Factors Contributing to Increased Globalisation

Factors Contributing to Increased Globalisation

1. Defining Globalisation

   • The OECD defines globalisation 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"
   • The overall process of globalisation
     • Is a process in which economies have become increasingly integrated and inter-dependent
     • Is dynamic rather than an end state
     • Is not inevitable - it can reverse, indeed the growth of world trade in goods and services slowed in recent years following the global financial crisis

2. Key Features of Globalisation

   • Trade to GDP ratios are increasing for most countries
   • Expansion of Financial Capital Flows between countries
   • Foreign Direct Investment and Cross Border M&A
   • Rising number of global brands - including from emerging countries
   • Deeper specialisation of labour - components come from many nations
   • Global supply chains and new trade and investment routes e.g. South-South trade
   • Increasing levels of international labour migration within countries
   • Increasing connectivity of people and businesses through mobile and Wi-Fi networks

3. Factors Contributing to Globalisation

   • Containerisation
     • The costs of ocean shipping have come down, due to containerisation, bulk-shipping, and other efficiencies
       • The lower the unit cost of shipping products around the global economy helps to bring prices in the country of manufacture closer to those in export markets, and it makes markets more contestable globally
   • Technological Change
     • Rapid and sustained technological change has reduced 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 some industries
       • If the MES is rising, a domestic market may be regarded as too small to satisfy the selling needs of these industries
         • Many emerging countries have their own transnational corporations
   • Differences in Tax Systems
     • The desire of businesses to benefit from lower unit labour costs and other favourable production factors abroad has encouraged countries to adjust their tax systems to attract FDI
       • Many countries have become engaged in tax competition between each other in a bid to win lucrative foreign investment projects
   • Shift from Protectionism towards Open Trade
     • Old forms of non-tariff protection such as import licensing and foreign exchange controls have gradually been dismantled. Borders have opened and average import tariff levels have fallen
       • However, in the last few years, there has been a rise in non-tariff barriers such as import quotas as countries have struggled to achieve real economic growth and as a response to persistent trade and current account deficits
   • Growth of MNCs
     • In their pursuit of revenue and profit growth, increasingly global businesses and brands have invested significantly in expanding internationally
       • This is particularly the case for businesses owning brands that have proved they have the potential to be successfully globally, particularly in faster-growing economies fueled by growing numbers of middle class consumers

4. Benefits

   • Encourages producers and consumers to benefit from deeper divison of labour and economies of scale
   • Competitive markets reduce monopoly profits and incententivise businesses to seek cost-reducing innovations
   • Enhanced growth has led to higher capita incomes - and helped many of the poorest countries to achieve faster economic growth and reduce extreme poverty measured as incomes
   • Advantages from the freer movement of labour between countries
   • Gains from the sharing of ideas / skills / techonologies across national borders
   • Competitive pressures of globalisation may prompt improved governace and better labour protection

5. Drawbacks and Risks

   • Inequality
     • Globalisation has been linked to rising inequalities in income and wealth. This leads to political and social tensions and financial instability that will constrain growth
       • Many of the world's poorest people do not have access to basic technologies and public goods. They are excluded from the benefits
   • Inflation
     • Strong demand for food and energy has caused a steep rise in commodity prices
       • Food price inflation has placed millions of the world's poorest people at great risk
   • Vulnerability to External Economic Shocks
     • National economies are more connected and interdependent, this increases the risk of contagion i.e an external event somewhere else in the world coming back to affect you has risen / making a country more vunerable to marco-economic problems elsewhere
   • Threats to the Environment
     • Irreversible damage to ecosystems, land, degradation, deforestation, loss of bio-diversity and the fears of a permanent shortage of water afflict millions of the world's most vulnerable
   • Race to the Bottom
     • Nations desperate to attract inward investment may be tempted to lower corporate taxes, allow lax health and safety laws and limit basic welfare safety nets with damaging social consquences
   • Trade Imbalances
     • Global trade has grown but so too have trade imbalances
       • Some countries are running big trade surpluses and these imbalances are creating tensions and pressures to introduce protectionist policies such as new forms of import control
         • Many developing countries fall victim to export dumping by producers in advanced nations (dumping is selling excess output at a price below the unit cost of supply)