THE GLOBAL ECONOMY

Lesson Objectives:
a. Define economic globalization.
b. Identify and explain the actors that facilitate economic globalization.
c. Characterize the Modern World System.
d. Recognize the advantages and disadvantages of global economic integration.
e. Formulate a personal stance on global economic integration.

Economic globalization is the economic mixing and interdependence of economies

across the world through an escalation of cross-cultural movement of goods,
services, technologies, and wealth (Joshi, 2009). Economic globalization is the reason
that you can go to your local superstore and buy products from all over the world,
while people in Europe and Asia can also buy American products.
With this unprecedented growth in economic globalization some argue its
impact on the world has been very positive. However, there are some who are not so
sure that it has been the best thing for all parts of the world. Indeed, going global is a
big decisions that many businesses think long about making.

The Pros of Going Global

The first benefit is a global reputation. Since the business builds a name
internationally, this could help it stay in business longer and build an admirable
reputation. The second benefit is there can be cheaper labor costs, which can help
reduce employee costs. Hiring local employees is another advantage, since by hiring
employees overseas, the business is fostering a good relationship with the country
and local economy. Companies going global also benefit from fresh ideas. By hiring
new employees, the business is increasing the likelihood of new and creative
business ideas. Cheaper operating costs are also a pro, since the cost of running the
business abroad could be cheaper than at home. Cheaper supply costs may also
come into play, since the cost of suppliers and distributors could also be cheaper
than at home. Another advantage is the ability to have global partnerships. More
partnerships could be built with neighboring countries and these partnerships can
assist in increased marketing potential for the business. Finally, going global
provides a back-up income source in case the business at home has trouble meeting
its yearly goals.

The Cons of Going global

First is local politics, since the country may run into some political issues that could
cause some harm to business sales. Other issues or risks to watch out for are the
crime rate and war. Cultural differences also have to be considered, since it is
important to really understand the culture of the country where you are moving to.
For example, a country where the people believe in dressing modestly will not
welcome a business that manufactures revealing clothing.Finally, it is essential to
consider the possibility of financial instability. It is important to consider how the
country does when it comes to managing its wealth. It would be good to know how
the local businesses are managing, as well as how the currency compares to the US
dollar.

Major Drivers of Globalization

The first factor is the benefit of technological innovation, which has allowed a
company to rapidly globalize their business. The company has been able to manage,
reproduce, and standardize their food across the world with local sourcing of
ingredients coordinated by technology, such as video conferencing and emailing
with suppliers. Second factor is the development of their transportation systems,
which allow quick, affordable migration of their products across the globe. The
company utilizes freight trains, ships, and even planes to transfer products to their
restaurants.
Lastly, Social and political reforms have also affected the globalization of a
business. The enormous growth in population and consumerism of countries, such as
China, Japan, and India, has created opportunities for new customers globally. And
the collapse of communism in Central and Eastern Europe has created even more
new markets and business partnerships for Meat Queen to establish their restaurant
business.
Modern World System Theory
In this day and age, the world has changed as globalization takes place where we are
moving away from being self-contained countries to being a more integrated world.
There are two broad categories that describe the impact of globalization: market
globalization and production globalization (Levitt, 2001).

Market globalization is the decline in barriers to selling in countries other than the
home country. This change will make it easier for your company to begin selling
products internationally, since lower tariffs keep consumer prices lower and fewer
restrictions when crossing borders makes it easier for a company to enter a foreign
market.
Production globalization is the sourcing of materials and services from other
countries to gain advantage from price differences in different nations. For example,
you might purchase materials and components for your cameras from multiple
countries and then assemble the product in yet another international location to
reduce your costs of production. This change should lead to lower prices for
consumers since products cost less to produce.

The primary effects of globalization include the following:

1) Distributed Operations wherein companies may locate facilities in multiple
countries. There are many reasons to spread out operations, including: (a) reduced
labor or production costs in the country where a plant is located, and (b) reduced
distribution costs due to locating a plant nearer to the customers
2) Changes in location wherein companies may locate their firms in new places, both
to reduce labor and production costs and to take advantage of free trade zones.
3) Increasing complexity — although multiple locations and distributed operations
may lead to reductions in cost, it also causes increasing complexity in management of
the interactions between the facilities

The Modern World System is focused on the concept of economic integration.

Economic integration involves agreements between countries to permit, to varying

degrees, the flow of capital, labor, goods, and services across their respective
international borders (Tovias, 1994). It is an arrangement between different regions
that often includes the reduction or elimination of trade barriers, and the
coordination of monetary (consists of the decisions made by a
government concerning the money supply and interest rates) and fiscal policies (the
use of taxation and government spending policies to affect the overall business
activity).
Types of Integration
FREE TRADE AGREEMENTS
Most efforts at economic integration occur today through the use of free trade
agreements, which are agreements entered into between countries regarding specific
trade issues, such as reduction of tariffs (a type of tax on imported or exported goods
and services) and quotas (nontariff barriers between countries) that limit imports.
Trade agreements can be bilateral (between two countries) or multilateral (between
several countries).
FREE TRADE AREAS
A free trade area eliminates barriers to trade among the members such as tariffs and
quotas. Members of a free trade area make their own policies concerning trade with
other countries outside of the free trade area.
CUSTOMS UNION
A customs union is formed by countries that not only eliminate trade barriers
between the members but also have a unified trade policy with countries outside of
the union.
COMMON MARKET
A common market has all of the characteristics of a customs union but also
eliminates barriers to the movement of capital, labor, and technology. Restrictions on
immigration, emigration, and foreign investment between members are lifted.
ECONOMIC UNION
The highest level of economic integration occurs in economic unions. In addition to
all of the economic integration features found in common markets, members of an
economic union must be able to maintain consistency with monetary policy, fiscal
policy, and tax policy. An economic union also uses a common currency.

The Advantage and disadvantage of Economic Integration

The advantages of economic integration, fall into three categories
namely: 1) trade benefits, 2) employment and 3) political cooperation.
With economic integration, member countries (a) have a wider selection of goods
and services not previously available; (b) can acquire goods and services at a lower
cost after trade barriers due to lowered tariffs or removal of tariffs; and (c) have
increased efficiency gains which leads to an increased purchasing power since more
trade is encouraged between member countries, hence the balance of money spent
for cheaper goods and services can be used to buy more products and services.
Employment opportunities, on the other hand, tend to improve because as economic
integration encourage trade liberation and lead to market expansion, more
investment into the country and greater diffusion of technology, it creates more
employment opportunities for people to move from one country to another to find
jobs or to earn higher pay.
Lastly, political cooperation among countries can improve because of stronger
economic ties, which can help resolve conflicts peacefully and lead to greater
stability. This integration is an essential strategy to address the effects of conflicts
and political instability that may affect the region.
Disadvantages of economic integration.

For one, there is creation of trading blocs since economic integration can also
increase trade barriers against non-member countries. The downsides also include
trade diversion and the erosion of national sovereignty. Because of trade barriers,
trade is diverted from a non-member country to a member country
despite the inefficiency in cost.
Additionally, national sovereignty requires member countries to give up
some degree of control over key policies like trade, monetary and fiscal policies. The
higher the level of integration, the greater the degree of controls that needs to be
given up particularly in the case of a political union economic integration which
requires nations to give up a high degree of sovereignty.