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Year 10 Society and Environment. Economics and Enterprise. Globalisation.


Definition. Globalisation is the process of bringing the countries of the world closer together in an economic sense. It involves the spread of business, trade and investment beyond and across national borders. Globalisation is the economic unification of the worlds commercial, investment and financial markets. As countries economically interact with one another, especially through trade, increasing amounts of money mainly through investment and trade, flow between them they get to know more and more about each other and as a result, closer and more friendly ties develop between them. A reduction in international conflict and an increase in international cooperation are necessary for the success of globalisation. The trend towards globalisation is not a recent development although the pace of globalisation has quickened since the 1980s. Globalisation has been slowly developing since the Industrial Revolution occurred in England (from the 1760s) and spread to the rest of Europe (1800 1860), the USA (1850s), Asia (Japan was the first Asian country to embrace the Industrial Revolution in the 1870s), Africa (1890s) and Australia (1910s BHP established Australias first iron and steel works at Newcastle in 1915 closed in 1997. In South Australia, the Port Kembla steel works was established in 1933.). The main features of globalisation include increasing tendency towards internationalisation, specialisation and interdependence of countries. Leading the charge towards globalisation over the past 20 30 years have been the multinational or transnational companies that have their headquarters in one country but have grown out of business operations in several countries. Examples of multinational or transnational companies that have lead and benefited from globalisation include The Ford Motor Company, General Motors, Mitsubishi, Nissan, Toyota, Shell Petroleum, Exxon, BP, Nokia, Microsoft, IBM (International Business Machines), Coca Cola, Pepsi Cola, McDonalds, Hungry Jacks, Kentucky Fried Chicken, American Express, Nike, Sony, Nestle, Johnson & Johnson, National Australia bank, and Deutsche Bank.

Page 2. Globalisation has been driven by the activities of Multinational or transnational companies. They produce goods and services that can be sold all over the world. The reason why they sell on the world market is their desire to make a profit. Global consumers. The tastes and desires of consumers in different countries are becoming increasingly similar. Fashion, technology and food can easily be exported to a variety of countries. In terms of technology, there are very few national differences that transnational companies need to cater for when exporting their products. Personal computers, clothes, shoes, CDs and CD players, DVDs and DVD players do not have to be modified to sell in particular countries and so it is easy to sell these products to any country. An IBM computer can be manufactured in USA and sold without modifications to Britain, Australia, Germany and any other country because consumer demand for these products is not determined by their nationality. Similar consumer tastes and desires means that now and increasingly in the future transnational companies can manufacture similar products for sale in many different countries. Technological developments. The development of better, faster and larger ships and aeroplanes has made overseas transportation of products cheaper and quicker. This has cut production costs and this in turn has made it easier for transnational companies to develop and survive in the international community. Advances in telecommunications and computer technology, especially the Internet and email, have made international trade and communications much quicker and easier and thus the countries of the world have been brought closer into contact. It is now possible for consumers to find out what is available on the international market, order it and coordinate its delivery sometimes in a matter of hours and sometimes in a matter of minutes. Governments. The actions of governments since the end of World War Two in 1945 have helped foster the development of globalisation. Governments have worked hard to reduce the barriers to international trade, especially by lowering tariff barriers. Some governments such as Australia in the 1980s have changed their foreign investment rules to allow foreign investors an easier access to their domestic markets. Some governments have also deregulated the financial system of their country and sold to private entrepreneurs government controlled industries (this process is called privatisation) and these changes have helped integrate their countries into the global economy because their industries are more competitive.

Page 3. Reasons for Globalisation. Globalisation helps minimise labour costs and hence profitability for transnational companies. Transnational companies hope to increase their profits by cutting their labour costs. This may be done by shifting their production process from a country that has high labour costs to a country that has lower labour costs. Countries such as Mexico, Thailand, Philippines and Indonesia have lower labour costs than Australia, Britain and USA. American footwear company Nike, has established a production company in Indonesia for the purpose of lowering its production costs and increasing its profits. Transnational companies are able to relocate part if not all of their production process whilst still maintaining their company headquarters (Nike has its headquarters in Oregon) in their home country because investment or money capital is mobile and can easily be moved from one country to another. There have been instances where businesses from high-income countries that have been established overseas have been relocated back to their original country because the labour market in the home country has been reformed and subsequently become more efficient. Thus production costs have fallen and it is now profitable for a business to recommence operations back in their country of origin. Globalisation increases access to natural resources. Some countries such as Japan, Singapore, Britain, Taiwan and Switzerland have limited access to cheap natural resources (minerals and agricultural land) and so they relocate some businesses to or invest in those countries that can provide them with their needs. Globalisation helps economies of large-scale production. In economics, the term scale refers to the size of a firm. Thus, it is possible in the short run for large firms because of their size to produce goods cheaper than smaller firms. This is because in large firms, the fixed or overhead costs of production (fixed costs are those costs which in the short term dont rise as output increases. Fixed costs include the costs of capital, technology, research and product development.) can be spread over a wider range of output and sales and this has the effect of lowering the average costs of production. A firm has fixed costs even when it is not producing and when it starts to produce it has both fixed and variable costs. Variable costs are those costs that occur as a result of production. Power is a variable cost. The more goods a firm produces, the more power (timber, coal, gas, electricity, oil, nuclear energy) it uses.

Page 4. QUANTITY 1 2 3 4 5 VARIABLE TOTAL COST FIXED (TC = F+V) COSTS (F) COSTS (V) 100 10 110 100 20 120 100 32 132 100 44 144 100 50 150 AVERAGE COSTS (TC/Q) 110 60 44 36 30

Economies of scale can also be achieved through the horizontal or vertical integration of a local firm with an international firm. Horizontal integration occurs when two firms in the same industry amalgamate. The New Zealand beer manufacturer, Lion Nathan achieved a horizontal integration with the Australian brewer when it purchased the Australian firm Fosters Brewing. A vertical integration occurs when firms in different industries amalgamate. A large firm can be formed if an overseas mining company such as the British company Billiton combines with a local Australian steel manufacturing company (BHP) to form BHP-Billiton. Globalisation takes advantage of Government Policies. Globalisation of companies allows some firms to take advantage of government policies whose intent is to offer policies that will attract foreign businesses to establish themselves in the country ruled by that government. Businesses are attracted to these policies because they lower production costs for the firm and consequently increase profitability. Such policies include 1. Give generous subsidies (= a cash payment from the government to the firm.) to firms to encourage them to remain in the industry. 2. Give lower tax rates and concessions (cheap power, water, transportation) to producers. 3. Ignore environmental concerns and protect firms from competition from exports. These policies, either individually or collectively can persuade or encourage companies to relocate offshore (= move their operational base either fully or partly from their home country to another country) in the search for higher profits. A French multinational tyre manufacturer didnt like the decision of the French Government to introduce indicative economic planning and so the company decided to build three production factories overseas for every one it built in France, thus allowing it to minimise the effect of the French Governments decision on its planning and production decisions. Globalisation helps minimise transportation costs. Sometimes, the setting up of production plants in key markets around the world can help lower shipping and

Page 5. other transport costs and this in turn can boost a firms profit by cutting its production costs. Globalisation can increase flexibility in decision-making. Sometimes, companies globalise to improve the flexibility or choice in their decision-making about production and investment. This is one of the reasons why firms such as BHPBilliton, Ford and Fiat have production plants located around the world. It gives them advantages as they can move or outsource aspects of production (such as engine assembly and car panel manufacture to wherever the production costs of specific operations are the lowest. By decreasing production costs, the firms are attempting to maximise their profits. The Effects of Economic Globalisation. Globalisation has caused a number of changes such as 1. A move towards free trade with a need for much greater international competitiveness. 2. Increased specialisation of local production in areas of comparative cost advantage. (countries should only produce those products in which they have a comparative advantage over other countries and trade them for those goods in which they have a comparative disadvantage. This means that countries would not be wasting precious resources on producing goods and services that are expensive to produce in comparison with other countries costs of production.)