Globalization and the World Economy Essay
Globalization and the World Economy
Globalization is a powerful real aspect on the new world system, and it represents one of the most influential forces in determining the future course of the planet. It is described as having “many dimensions: economic, political, social, cultural, environmental, and security” (Intriligator, 2001). Globalization in the 21st century is inevitable. Increased globalization and international businesses are growing because technology is expanding rapidly especially in communications and transportation.
According to Daniels, Radebaugh, and Sullivan (2007) countries are beginning to remove many international restrictions facilitating trade and commerce. Numerous governments have developed services to help conduct international business more easily. Consumers are becoming more knowledgeable about foreign goods and services and want them in their home country. Increased global competition has stimulated more companies to enter the international arena for selling goods and services. In most cases, improved political relationships among some of the major economic powers have made international trade more profitable.
As the world shrinks because of the internet, improved communication and transportation more countries are cooperating on transnational issues related to business and commerce. Globalization has changed the scope and focus of business. The impact of globalization can be categorized generally in terms of distance, country, and culture. Our world is becoming increasingly interdependent because of globalization. Globalization did not just “happen”. It was driven and is being driven by a number of worldwide developments. Some of these developments have spanned many years, and some have occurred in a relatively short period of time.
The first development was the end of the cold war. As stated by Brooks and Wohlforth (2000) the world changed in 1991 when the “Soviet Empire” collapsed. Mikhail Gorbachev’s policies helped to bring major political changes. With the removal of a threat of war, global interdependence could take hold. The second development is the world’s increasing population growth. This growth all but ensures a broad, expanding, worldwide market for goods and services, and an expanding workforce. The third development is the emergence of free markets on a worldwide basis.
According to Ruggiero (1996), country after country is opening its borders to a freer flow of goods, services, technology, and capital. Many are forming regional trade blocks that facilitate investment and commerce in their local economies. The World Trade Organization (WTO), an international body that deals with the rule of trade between nations, is actively helping countries at all level of development with financial and trade agreement support. The fourth development has been the ongoing emergence of a worldwide technical and logistics framework.
Daniels, Radebaugh, and Sullivan (2007) remark that tremendous strides in communications and transportation technology enable businesses to quickly know about and demand products and services developed in another part of the world. A worldwide telecommunications network is in place to facilitate global commerce, with millions of phones supported by satellites and fiber optic cables. An array of ships, planes, trucks and other logistical systems makes it possible to transport people and packages to almost any point in the world.
The last development is the explosion of the internet on the world scene, which is playing a key role in aspects of global commerce. Kabuga (2000) argues that the arrival of the internet has speeded up globalization. This growth in internet usage on a worldwide basis has had a major effect on global business activities. The advent of the internet has allowed for rapid access to world markets. Knowing how to use the internet for globalization activities can be very beneficial for a company. In this dotcom economy, everything can be produced anywhere and sold anywhere.
The internet has given many companies a new view on how to handle global business needs. Globalization is not just a “me too” trend. There are solid reasons why some businesses embrace the global path and others do not. Three solid business factors for globalization are expansion of sales, to acquire resources, and to minimize risk. Daniels, Radebaugh, and Sullivan (2007) claim that a company’s sales are dependent on two factors: the consumers’ interest in their products or services and the consumers’ willingness and ability to buy them.
Higher sales mean higher profits, so increased sales are a major motive for company’s expansion into globalization. To acquire resources manufacturers and distributors seek out products, services, and components produced in foreign countries (Daniels, et al. , p18). Foreign sources may give companies lower costs, new or better products, and additional operating knowledge. To minimize swings in sales and profits, companies may seek out foreign markets to take advantage of business cycle differences among countries (Daniels, et al. , p18).
International operations may reduce operating risk by smoothing sales and profits and preventing competitors from gaining advantages. When deciding how and where to conduct business globally, it’s important that companies have some knowledge of the target countries. According to Daniels, Radebaugh, and Sullivan (2007) political policies and legal practices, behavioral factors, economic forces, and geographical influences are key external forces that affect the way a company operates and the amount of adjustment it must make to its operations in a particular country.
Knowing background information on the countries can help in two areas: communication and credibility. Knowing about the target country gives a common ground for talking with people from that country. This can open the door to effective communication. Knowing about the target country gives credibility when talking about the country to others, both within the organization and native to the foreign country. Another benefit of knowing about foreign operations is increased awareness of how to help an operation be successful.
Without adequate knowledge, a company may not realize what it takes to succeed with a foreign operation or realize that an operation is in danger of failing. Globalization has sparked some of the most highly charged debates of the past decade, been the subject of countless books and cause of major demonstrations in Europe and North America (World Bank, 2000). Critics of globalization see it as a process by which power is taken from the poor and given to the rich and powerful, particularly to transnational corporations Aisbett (2004).
Daniels, Radebaugh, and Sullivan (2007) have put these claims into three broad categories: threat to national sovereignty, growth, and growing income inequality. Globalization does not reduce national sovereignty. It does create a strong incentive for governments to pursue sound economic policies (International Monetary Fund, 2000). While globalization may confront government officials with more difficult choices, the result for their citizens is greater individual freedom. In this sense, globalization acts as a check on government power that makes it more difficult for governments to abuse the freedom and property of their citizens.
Criticisms against globalization are really criticisms against economic growth. The assumption is that globalization brings more production or growth, which, in turn, brings both long-term and negative consequences (Daniels, et al. , p15). Growth and globalization have gone hand-in-hand; economic growth in the last fifty years has been faster than it was in earlier centuries. According to Krueger (2002), the impact of the faster growth on living standards has been phenomenal. We have observed the increased well-being of a larger percentage of the world’s population by a greater increment than ever before in history.
Globalization offers greater opportunity for people to tap into more and larger markets around the world. In regards to growing income inequality people look at not only absolute achievement or improvement, but also at how well they do compared to other people, especially those in other countries. Thus, improvement in global well-being is of little solace to most people unless they, themselves, are doing better and at least keep up with others (Daniels, et al. , p15). Growing income inequality is said to be the Achilles Heel of globalization (Krueger, 2002). This characterization is misleading in several respects.
There has been in the last century remarkable income growth, but it obvious that the progress has not been evenly dispersed. The gaps between rich and poor countries, and rich and poor people within countries, have grown. The richest quarter of the world’s population saw its per capita Gross Domestic Product (GDP) increase nearly six-fold during the century, while the poorest quarter experienced less than a three-fold increase (International Monetary Fund, 2000).
As stated by Krueger (2002) “poor people are desperate to improve their material conditions in absolute erms rather than to march up the income distribution”. The focus should be on impoverishment than on inequality. Many have argued that these claims have exploited people in developing countries, caused massive disruptions to their lives and produced few benefits in return (World Bank, 2000). According to Daniels, Radebaugh, and Sullivan (2007) anti-globalization forces have protested meetings of international organizations and conferences, both peacefully and violently in recent years, as they press for legislation and other means to stop or slow the globalization process.
Organizations against globalization see it as a new form of imperialism or as a new stage of capitalism in the age of electronics. Globalization has involved greater openness in the international economy, an integration of markets on a worldwide basis, and a movement toward a borderless world. Supporters point to the significant reductions in poverty achieved by countries, which have embraced globalization with the world economy such as China, Vietnam, India, and Uganda. “Globalization has had a significant impact on all economies of the world, with manifold effects” (Intriligator, 2001).
According to an article on Freetrade. org (2007) for the less developed countries, globalization offers access to foreign capital, global export markets, and advanced technology while breaking the monopoly of inefficient and protected domestic producers. Faster growth, in turn, promotes poverty reduction, democratization, and higher labor and environmental standards. Because it expands economic freedom and spurs competition, globalization raises the productivity and living standards of people in countries that open themselves to the global marketplace.
This growth in cross-border economic activities takes various forms such as International Trade, Foreign Direct Investment (FDI), and Capital Market Flows. In international trade, a growing share of spending on goods and services is devoted to imports from other countries. A growing share of what countries produce is sold to foreigners as exports. As stated by Daniels, Radebaugh, and Sullivan (2007) to meet their international objectives companies’ strategies require them to trade and transfer means of production internationally.
When countries have fewer restrictions on foreign trade, it gives them the opportunity to gain economies of scale by servicing markets in more than one country from a single base of production. This trading and transferring of goods and services is what links countries economically. Several impacts of globalization on national economies deserve particular mention. One is the growth of foreign direct investment at a rapid rate. Foreign direct investment is on the rise around the world.
It is now a competitive requirement that businesses invest all over the globe to access markets, technology, and talent. Attracting foreign direct investment has become a key part of national development strategies for many countries. They see such investments as bolstering domestic capital, productivity, and employment, all of which are crucial to jump-starting economic growth. While many highlight FDI’s positive effects, others blame FDI for “crowding out” domestic investment and lowering certain regulatory standards.
The effects of FDI can sometimes barely be perceived, while other times they can be transformative. While the FDI’s impact depends on many conditions, well-developed and implemented policies can help maximize gains (World Bank, 2000). Capital market flows over the course of the past decade, companies’ in many countries (especially in the developed world) have increasingly diversified their portfolios to include foreign financial assets (foreign bonds, equities, loans), while borrowers increasingly turn to foreign source of funds, along with domestic ones.
While flows of this kind to developing countries rose sharply in the 1990s, they have been much more volatile than either trade or FDI flows, and they have been restricted to a narrower range of “emerging market” countries (World Bank, 2000). Globalization has many advantages; properly executed it integrates world trade and financial markets, promotes economic growth, and provides opportunities for better education and living standards. It has already been noted that globalization has both positive and negative effects.
Whether one sees globalization as a positive or as a negative development, it must be understood that it has clearly changed the world system and that it poses both opportunities and challenges. It is additionally clear that the above economic, political, social, cultural, environmental, and security developments that have led to globalization are still very active. I believe these trends toward greater globalization will continue to expand in the future.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 19 November 2016
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