Globalization –

Presented by Sandesh Kadam

Technology and its impact on Globalization

 Advancements in technology have considerably facilitated globalization. In fact

technological progress has been one of the main forces driving globalization.
Technological breakthroughs compel business enterprises to become global by
increasing the economies of scale and the market size needed to break even.
 Technological advancements reduce costs of transportation and
communication across nations and thereby facilitate global sourcing of raw
materials and other inputs. Patented technology encourages globalization as
the firm owning the patent can exploit foreign markets without much
competition.
 Information technology has led to the emergence of the global village. For
example, the world wide web has reduced the barriers of time and place in
business dealings. Buyers and sellers can now make transactions at any time
and any part of the globe. Technological change also affects investments.
 Earlier, high technology production was limited to rich countries with high
wages. Now technology is easily transferable to developing countries where
high tech production can be combined with low wages. A large number of firms
in advanced countries are now outsourcing labour intensive services from
developing countries like India.
Technological generation

 Globalization, by dint of spectacular success of the Information a nd

Communication Technologies (ICTs) and by the wave of dismantling the
barriers to free flow of trade, investment, finance, technology, knowledge
and information between the countries fostered phenomenal changes in
the structure and nature of manufacturing across the globe.
 The particular process of production has been split up into two or more
processes, which have been undertaken in different locations, leading
however to the same final production. Various kinds of agglomeration and
industrial clusters have become the order of the day and the firms have
been in the process of making decisions such that the upstream boundary
set by a single firm consists of purchasing materials or parts from other
firms and the downstream boundary is determined by selling its product to
other firms (Kimura, 2004).
 The mass production feature of the manufacturing firm has been replaced
by a flexible multiproduct firm that lays emphasis on quality and quick
response to market conditions, while adopting technologically-advanced
equipment and new forms of organization (Milgram and Roberts, 1990).
Technological generation cont..

 Since single-purpose equipment for mass production is being replaced by

flexible machine tools and programmable multi-task production equipment and
since these new machines can be quickly and cheaply switched from one task
to another, their application allows the firms to produce a variety of outputs
efficiently in small batches.
 The study made by Milgram and Roberts showed how flexible equipment and
small batch sizes led to shorter product cycles, reduction in work-in-progress
and inventories of finished goods.
 The shortening of product cycles supports quick response to fluctuations in
demand and leads to lower back orders. These changes reveal a shift for the
manufacturing firms from the industrial systems to post-industrial systems-
while the driving force of the former was efficiency, which was rendered
capable by hard automation where success depends on quick response to
customer demands for customized high-quality products, in the post industrial
environment, success entails a close and careful linkage between the firm's
manufacturing strategy and its overall strategy. These changes coupled with
the transformation occurred through globalization, call for the consideration of
the issue pertaining to 'technology regime'.
Technological generation cont..

 Technology regime, a concept invoked by the

evolutionary theory in the hands of Nelson and
Winter (1982) and Winter (1984) and refined later on
by Dosi (1982), Pavit (1984), Malerba and Orsenigo
(1993), and others, loomed important in this context.
 It is defined in terms of an idea of technology as a
knowledge-based theory of production. According to
Malerba and Orsenigo (1993), technology regimes
define "broad prescription and trade-offs which
identify the basic dynamic mechanism and viable
behaviour in terms of basic types of organizations of
firms."
Trade barriers 

 Trade barriers are government-induced restrictions on international trade.

 Economists generally agree that trade barriers are detrimental and decrease

overall economic efficiency; this can be explained by the theory of comparative

advantage.
 Most trade barriers work on the same principle: the imposition of some sort of cost

(money, time, bureaucracy, quota) on trade that raises the price or availability of
the traded products. If two or more nations repeatedly use trade barriers against
each other, then a trade war results. Barriers take the form of tariffs (which impose
a financial burden on imports) and non-tariff barriers to trade (which uses other
overt and covert means to restrict imports and occasionally exports).
 In theory, free trade involves the removal of all such barriers, except perhaps those

considered necessary for health or national security.

 High income countries tend to have less trade barriers than middle income

countries which, in turn, tend to have less trade barriers than low income countries
 Small states tend to have lower trade barriers than large states

 The most common trade barriers are on agricultural goods. Textiles, apparel

and footwear are the manufactured goods which are most commonly protected by
trade barriers. Tariffs have been declining in the last twenty years as the influence
of the World Trade Organization has grown, but states have increased their use
of non-tariff barriers.
Rationale for Globalization

 There are several key factors which have influenced the process of
globalisation:
 Improvements in transportation - larger cargo ships mean that the
cost of transporting goods between countries has decreased. Economies of
scale mean the cost per item can reduce when operating on a larger scale.
Transport improvements also mean that goods and people can travel more
quickly.
 Freedom of trade - organisations like the World Trade Organisation
(WTO) promote free trade between countries, which help to remove
barriers between countries.
 Improvements of communications - the internet and mobile
technology have allowed greater communication between people in
different countries.
 Labour availability and skills - countries such as India have lower
labour costs (about a third of that of the UK) and also high skill levels.
Labour intensive industries such as clothing can take advantage of
cheaper labour costs and reduced legal restrictions in LEDCs.
Liberalization of world economy

 Economic liberalization is generally thought of as a

beneficial and desirable process for emerging and
developing countries.
 The underlying goal of economic liberalization is to have
unrestricted capital flowing into and out of the country,
boosting economic growth and efficiency.
 After liberalization, a country will benefit politically from the
stability incurred from foreign investment, which works
almost as a 'board of directors' for the emerging country.
 These countries are considered high-risk in their beginning
stages, but that doesn't deter significant investment from
institutional investors who want to get in first.
Unification of world economy

 Determines barriers and preconditions for reducing the

differences in the level of development in the global economy’s
countries and to develop recommendations for solving the
problem of the global economy’s economic systems unification.
 In order to determine possibilities, problems, perspectives, and
threats to overcoming the gap by developing countries, the
authors use the SWOT-analysis method
 The analysis determined determined that the level of economic
development of the most developed countries exceeds the
level of developing countries by more than four times.
 This reflects a huge gap depth and a high level of
differentiation for countries in the global economy.
 Barriers of unification of economic systems in the global
economy are primarily related to socio-political factors.
Unification of world economy cont..

 Developed countries show an average national GDP rate

of growth at 1.2% - 4% per year. The slowly developing
countries, which lag behind, show the smallest rate of
growth at less than 1.2% per year.
 Developed countries have the largest investment
attractiveness, and the volume of investments into these
countries constitutes more than $700 billion. For example,
in the USA, this indicator was $2,000 billion in 2014.
Developing countries are ranked second for investment
attractiveness, and they receive $300-700 billion of
investments annually. Underdeveloped countries pose less
interest for investors and, as a result, this leads to a $300
billion per year level of investments into these countries.
Evolution of Trade
Theories
 Mercantilism
 Absolute advantage ( Classical )
 Comparative advantage
 Factor Proportions Trade
 International Product Cycle
 New Trade Theory
 National Competitive advantage
Evolution of Trade
Theories cont..
 Mercantilism:
 Mercantilism is economic nationalism for the
purpose of building a wealthy and powerful
state. Adam Smith coined the term “mercantile
system” to describe the system of political
economy that sought to enrich the country by
restraining imports and encouraging exports.
  The goal of this policy was, supposedly, to
achieve a “favourable” balance of trade that
would bring gold and silver into the country and
also to maintain domestic employment.
Evolution of Trade
Theories cont..
 Absolute advantage ( Classical ):
 Adam Smith’s theory of absolute cost advantage in international trade
was evolved as a strong reaction of the restrictive and protectionist
mercantilist views on international trade.
 He upheld in this theory the necessity of free trade as the only sound
guarantee for progressive expansion of trade and increased prosperity
of nations. The free trade, according to Smith, promotes international
division of labour.
 The free and unfettered international trade can make the countries
specialise in the production and exchange of such commodities in
case of which they command some absolute advantage, when
compared with the other countries.
 When countries specialise on the basis of absolute advantage in costs,
they stand to gain through international trade, just as a tailor does not
make his own shoes and shoemaker does not stitch his own suit and
both gain by exchanging shoes and suits.
Evolution of Trade
Theories cont..
 Comparative advantage:
 It can be argued that world output would increase when the
principle of comparative advantage is applied by countries to
determine what goods and services they should specialise in
producing. Comparative advantage is a term associated with 19th
Century English economist David Ricardo.
 Ricardo considered what goods and services countries should
produce, and suggested that they should specialise by allocating
their scarce resources to produce goods and services for which
they have a comparative cost advantage. There are two types of
cost advantage – absolute, and comparative.
 Absolute advantage means being more productive or cost-efficient
than another country whereas comparative advantage relates to
how much productive or cost efficient one country is than another.
Evolution of Trade
Theories cont..
 Factor Proportions Trade:
 In 1930s Eli Heckscher and Bertil Ohlin developed the factor
proportions theory which is also known as the Heckscher-Ohlin
model.
 This theory holds that countries will produce and export products
that use large amounts of production factors that they have in
abundance, and they will import products requiring large amounts
of production factors that they lack (Rugman&Collinson, 2009).
 The original H-O model is also called 2*2*2 model. Because it
assumed that the only difference between countries was the
relative abundances of labour and capital. In this model 2
commodities, 2 factor model, implies that capital rich countries
will export capital intensive commodity and the labour rich
country will export labour intensive commodity.
Evolution of Trade
Theories cont..
 International Product Cycle:
 According to Raymond Vernon there are four stages in
a product’s life
cycle: introduction, growth, maturity and decline.
 The length of a stage varies for different products, one
stage may last some weeks while others even last
decades. This shows that the Product Life Cycle is very
similar to the diffusion of innovation model that was
developed by Everett Rogers in 1976.
 The life span of a product and how fast it goes through
the entire cycle depends on for instance market
demand and how marketing instruments are used.
Evolution of Trade
Theories cont..
International Product cycle. Vernon
Evolution of Trade
Theories cont..
New Trade Theory
New trade theory (NTT) suggests that a critical factor in determining

international patterns of trade are the very substantial economies of scale

and network effects that can occur in key industries.
These economies of scale and network effects can be so significant that they

outweigh the more traditional theory of comparative advantage. In some

industries, two countries may have no discernible differences in opportunity
cost at a particular point in time. But, if one country specialises in a
particular industry then it may gain economies of scale and other network
benefits from its specialisation.
Another element of new trade theory is that firms who have the advantage

of being an early entrant can become a dominant firm in the market. This is
because the first firms gain substantial economies of scale meaning that new
firms can’t compete against the incumbent firms. This means that in these
global industries with very large economies of scale, there is likely to be
limited competition, with the market dominated by early firms who entered,
leading to a form of monopolistic competition.
Evolution of Trade
Theories cont..
 National Competitive advantage
 Micheal Porter gave the diamond theory of national
advantage, which states that the features of home
country are crucial for the success of an
organization in the international markets.
 This theory is called the diamond theory, as it is
depicted in the shape of a diamond framework.
 It describes the factors that contribute to the
success of organizations in global industries. These
factors are called the determinants of the national
advantage.
Evolution of Trade
Theories cont..
 National Competitive advantage
 (a) Factors of Production: Include the inputs
necessary for producing goods and services.
The basic factors to carry out a business
include natural resources and labor; whereas,
advanced factors include infrastructure, such
as communication systems.
Evolution of Trade
Theories cont..
 National Competitive advantage
 (b) Demand Conditions: Refer to the nature and size
of the customers of the products in the home market.
The strong demand conditions in the home country
persuade the domestic organizations to constantly
improve the product. If the demand of a product is more
in the domestic market then it can influence the demand
of customers in the foreign market.
 (c) Related and Supporting Industries: Involve
industries in the country that are considered as the
leader of a particular product. These industries help in
innovation that helps organization under them to
produce at low cost.
Evolution of Trade
Theories cont..
 National Competitive advantage
 (d) Organizational Strategy, Structure, and Rivalry:
Varies from country to country. The strategies, structures,
and rivalry are very important for the success of an
organization. The strategies help in setting new goals, the
structure helps in managing operations, and rivalry helps
in generating innovative ideas in organizations.
 These four determinants can also be called as the
dimensions of the diamond model that help in
contributing to the national advantage. According to
Porter, these dimensions interact with each other and
help in increasing the competitiveness of the
organizations.