Globalisation

Globalisation

1. Causes of globalisation

   • a process of deeper economic integration between countries involving: An expansion of trade in goods and services An increase in transfers of financial capital including the expansion of foreign direct investment(FDI) by trans-national companies (TNCs) and the rising influence of sovereign wealth funds The development of global brands 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 iPod 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 iPods are assembled / manufactured in China and Taiwan by TNCs such as FoxConn High levels of labour migration within and between countries New nations joining the trading system. Russia joined the World Trade Organisation in July 2012
   • 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 economyhelps to bring prices in the country of manufacture closer to prices in the export market, and makes markets contestable in an international sense.
   • Economies of scale: Many economists believe that there has been an increase in the minimum efficient scale 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. Overseas sales become essential.
   • Differences in tax systems: The desire of multi-national corporations to benefit from lower labour costs and other favourable factor endowments abroad and develop and exploit fresh comparative advantages in production has encouraged many countries to adjust their tax systems to attract foreign direct investment.
   • Technological change – reducing the cost of transmitting and communicating information - known as “the death of distance” – this is an enormous factor behind trade in knowledge products using internet technology
   • De-regulation of global financial markets: This has included the removal of capital controls in many countries which facilitates foreign direct investment.
   • 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 finance crisis.
   • growth of trading blocs, increase in labour mobility,and increased capital mobility.
   • EVALUATION:It is hard to precisely define globalisation there are different interpretations about what we actually mean, therefore, there are differing factors that explain it. Improved technology is undoubtedly very influential in helping globalisation; without technologies such as the internet and global communication it would not have been possible to witness the increased interdependence of companies and countries. Increased free trade is important. However, there are various trade barriers still in existence and this has not stopped the growth of globalisation. Could there be a backlash against globalisation as people look for local alternatives to multinational products? I think this is unlikely as people prefer the security of buying established brand names.

2. ADVANTAGES

   • Providing an incentive for countries to specialise and benefit from the application of the principle ofcomparative advantage. Access to larger markets means that firms may experience higher demand for their products, as well as benefit from economies of scale, which leads to a reduction in average production costs. Globalisation enables worldwide access to sources of cheap raw materials, and this enables firms to be cost competitive in their own markets and in overseas markets. Seeking out the cheapest materials from around the world is called global sourcing. Because of cost reductions and increased revenue, globalisation can generate increased profits for shareholders. Globalisation has led to increased flows of inward investment between countries, which has created benefits for recipient countries. These benefits include the sharing of knowledge and create more jobs

3. DISADVANTAGES

   • The over-standardisation of products through global branding is a common criticism of globalisation. this leads to a lack of product diversity, as well as presenting barriers to entry to small, local, producers. Large multinational companies can also suffer from diseconomies of scale, such as difficulties associated with coordinating the activities of subsidiaries based in several countries. The increased power and influence of multinationals is also seen by many as a considerable disadvantage of globalisation. MNCs can operate as local monopsonies of labour, and push wages lower than the free market equilibrium. The over-standardisation of products through global branding is a common criticism of globalisation. Critics of globalisation also highlight the potential loss of jobs in domestic markets caused by increased, and in some cases, unfair, free trade. Globalisation can also increase the pace of deindustrialisation,
   • Jobs may be lost because of the structural changes arising from globalisation. Structural changes may lead to structural unemployment and may also widen the gap between rich and poor within a country. One of the most significant criticisms of globalisation is the increased risk associated with the interdependence of economies. As countries are increasingly dependent on each other, a negative economic shock in one country can quickly spread to other countries. Globalisation generates winners and losers, and for this reason it is likely to increase inequality, as richer nations benefit more than poorer ones. Increased trade associated with globalisation has increased pollution and helped contribute to CO2 emissions and global warming. Trade growth has also accelerated the depletion of non-renewable resources, such as oil.

4. EFFECTS OF GLOBALISATION

   • Changed Food Supply
   • Division of labour and specialization
   • Less Job security and Labour drain
   • Decrease in diversity of cultures and increased pollution and protests
   • Comparative Advantage. Firms can benefit from specialising in goods where they have a comparative advantage. This will also lead to lower prices for consumers. see: comparative advantage Shifting Sectors. Globalisation will lead to a shift in the sectors of the economy. For example the UK no longer has a comparative advantage in many manufacturing industries. Developing countries now have an advantage due to lower labour costs. This process can lead to temporary structural unemployment. But these effects can be offset by specialisation in other areas e.g. in Financial and insurance services. Increased Competition. Globalisation means that domestic monopolies will now face more international competition. This will help reduce costs and prices for firms. Migration. Globalisation makes it easier for migrants to enter and work in the a country. This can help a country like Kuwait fill job vacancies. However, it can also place greater stress on housing and public service.
   • Tax Avoidance: Amazon and Google, can set up offices in countries like Bermuda and Luxembourg with very low rates of corporation tax and then funnel their profits through these subsidiaries. This means they pay very little tax in the countries where they do most of their business. This means governments have to increase taxes on VAT and income tax. It is also seen as unfair competition for domestic firms who don’t use same tax avoidance measures.
   • increased opportunities to look for work elsewhere. This process of labour migration also helps reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers migrating west. Also, it helps countries with labour shortages fill important posts. For example, the UK needed to recruit nurses from the far east to fill shortages. However, this issue is also quite controversial. Some are concerned that free movement of labour can cause excess pressure on housing and social services in some countries. Countries like the US have responded to this process by actively trying to prevent migrants from other countries.
   • Trade Imbalances
   • Macroeconomic Instability
   • Geographical seepage occurs because of inter-relationships between economies, supply-chains and financial markets One example is how developing countries that were really not part of the financial bubble and subsequent crisis of 2007-08 have suffered economically because of the global downturn. Seepage is partly due to the changing structure of the world economy arising from outsourcing. The share of industrial production in GDP in BRIC nations has been rising - indeed more and more industrial production takes place in emerging markets. So when demand for new cars, iPods and other electronic goods dries up from the richer nations the BRIC nations see a dramatic fall in export growth. And developing nations reliant on exporting commodities to advanced economies will suffer from a fall in demand for and price of their output.
   • ‘sovereign wealth funds’ have been in existence since the 1950’s. As a result of high commodity prices and the success of export-oriented economies, China, Singapore, Dubai, Norway, Libya, Qatar and Abu Dhabi have all built up a sizeable surplus of domestic savings over investment. Now some other countries with large reserves of oil and gas are considering setting up their own funds – in August 2012, Tanzania announced it is to set up a sovereign wealth fund. Not all have been successful. Nigeria’s has operated an Excess Crude Account the surpluses from which have been largely used to pay off existing international debts. China established its official sovereign wealth fund China Investment Corp (CIC) five years ago with the aim of earning high returns by investing abroad the dollars China earns from its exports. In January 2012, CIC’s $410bn sovereign wealth fund, bought an 8.68 per cent stake in Thames Water, the water network that serves London.
     • Provide an injection of fresh capital to allow banks to recapitalize balance sheets and provide a strong platform for lending o other firms and individuals

5. Effects on Developing Country

   • developing country wishes to develop a new manufacturing industry, it may face higher costs than advanced industries in the west, who will benefit from years of experience and economies of scale. To develop an industry it may be necessary to have protection from cheap imports; this gives the firm chance to develop and gain economies of scale. 2. Globalisation keeps Developing countries producing primary products. Developing countries may have a comparative advantage in primary products, however, this offers little scope for economic growth. Primary products have a low income elasticity of demand. Therefore, with economic growth demand for products increases only slowly. Primary products often have volatile prices, this can cause the economy to be subject to fluctuations in income 3. Multi national Companies may be able to force out local retailers, leading to less choice for consumers and less cultural diversity.
     • Just because free trade is usually beneficial and a powerful source of global growth, it doesn't mean that Free trade is always the answer for every country in every circumstance. Developing countries may benefit from tariff protection to diversify their economy. If a country earns 80% of its export revenue through exporting raw materials, this does not reflect a balanced economy. It makes sense to try and diversify, even if current comparative advantage only lies with commodities. To diversify, tariff protection may be necessary, at least in short term. There is a danger tariff protection may encourage inefficiency. But, Most developed countries had tariff protection during their development. Tariff protection should be short term and removed over time, like in many Asian economies. This is where opponents of free trade may have a point. There is a justification for developing countries to have some tariff protection when developing new infant industries.