
without challenges. If you can 8create an effective strategy for getting over the hurdles that
globalization might present, the process can reap many benefits that your business will get to
enjoy for years into the future.
• Free flow of capital. Globalization helps free flow of capital from one country to the other. It
helps the investor to get a fair amount of interest or dividend and the global companies to
acquire finance at lower cost of capital. Further, globalization increases capital flows from
surplus countries to the needy countries, thus increasing global investment.
• Free flow of technology. Globalization helps free flow of technology from advanced countries
to the developing countries. It helps developing countries to implement new technology.
• Free flow of capital. Free flow of capital along with the technology enables developing
countries to boost industrialization in their countries. This ultimately increases global
industrialization.
• Spread – out the manufacturing facilities. Globalization of production leads to spread up of
manufacturing facilities in all the global countries depending upon the location and various
favorable factors of production.
• Balanced development of world economies. With the flow of capital, technology and locating
manufacturing facilities in developing countries, these countries industrialize their economies.
This, in turn, leads to a balanced development of all the countries.
• Increase in the production and consumption. Increased industrialization in the globe leads to
increase in production, thus resulting in balanced industrial development along with increase
in income, which in turn enhances the levels of consumption.
• Low prices with high quality. Increase industrialization, spread of technology, increased
production and consumption levels enable the companies to produce and sell products of high
quality at low prices.
• Cultural exchange and demand for variety of products. Globalization reduces the physical
distance among the countries sand enables people of different countries to acquire the
lifestyles of other countries. Cultural exchange, in turn, makes people demand a variety of
products that are being consumed in other countries.
• Increase in employment and income. Globalization results in shift of manufacturing facilities
to the low wage developing countries. It creates job opportunities in developing countries.
• Higher standard of living. Globalization reduces prices and thereby enhances consumption
and standards of living in all the countries of the world.
• Balanced human development. Increase in industrialization on balanced lines in the globe,
improves the skills of people of developing countries.
• Increase in welfare and prosperity. The balanced industrial, social and economic
development of the world nations consequent upon the globalization along with the welfare
measures provided by the government lead to increase in the welfare of the people and
prosperity of the world countries.
THE CHALLENGES OF GLOBALISATION
• Covering Your Legal Bases. Check with your attorney to make sure you are not triggering any
additional legal requirements. For example, many countries require a company to register if
they are doing business in the jurisdiction. You need to notify your legal counsel so you can
determine whether your new business activities trigger any additional legal requirements.
• Taxes and Shipping. Can you even ship to where you ‘re trying to expand? What taxes should
be collected? It hard knows the answers to these questions, but they are crucial to expanding
your company beyond your own country’s border.
• Managing Growth. Managing growth, from both a cost and service perspective, is the most
complicated result of startup success. Flexibility and responsiveness in your supply chain can
be a strength within local markets, but duplicating those strengths around the world is
difficult. A startup must provide premium, consistent service to every customer in order to
thrive; that challenge is complicated when those customers are stretched out across the
globe.
• Globalisation kills the domestic business. The domestic business of the developing countries
fails to compete with the MNCs on the quality and technology front. This leads to closing down
of domestic companies, which is already evident in India. There is also dumping from China,
the USA, Malaysia, Taiwan, South Korea, etc. This has killed some of the small industries and
created problems to large scale industries.
• Exploits human resources. The process of globalization helps companies to move to the
developing countries which lack adequate laws and regulations to protect human resources
and the environment. The unscrupulous foreign industries abuse the labour and natural
resources in order to have the cost advantage.
• Political and legal Differences. The political and legal environment of foreign markets is
different from that of the domestic. It should also be noted that the political and legal
environment is not the same in all provinces of many home markets.
• Cultural differences. The cultural differences, is one of the most difficult problems in
international marketing. Many domestic markets, however, are also not free from cultural
diversity.
• Economic differences. The economic environment may vary from country to country.
• Differences in the currency unit. The currency unit varies from nation to nation. This may
sometimes cause problems of currency convertibility, besides the problems of exchange rate
fluctuations. The monetary system regulations may also vary
• Differences in language. An international marketer often encounters problems arising out of
the differences in the language. Even when the same language is used in different countries,
the same words of terms may have different meanings. Language problem, however, is not
something peculiar to the international marketing.
• Differences in the marketing infrastructure. The availability and nature of the marketing
facilities available in different countries may vary widely. For example, an advertising medium
very effective in one market may not be available or may be underdeveloped in another
market.
• Trade restrictions. A trade restriction, particularly import controls, is a very important
problem, which an international marketer faces.
• Higher costs of distance. When the markets are far removed by distance, the transport cost
becomes high and the time required for affecting the delivery tends to become longer.
Distance tends to increase certain other costs also.
• Differences in trade practices. Trade practices and customs may differ between two countries
GLOBAL INSTITUTIONS
Various global institutions have emerged as a result of globalisation and business taking place across
national borders.
4.7.1 World Trade Organisation - WTO
WTO - World Trade Organisation: The World Trade Organisation is the only international organisation
which deals with trade rules across nations. It is based in Geneva Switzerland and was established in
1995. As at July 2008, the WTO had 153 member organisations. It has facilitated the establishment of
WTO agreements which have been signed by the majority of the world’s trading nations
These WTO agreements assist organisations in producing, importing and exporting in
the global marketplace. The WTO’s specific functions include:
Administering WTO trade agreements
• Providing a forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Providing technical assistance and training for developing countries
• Cooperating with other international organisations (www.wto.org).
4.7.2 World Bank - WB
World Bank: This international organisation is an important source of financial and technical
assistance to developing countries. It is not a bank, but comprises two unique development structures:
• The International Bank for Reconstruction and Development (IBRD), which focuses on middle
income and credit worthy poor countries.
• International Development Association (IDA), which focuses on the poorest countries in the
world (www.worldbank.org).
The World Bank provides low interest loans, interest free credits and grants to developing countries
for investments in education, public administration, infrastructure, health, financial and private sector
development, environmental and natural resources management as well as agriculture
(www.worldbank.org).
4.7.3 International Monetary Fund - IMF
The International Monetary Fund is an international organisation comprising 185 member countries
and was established to:
• Foster economic growth and high levels of employment.
• Provide temporary financial assistance to countries to assist in easing the balance of payments
adjustment
• Promote global monetary cooperation, exchange stability and orderly exchange
arrangements.
UN – United Nations: The United Nations was established in 1945 by 51 countries that were
committed to preserving peace through collective security and international cooperation
(www.un.org). The UN’s membership totals 192 countries and comprises almost every country in the
world. UN members agree to accept the requirements of the UN Charter, which is an international
treaty setting out the principles of international relations. The UN Charter specifies the functions of
the UN to be:
• Maintain international peace and security
• Develop friendly relations among nations
• Cooperate in the solving of international problems
• Promote respect for human rights
• Harmonise the actions of nations (www.un.org)
The UN comprises six main structures:
• The General Assembly
• The Security Council
• The Economic and Social Council
• The Trusteeship Council
• The Secretariat
• The International Court of Justice (www.un.org).
While the UN is primarily known for its peace keeping role, it also is concerned with promoting higher
standards of living and economic and social progress, which are important to the success of a global
economy
DRIVERS OF GLOBALISATION
Declining Trade and Investment Barriers
During the 1920s and 1930s many countries but in place stringent barriers to international trade and
foreign direct investment. However, since World War II many nations have taken steps to remove
and/or lessen these stringent barriers (Hill, 2014:10). The promotion of the free-flow of goods and
services between nations was enshrined in the General Agreement on Tariffs and Trades
The role of technological change
Technology has not only played a role in ushering in the age of globalization, it has been the main
catalyst for its advancement. Major breakthroughs in information technology, communication, and
transportation have been the driving forces behind the early 21st century global market boom.
Perhaps the most significant advancement in globalization has been the Internet and information
systems. Massive amounts of information and data are available via the World Wide Web, and there
is rarely a question that cannot be answered with a search engine.
Although the Internet has granted people all over the world the ability to share information with each
other, it has been a surge in telecommunications technology that has facilitated the global exchange
of data. Before advancements like email, cellular technology, instant text messaging, and broadband
communication, businesses were limited to telephone calls and postal services for their
communication needs. Fax machines were a major advancement years earlier, but they were limited
in their usefulness. The first decades of the 21st century opened the doors to instant communication
to anywhere in the world. The world’s banking systems have also benefited from the ability to instantly
transfer funds, simplifying long-distance transactions
Most global businesses use technology that has been available for many years, such as planes and
ships. However, innovative navigation advancements, such as global positioning systems, have
increased efficiency and made travel safer. Additionally, cargo ships have grown in size and sturdiness
over time, and many can now carry huge amounts of cargo overseas.
Important advances have occurred in:
• Microprocessors and telecommunications
• The Internet and World Wide Web
• Transportation technology
Implications of technological change for the globalization of production include:
• Lower transportation costs that enable firms to disperse production to economical,
geographically separate locations
• Lower information processing and communication costs that enable firms to create and
manage globally dispersed production systems
Implications of technological change for the globalization of markets include:
• Low cost global communications networks help create electronic global marketplace
• Low-cost transportation help create global markets
• Global communication networks and global media are creating a worldwide culture, and a
global market for consumer products
CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY
World Output and World Trade Picture: During the 1960s the United States dominated the
world economy and the world trade picture. However, over the past 30 years, the United
States’ dominance has waned, as countries such as Japan, Germany, South Korea and China
have become considerable players in the export market (Hill, 2014: 14 – 15).
Most forecasts predict a rapid rise in the share of world output achieved by developing nations
such as China, India, Indonesia, Thailand, South Korea, Mexico and Brazil, with a parallel
decrease in the share of world output held by industrialised rich countries such as the United
States, Germany, Japan and Great Britain (Hill, 2014: 15). Indeed, the World Bank has
forecasted that by 2020, the developing nations of today may account for 60% of world
economic activity.
• Foreign Direct Investment Picture: During the 1960s, foreign direct investment was
dominated by the United States, with US firms holding 66% of all foreign direct investment
flows (Hill, 2014: 17). However, with the reduction in barriers to the free flow of goods,
services and capital, during the 1970s European and Japanese firms
significantly increased their foreign direct investment through moving production facilities to
developing nations where production costs were lower (Hill, 2014: 17). Over the period 1980
to 2005, the trend has been for developing nations in increase their foreign direct investment
activities, while developed nations (such as the US and the UK) have decreased their foreign
direct investment activities (Hill, 2014: 17).
• Nature of the Multi-National Enterprise: A Multi-National enterprise refers to a business
“that has productive activities in two or more countries” (Hill, 2014:18). Two recent trends
influencing the global economy have been:
➢ The emergence of non-US multinationals, including multi-nationals from developing
countries (US multi-nationals dominated global business during the 1960s); and
➢ The emergence of mini-multinationals (small and medium sized organisations) which
are becoming increasingly involved in international trade and investment
• Changing World Order: The demise of communism within Eastern Europe in the early 1990s,
and subsequent commitment to free market economies and democratic politics, opened up a
host of export and investment opportunities for Western businesses. Furthermore, the
economic development of China presents both opportunities and threats for established
global businesses (Hill, 2014: 19).
• Global Economy of the 21st Century: Rapid changes have occurred within the global economy
within the past quarter of a century. In particular, barriers to the free flow of goods, services
and capital have been reduced and the volume of cross-border trade and investment has
grown considerably. Overall, national economies are becoming more “closely integrated into
a single, interdependent, global economic system” (Hill, 2014: 20). Liberal economic policies
are also being adopted by countries which were previously opposed to these. Overall the
current trends suggest that there is movement towards a global economic system which is
more favourable for global business
