Globalization is a process of interaction and integration among the people, companies, and governments of different nations, and it is determined by investment and international trade of goods, services, capital, people etc. and this is encouraged by information technology. Globalization is a world-wide phenomenon and it affects the environment, political system, culture, lifestyle, economic growth and well-being of the people all over the world. Globalization has increased the interconnection between different countries and facilitated trade and cultural exchange.
Globalization has been an evolving process i.e. it has been taking place since so many years, however, the essence of globalization is felt over the last few decades. In simple terms, globalization has resulted in increased international trade, companies operating in more than one nation, dependence on the global economy, freer movement of capital, goods, and services, development of Multi-National Corporations (MNCs). Thus, globalization has promoted worldwide movement toward economic, financial, trade, and communications integration which broadened people’s outlook. The current wave if globalization is all about “farther, faster, cheaper, and deeper”.
Globalization have spurred technological developments, cross-border trade, investment, migration and led the world into a new phase of economic development. Through the years, economies have opened domestically and internationally and many governments adopted free market systems resulting in increased productive capacity, reduction in barriers to trade & commerce, development of international industrial and financial business structures etc.
The stance on globalization has been controversial. It does have its own advantages and disadvantages. The markets which are affected by globalization includes financial markets i.e. capital markets, money and credit markets, insurance markets, commodity markets, and product markets etc. Globalization has speared into the unseen holes of the economy. It is a form of stimu¬lation to liberalization and privatization of economy and other activities related to it. Overall, the pace and patterns of globalization have been irregular for firms, sectors, and countries and it is being driven by a combination of economic, technological, socio-cultural, political, and biological factors.
Causes of Globalization
- Transport and communications: Improved transport is making global travel easier and cheaper. Also, this being the age of internet, communication is now, faster than ever.
- Public Policy: Over the years, the implementations of government policies, both domestic and internationally have opened economic borders for countries across the world which has stimulated domestic production potential and opened countries to increased financial opportunities abroad. Less protectionism has been the focus of governments, so as to decrease barriers to trade and actively encourage international commerce.
- Technology: Technology is one of the most important factors for the growth of globalization. There is increased trade in knowledge products through web technology and through the advancements in information technology (IT), the flow of information across borders have empowered individuals to take control of their financial lives. Technology has developed the ability to communicate internationally and people are more aware about the economic trends.
- Freedom of trade: Due to the global integration, organizations like WTO promote free trade between countries, which help to remove barriers between countries and facilitate foreign direct investment.
- Online markets: The rise of new electronic payments systems, including e-wallets, pre-pay and mobile pay, e-Invoices and mobile pay apps, also facilitate increased global trade.
- Containerization: The costs of ocean shipping have fallen due to containerization, bulk shipping, and other efficiencies. Thus, lower cost of shipping products around the global economy makes the markets more competitive and consumers get lower prices.
- Economies of scale: There has an improvement in the economies of scale after globalization and thus, firms exploit the gains from economies of scale to gain increased specialization.
- Improved mobility of capital: There has been improved mobility of capital through the years which has reduced the capital barriers, making it easier for capital to flow between different economies resulting in increased ability of firms to receive finance. Also, the global financial markets are now interconnected.
- Increased mobility of labor: People are more willing to move between different countries in search for work and the process is now much simpler than before. Also, global trade remittances play a large role in transfers from developed countries to developing countries.
- Development of MNCs: The emergence of multinational corporations has been central to the emergence of globalization and this has initiated the movement of people for jobs.
Characteristics of Globalization
Globalization is the geographic dispersion of industrial and service activities such as research and development, sourcing of inputs, production and distribution, and the cross-border networking of companies etc. The main characteristics of globalization are as follows:
- Free trade: Free trade of goods and services between countries and within regions which means absence of excessive governmental control over trade
- Liberalization: The freedom to set up industry, trade or commerce either in domestic country or abroad i.e. free exchange of capital, goods, service and technologies between countries.
- Development of Global Economy: Control of economic activities by domestic market and international market and proper coordination of national economy and world economy leading to inter-dependency among the economies.
- Transfers of capital: Expansion of foreign direct investment (FDI) resulting in rising influence of sovereign wealth funds.
- Shift of power: 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. The developing countries take the lead in globalization process.
- Labor Migration: A high level of labor migration within and between countries is one of the features of globalization.
- Borderless Globe: Localities get connected with the world by breaking national boundaries i.e. creating links between one society and another or between one country and another through international transmission of knowledge, literature, technology, culture and information. There is integration across the world by economic, commercial, political, cultural and technological ties have created a new world order with no national boundaries. Therefore, it is rightly said that globalization goes hand in hand with localization, regionalization and multiculturalism.
- Global brands: The development of global brands that serve markets in higher and lower income countries is also a characteristic of globalization.
- Investment: There has been increased spending on investment, innovation and infrastructure across large parts of the world.
Effects of Globalization
Globalization is a continuous phenomenon. It has lead to the shift in sectors of the economy. Countries now specialize in the production of goods and services in which they have a comparative advantage. Globalization has increased the competition which means that domestic monopolies will now face more international competition and this will help to reduce costs and prices for firms. Globalization has promoted migration i.e. it has made easier for migrants to enter and work into other countries and fill labor shortages. Now, the countries get more affected by global economic cycle.
Thus, with globalization there has been emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies and thus, industrial development followed for the developing countries. There is better access to the financial markets which also raised the instability of the global financial structures. The development of the global common market gave the freedom of exchange of goods and capital. Also, the competition in the global job market increased. Globalization has a major impact on wages and income distribution of the countries. Due to the increased competition, companies upgraded their products and became technologically skillful for the survival in global business market. Also, there has been cultural diffusion and growth of cross-cultural contacts.
Globalization has a dramatic effect overall. It has both benefits and costs. Some of the positive impacts are inward investment by companies which helps in providing new jobs and skills for local people. Also, the MNCs bring wealth and foreign currency to local economies by buying their resources, products and services and this money is used for investment purposes for education, health etc. People experience new ideas, lifestyles, food, cultures etc. It also increases the awareness among people about global issues and activities. Globalization makes poor countries and their citizens to develop economically and raise their standards of living and it enables worldwide access to sources of cheap raw materials which allows firms to be cost competitive in their own markets and in overseas markets. Due to this global sourcing, there is reduction in cost and increased revenue which implies increased profits for the shareholders. Trade enhances the division of labor as businesses and countries specialize in areas of comparative advantage and this have a positive impact on the business overall. Globalization has improved the economic condition of many poorest countries and reduced the level of poverty too.
However, there exist some costs to education too. Globalization generally operates in the interest of rich countries and they continue to dominate world trade at the expense of developing countries. There are no guarantees that the wealth from inward investment will benefit the local community and globalization can be a threat to world’s cultural diversity. There exist environmental risks such as pollution, global warming etc. which are neglected by the MNCs. Also, these large companies have poor working conditions, provide low wages to local workers and have safety issues too. All these lead to the formation of World Trade Organization, International Labor Organization etc. which promotes free flow of trade around the world, protect the workers, regulate the countries. Globalization leads to over-standardization of products through global branding which lack product diversity, and there are barriers to entry to small, local, producers. There can potential job losses in the domestic markets due to increased free trade, structural changes. Globalization has increased the pace of de-industrialization which is the slow erosion of an economy's manufacturing base. Due to the increased inter-dependency among nations, a negative economic shock in one country can quickly spread to other countries i.e. macroeconomic instability among the economies. Globalization is often linked with rising inequalities in income and wealth as richer nations benefit more than poorer ones.
Thus, to find the right balance between benefits and costs associated with globalization, people and governments need to understand how globalization works and the policy choices facing them and their societies.
Economic Consequences of Globalization for Developed and Developing Countries
The economic consequences of globalization are on GDP, industrialization and the Human Development Index (HDI). The GDP of a country is the market value of all finished goods and services produced within a country's borders in a year, and it is a measure of a country's overall economic output. Industrialization is a process of development which takes place with the help of technological innovation and transforms a country into a modern industrial developed nation and this process initiates economic development and social change. Lastly, the Human Development Index is calculated based upon three factors i.e. a country's population's life expectancy, knowledge and education measured by the adult literacy, and income. Based upon the strategies of development and investment opportunities, the degree of globalization is determined.
Globalization has made the relationships between developed countries and developing nations stronger because it made each country depend on another country. Both the developing and the developed countries depend upon each other in some way or the other like developing countries depend on developed countries for resource flows and technology and at the same time developed countries depend on developing countries for raw materials, labor and markets for industrial goods.
Globalization as a major impact on developed countries i.e. it provides opportunities for reducing macroeconomic volatility on output and consumption via diversification of risk. There is financial integration which helps a country to diversify its productive base and specialize in productive. The successful companies which are independent of size gradually become a part of the global economy. On the other hand, globalization leaves a bigger impact on developing countries i.e. it increases the standard of living of the people in those countries, promotes higher growth, access to new markets but at the same time, it widens the income disparity and decreases employment mostly the unskilled labor creating job insecurity and lastly, undermines social welfare.
Also, globalized competition has forced many skilled workers i.e. highly educated and qualified professionals, such as scientists, doctors, engineers and IT specialists to migrate to the developed countries for higher wages and greater lifestyle prospects for themselves and their family. This leads to decrease in skilled labor in the developing countries.
Role of MNCs in Globalization
Multinational Corporations (MNCs) stand at the center of all of these developments. Over the years, with globalization, MNCs have also grown. These companies set up production in more than one country and generally they set up production where cheap labor is available, markets are near, government policies encourage investment etc. All these at the end, generate employment. MNCs sell and produce in different countries making interlinks between the economies and speed up the globalization process.
Internationalization of economic activity is driven to a large extent by MNCs i.e. at least 80% of all international trade is related to at least one MNC. A large share of it is intra-industry trade between developed countries that includes a large share of trade in intermediate goods is carried out by MNCs. Similarly, for FDI, which is strongly concentrated on developed countries and FDI occurs in waves with different cycles for different countries driven by the MNCs.
MNCs set up factories and plants in developing countries using capital from developed nations, where they can access raw materials and labor more cheaply and the, the finished products are shipped back to wealthy countries where there is a consumer market. These links form the economic integration resulting in a common global market.
Thus, globalization has impacted nearly every aspect of modern life and continues to be a growing force in the global economy. Despite its drawbacks, globalization is inevitable and it is beneficiary to the world economy overall. Globalization continues to be the most widely accepted solution to ensuring consistent economic growth around the world and it has evidences too.
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