Globalization

Globalization Benefits and Challenges

Globalization, a process:

 Advances in technology (e.g. mobile phones, airplanes, telephones, and the internet) have made
the growth of transport and communication networks possible.
 This means that people and countries can exchange information and goods more quickly and in
a less complicated way.

Globalization

 comes from “Globe” and means the worldwide coming together; countries and nations.
 Benefits:
o The world grows closer and there is an active exchange of goods between countries.
o More affordable products are available for more people
o There is also exchange of services, knowledge, cultural goods and languages
 Challenges:
o People and the environment suffer because of intense exchange of goods
o If a company decides to move productions to an economically disadvantaged country,
people in industrialized countries lose their jobs.
o Many people in these disadvantaged countries work for very little money. They often
remain poor and do not have sufficient insurance, social insurance or health insurance
cover.
o Ecological problems such as climate change. The use of airplanes, ships and lorries to
transport goods over international borders causes more carbon dioxide to be released
into the atmosphere which, in turn, is the main cause of global warming.
 Globalization itself is neither good nor bad. It just depends how the people deal with all the new
possibilities in the future.

What is Globalization?

 Globalization refers to the shift toward a more integrated and interdependent world economy.
 Globalization has several facets, including globalizations of markets and globalization of
production.

What is the simple meaning of globalization?

 Globalization is about the world becoming increasingly interconnected.

 Countries are more connected than ever before due to factors such as air travel, containerized
sea shipping, international trade agreements and legal treaties, and the internet.
 In the world of business, globalization is associated with trends such as outsourcing, free trade,
and international supply chains.
International Business

 Business that engages in international (cross-border) economic activities or the action of doing
business abroad. (Peng, 2013)

Global Business

 Business around the globe including both international activities and domestic business
activities. (Peng, 2013)

2 Main Components of Globalization

1. Globalization of markets
2. Globalization of production

Globalization integrates economies and societies. The globalization process includes

 Globalization of markets
 Globalization of production
 Globalization of technology
 Globalization of investment

Characteristics of Globalization

 Domestic and foreign market differences disappear

 Expand business activities worldwide
 Buying and selling goods to any country in the world
 Companies consider entire world as a market
 Resources can be obtained from entire world
 Strategies are based on global approach
 Rapid increase in interdependence between different countries
 Customer tend to get highest value for money
 Promotes formation of trade blocs
o A trade bloc is a type of intergovernmental agreement, often part of a regional
intergovernmental organization, where barriers to trade (tariffs and others) are reduced
or eliminated among the participating states.
 Focus is shifting from the bureaucrat to business savvy
 Rapid increase in mobility of resources
 Removes international trade barriers
 Drives out inefficient companies
 Provides tremendous scope for sound companies

Advantages of Globalization (Lambin, 2001)

 Customers hold more power

 Less developed countries access international markets
 Brands grow worldwide
 Emergence of transnational market segments
 o market segmentation is the process of dividing a broad consumer or business market,
normally consisting of existing and potential customers, into sub-groups of consumers
based on some type of shared characteristics.
 Growing power of large international distributors
 Adoption of socio-ecological view of consumption
 Emergence of a global economy
 Development of good corporate citizenship behavior

Disadvantages of Globalization

 Domestic business may be ignored

 Could exploit human resources
 May lead to unemployment and under-employment
 Decline in demand for domestic products
 May result into decrease in domestic income
 May result into exploitation of natural resources in under-developed countries
 Unethical business tactics-bribery
 May result into commercial and political colonization

Why is globalization important?

 Because it is one of the most powerful forces affecting the modern world, so much so that it can
be difficult to make sense of the world without understanding globalization

Globalization stages

Stage 1 – Domestic company

 Market potential is limited to the home country

Stage 2 – international company

 Market entry strategies

o Offshoring/global outsourcing (seeking cheaper source of raw material or labor)
o Exporting
o Licensing
o Franchising
o Joint ventures/acquisitions

Stage 3 – Multinational company

 The domestic based company begins to carry out its own manufacturing, marketing and sales in
the key foreign markets

Stage 4 – Global company (Global strategy and approach)

 The company moves toward a genuinely global mode of operation

Stage 5 – Transnational company (Global resources serve global markets)

  Operates at the global level by way of utilizing global resources to serve the global markets

International Business Theories

1. Adam Smith Theory

 Free Trade – has the advantages of division of labor and specialization both at the
national and international levels.
 a free market is a system in which the prices for goods and services are self-regulated by
buyers and sellers negotiating in an open market.
 markets tend to work best when the government leaves them alone. Smith argued that
rational people (aka acting in their own interest) would naturally find the best way to
use the nation’s resources — He viewed government regulation as potentially
detrimental to economic growth.
 Capitalism
2. Ricardian Theory
 “Principles of Political Economy and Taxation”
 Comparative Cost Theory – countries can gain from trade if the had an absolute
advantage as put forward by Adam Smith but also if they had a comparative advantage
in production
3. Hecksher-Ohlin Theory
 Countries will export products that use their abundant and cheap factors or production
and import products that use the countries’ scarce factors.
 how a country could gain comparative advantage by producing products that utilized
factors that were in abundance in the country.
 Their theory is based on a country’s production factors—land, labor, and capital, which
provide the funds for investment in plants and equipment.
 Factors that were in great supply relative to demand would be cheaper; factors in great
demand relative to supply would be more expensive.
 Factor Proportions Theory - countries would produce and export goods that required
resources or factors that were in great supply and, therefore, cheaper production
factors. In contrast, countries would import goods that required resources that were in
short supply, but higher demand.

The theories of Smith and Ricardo didn’t help countries determine which products would give a country
an advantage. Both theories assumed that free and open markets would lead countries and producers
to determine which goods they could produce more efficiently.