Globalization


The OECD defines globalization as

"The geographic dispersion of industrial and service activities, for example research and development, sourcing of inputs, production and distribution, and the cross-border networking of companies, for example through joint ventures and the sharing of assets."

Characteristics of globalisation

  1. Greater trade in goods and services both between nations and within regions
  2. An increase in transfers of capital including the expansion of foreign direct investment (FDI) by trans-national companies (TNCs) and the rising influence of sovereign wealth funds
  3. The development of global brands that serve markets in higher and lower income countries
  4. Spatial division of labour– for example out-sourcing and off shoring of production and support services as production supply-chains has become more international. As an example, the iPhone is part of a complicated global supply chain. The product was conceived and designed in Silicon Valley; the software was enhanced by software engineers working in India. Most iPhones are assembled / manufactured in China and Taiwan by TNCs such as FoxConn
  5. High levels of labour migration within and between countries
  6. New nations joining the world trading system. China and India joined the WTO in 1991, Russia joined the WTO in 2012
    A fast changing 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
  7. Increasing spending on investment, innovation and infrastructure across large parts of the world
    Globalisation is a process of making the world economy more inter-dependent
    Many of the industrializing countries are winning a rising share of world trade and their economies are growing faster than in richer developed nations especially after the global financial crisis (GFC)

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Main drivers of globalisation:

  • Containerisation – the costs of ocean shipping have come down, due to containerization, bulk shipping, and other efficiencies. The lower cost of shipping products around the global economy helps to bring prices in the country of manufacture closer to prices in the export market, and makes markets more contestable in an international sense.
  • Technological change – reducing 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 particular industries. If the MES is rising, a domestic market may be regarded as too small to satisfy the selling needs of these industries.
  • Opening up of global financial markets: This has included the removal of capital controls in many countries facilitating foreign direct investment.
  • Differences in tax systems: The desire of corporations to benefit from lower unit labour costs and other favourable factor endowments abroad and develop and exploit fresh comparative advantages in production 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 licencing and foreign exchange controls have gradually been dismantled. Borders have opened and average tariff levels have fallen – that said in the last few years there has been a rise in protectionism as countries have struggled to achieve growth after the global financial crisis.

Globalization no longer necessarily requires a business to own or have a physical presence in terms of either owning production plants or land in other countries, or even exports and imports. Many businesses use licensing and franchising to help expand their overseas operations.