Globalisation – Introduction

Introduction to Globalisation

The OECD defines globalization as

“The geographic dispersion of industrial and service activities, for example research and development, sourcing of inputs, production and distribution, and the cross-border networking of companies, for example through joint ventures and the sharing of assets.”

51 of the largest economies in the world are corporations. The top 500 TNCs account for nearly 705 of world trade.

Globalisation is best defined as a process of deeper economic integration between countries involving:

 

  • An expansion of trade in goods and services
  • An increase in transfers of financial capital including the expansion of foreign direct investment (FDI) by trans-national companies (TNCs) and the rising influence of sovereign wealth funds
  • The development of global brands
  • Spatial division of labour– for example out-sourcing and off shoring of production and support services as production supply-chains has become more international. As an example, the iPod is part of a complicated global supply chain. The product was conceived and designed in Silicon Valley; the software was enhanced by software engineers working in India. Most iPods are assembled / manufactured in China and Taiwan by TNCs such as FoxConn
  • High levels of labour migration within and between countries
  • New nations joining the trading system. Russia joined the World Trade Organisation in July 2012

Global inter-dependence and shifts in world economic influence

The shifting centre of global influence

“In 1980, North America and Western Europe produced more than two-thirds of the world’s income, so as a result, in 1980 the world’s economic center of gravity was a point in the middle of the Atlantic Ocean. By 2008, because of the continuing rise of India, China and the rest of East Asia, that center of gravity had shifted to a point just outside İzmir.” Professor Danny Quah, LSE

Globalisation is a process of making the world economy more inter-dependent

  • It is also bringing about a change in the balance of power in the world economy. Many of the newly industrializing countries are winning a rising share of world trade and their economies are growing faster than in richer developed nations especially after the global financial crisis (GFC)

Previous waves of globalisation

There have seen several previous waves of globalisation:

  • Wave One: Began around 1870 and ended with the descent into protectionism during the interwar period of the 1920s and 1930s. This first wave started the pattern which persisted for over a century of developing countries specializing in primary commodities which they export to the developed countries in return for manufactures. During this wave of globalisation, the ratio of world exports to GDP increased from 2 per cent of GDP in 1800 to 10 per cent in 1870, 17 per cent in 1900 and 21 per cent in 1913.
  • Wave Two: After 1945, there was a 2nd wave of globalization built on a surge in trade and reconstruction. The International Monetary Fund was created in 1944 to promote a stable monetary system and provide a sound basis for multilateral trade, and the World Bank to help restore economic activity in the devastated countries of Europe and Asia. Their aim was to promote lastingmultilateral co-operation between nations. The General Agreement on Tariffs and Trade (GATT) signed in 1947 provided a framework for a mutual reduction in import tariffs. GATT eventually became known as the WTO.
  • Wave Three: The most recent wave of globalisation has seen another sharp rise in the ratio of trade to GDP for many countries and secondly, a sustained increase in capital flows between counties

What factors have contributed to globalisation?

Among the main drivers of globalisation are the following:

  • Containerisation – the costs of ocean shipping have come down, due to containerization, bulk shipping, and other efficiencies. The lower cost of shipping products around the global economyhelps to bring prices in the country of manufacture closer to prices in the export market, and makes markets contestable in an international sense.
  • Technological change – reducing the cost of transmitting and communicating information – known as “the death of distance” – this is an enormous factor behind trade in knowledge products using internet technology
  • Economies of scaleMany economists believe that there has been an increase in the minimum efficient scale associated with particular industries. If the MES is rising, a domestic market may be regarded as too small to satisfy the selling needs of these industries.  Overseas sales become essential.
  • De-regulation of global financial markets: This has included the removal of capital controlsin many countries which facilitates foreign direct investment.
  • Differences in tax systems: The desire of multi-national corporations to benefit from lower labour costs and other favourable factor endowments abroad and develop and exploit freshcomparative advantages in production has encouraged many countries to adjust their tax systems to attract foreign direct investment.
  • Less protectionism – old forms of non-tariff protection such as import licencing and foreign exchange controls have gradually been dismantled. Borders have opened and average tariff levels have fallen – that said in the last few years there has been a rise in protectionism as countries have struggled to achieve growth after the global finance crisis.
Average Most Favoured Nation Applied Import Tariffs (%)

1991

2001

2009

Developing Countries (134 countries)

27.7

13.5

9.9

Low Income Developing Countries (42 countries)

44.4

14.4

11.8

Source: World Bank

  • The breakdown of the Doha trade talks dashed hopes of a globally based multi-lateral reduction in import tariffs. In its place there has been a flurry of bi-lateral trade deals between countries and the emergence of regional trading blocs such as NAFTA and MECOSUR
  • Globalization no longer necessarily requires a business to own or have a physical presence in terms of either owning production plants or land in other countries, or even exports and imports. For instance, economic activity can be shifted abroad using licensing and franchising which only needs information and finance to cross borders.

Joint Ventures

Increasingly we see many examples of joint-ventures between businesses in different countries

  • BMW and Toyota agreed a partnership in 2011 to co-operate on hydrogen fuel cells, vehicle electrification, lightweight materials and a future sports car. Partnership agreements between competing automakers are becoming increasingly common in the industry as manufacturers seek to pool efforts on costly technologies.
  • Renault-Nissan’s joint venture with Indian firm Bajaj to produce a £1,276 car
  • Alliances in the airline industry e.g. Star Alliance and One World
  • Burger King, the US fast food restaurant chain plans to open 1,000 stores in China through a new joint venture with a Turkish private equity business
  • Sony and Olympus agreed to form an alliance in September 2012 setting up a new company (51% owned by Sony to develop new businesses)

Our chart above tracks the annual growth of real GDP for the world economy and for developing countries as a group. In nearly every year the developing world has seen faster growth. 2009 marked a difficult year for the world economy with a recession – this was felt most severely in rich advanced countries.

Globalisation – Gains, Risks & Disadvantages

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

China stimulates innovation in the West

Apple’s iPhone and iPad were both designed and prototyped in California and then produced in China. Chinese manufacturing competition is increasingly capturing low-skill production while simultaneously fostering high-skill innovation in the West.

About 15 percent of technical change in Europe in the past decade can be attributed directly to competition from Chinese imports, an annual benefit of almost €10 billion to European economies. Firms have responded to the threat of Chinese imports by increasing their productivity—adopting better IT, boosting R&D spending, and increasing patenting.

Source: Von Reenan & Bloom. LSE

Gains from Globalisation

 

Globalisation can lead to improvements in efficiency and gains in economic welfare.

Trade enhances the division of labour as countries specialise in areas of comparative advantage

Deeper relationships between markets across borders enable and encourage producers and consumers to reap the benefits of economies of scale

Competitive markets reduce monopoly profits and incentivize businesses to seek cost-reducing innovations and improvements in what they sell

Gains in efficiency should bring about an improvement in economic growth and higher per capita incomes. The OECD Growth Project found that a 10 percentage-point increase in trade exposure for a country was associated with a 4% rise in income per capita

Globalisation has helped many of the world’s poorest countries to achieve higher rates of growth and reduce the number of people living in extreme poverty

For consumers globalisation increases choice when buying goods and services and there are gains from a rapid pace of innovation driving dynamic efficiency benefits

Risks and Disadvantages from Globalisation

Globalisation is not an inevitable process and there are risks and costs:

  1. Inequality: Globalisation has been linked to rising inequalities in income and wealth. Evidence for this is a rise in the Gini-coefficient and a growing rural–urban divide in countries such as China,India and Brazil.
  2. Inflation: Strong demand for food and energy has caused a steep rise in commodity prices. Food price inflation (known as agflation) has placed millions of the world’s poorest people at great risk.
  3. Macroeconomic instability: A decade or more of strong growth, low interest rates, easy credit in developed countries created a boom in share prices and property valuations. The bursting of speculative bubbles prompted the credit crunch and the contagion from that across the world in from 2008 onwards. This had negative effects on poorer & vulnerable nations.
  4. In 2007-08, financial crises generated in developed countries quickly spread affecting the poorest and most distant nations, which saw weaker demand and lower prices for their exports, higher volatility in capital flows and commodity prices, and lower remittances.
  5. Threats to the Global Commons: A major long-term threat to globalisation is the impact that rapid growth and development is having on the environment. Threats of irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and the fears of a permanent shortage of water are afflicting millions of the most vulnerable people are vital issues.
  6. Trade Imbalances: Trade has grown but so too have trade imbalances. Some countries are running enormous trade surpluses and these imbalances are creating tensions and pressures to introduce protectionist policies.
  7. Unemployment: Concern has been expressed by some that investment and jobs in advanced economies will drain away to developing countries. Inevitably some jobs are lost as firms switch their production to countries with lower unit labour costs. This can lead to higher levels of structural unemployment and put huge pressure on government budgets causing rising fiscal deficits.
  8. Standardization: Some critics of globalisation point to a loss of economic and cultural diversity as giant firms and global brands come to dominate domestic markets in many countries.

Sovereign Wealth Funds (SWF)

Investment funds run by foreign governments, also called ‘sovereign wealth funds’ have been in existence since the 1950’s. As a result of high commodity prices and the success of export-oriented economies, China, Singapore, Dubai, Norway, Libya, Qatar and Abu Dhabi have all built up a sizeable surplus of domestic savings over investment.

Now some other countries with large reserves of oil and gas are considering setting up their own funds – in August 2012, Tanzania announced it is to set up a sovereign wealth fund. Not all have been successful. Nigeria’s has operated an Excess Crude Account the surpluses from which have been largely used to pay off existing international debts.

China established its official sovereign wealth fund China Investment Corp (CIC) five years ago with the aim of earning high returns by investing abroad the dollars China earns from its exports. In January 2012, CIC’s $410bn sovereign wealth fund, bought an 8.68 per cent stake in Thames Water, the water network that serves London. It also has investment stakes in France’s GDF Suez, Canada’s Sunshine Oil sands and Trinidad and Tobago’s Atlantic Liquid Natural Gas Company.

Sovereign wealth funds are already having an important effect on the UK economy. Singapore’s Temasek owns stakes in Barclays and Standard Chartered, while Qatar and Dubai between them own about a third of the London Stock Exchange. The government of Singapore has also built up a 3 per cent stake in British Land. Dubai’s sovereign wealth fund, Dubai International Capital (DIC) has invested money in building stakes in UK companies, including Travelodge and the London Eye.

Many sovereign wealth funds have provided an injection of fresh capital for the UK banking system in the wake of the losses sustained from the sub-prime crisis and the credit crunch. The banks have needed to re-capitalize to repair their balance sheets, improve their chances of survival and provide a stronger platform for a recovery in lending to businesses and individuals who need loans.

Geographical Seepage in the World Economy

Geographical seepage occurs because of inter-relationships between economies, supply-chains and financial markets

One example is how developing countries that were really not part of the financial bubble and subsequent crisis of 2007-08 have suffered economically because of the global downturn.

Seepage is partly due to the changing structure of the world economy arising from outsourcing. The share of industrial production in GDP in BRIC nations has been rising – indeed more and more industrial production takes place in emerging markets. So when demand for new cars, iPods and other electronic goods dries up from the richer nations the BRIC nations see a dramatic fall in export growth. And developing nations reliant on exporting commodities to advanced economies will suffer from a fall in demand for and price of their output.

The global credit crisis led to a partial drying up of capital flows into developing countries – one consequence is that some emerging markets find it really hard to get hold of the bank loans needed to finance their continued expansion.