Globalization

1. What is globalization? Pros/Cons…

There is not just one definition that can be

used to describe globalization. Globalization
involves a rising power of MNEs, it involves
rapid technological and communications
innovations, it involves the Internet etc. We
can describe globalization as the shift towards
a more integrated and interdependent world
economy. Today all of us who don’t live in the
USA have the opportunity to try foods and
drinks from fast food restaurants like
McDonalds Burger King, coffee from
Starbucks, we all have the opportunity to
watch MTV, HBO and Hollywood movies, we
can have a video chat with our relatives in
Australia, we can study online from anywhere
in the world and much more. In other words,
markets have become more homogenous
(globalization of markets has occurred).
 Thanks to globalization, international trade
(the exporting of goods/ services to other
countries) and FDI have increased rapidly.
Companies outsource and offshore their
activities more often and thus globalization of
production is created. Boeing for example
believes that by outsourcing about 65 of its
activities to foreign companies, it has
competitive advantage over its biggest rival
Airbus by using the world’s best suppliers.

2.What are the likely advantages and

disadvantages that come with globalization?

Globalization is probably one of the most

controversial topics ever. There are lots of
people who support the process of the world
becoming flatter and more homogenous and
on the other hand, there are people who fear
that globalization can bring nothing more but
inequality. Four major areas of debate occur:

 Jobs and income

Critics of globalization believe that because
of globalization trade barriers are falling and
firms rapidly shift their production to
countries with low-wage labor, thus people
in developed countries like the USA, UK,
Germany lose their jobs because of the
rapid shift of production to low-wage
nations such as Mexico, Indonesia and
Thailand for example. But supporters say
that free trade can be only beneficial for the
world economy, since every country will be
able to specialize in things that it can
produce most efficiently. For example if you
buy a shirt in the USA that has been
produced in Indonesia for few cents, you
can spend more money on products that
the USA can produce most efficiently like
computers and software. Another example
is Dell ( Hill International Business) which
reduces costs by outsourcing its customer
call services to India and thus it can offer its
computers by lower prices and costumers in
the USA benefit from this.
 Labor policies and the environment
Globalization critics once again ‘’attack’’ by
claiming that globalization has created
opportunities for companies to shift their
production to countries where the
environmental regulations are not really
tight and thus pollute the environment.
Critics of NAFTA the free trade agreement
between the USA, Mexico and Canada claim
that lots of US companies have shifted their
production to Mexico because of the low-
wage labor and the lack of environmental
regulations and thus the level of pollution in
Mexico has increased. But advocates of
globalization say that MNEs have much
tighter regulations when it comes to
pollution, in fact they can manage to
decrease pollution as much as possible.
They also claim that since the NAFTA
agreement, factories in Mexico have never
been cleaner.

 Shifts in economic power

 Critics say that because of globalization,
power has been taken from national
governments and has been given to
organizations like the EU and WTO. But
supporters of globalization claim that the
EU would never support a policy that is
against the good of all its members,
because it is designed to promote and
achieve the collective goals and interests of
its members.

 Wealth distribution Critics claim that there

is a huge gap between the rich and poor
and that benefits of globalization are not
shared equally. However, supporters say
that globalization has helped to reduce
poverty (the piramide has changed, poverty
has reduced from 1.85 billion to 767 million
in 2013) which is a huge amount. And
according to supporters poverty and the
stagnation of economic growth in some
countries are not globalization’s fault.
Countries that have below the average
economic growth and have a lot of poverty
are usually under totalitarian regimes which
they choose, they may have stagnating
economic growth because they have huge
debt loads etc.

There is another debate when it comes to

globalization. Friedman ( 2007) suggests
that the world is becoming more and more
flat and homogenous because of
globalization. He says that the massive
development of technology and the
Internet, cheap computer access has helped
the transportation of knowledge to become
extremely easy. Before the Internet
geographical distance did played a huge
role on how firms would do business but
now everything is virtual and we are all
becoming more and more similar. He
suggest top ten flatteners that have shaped
globalization: the fall of the Berlin Wall as a
symbol of economic liberalization, the
development of internet protocols,
increased outsourcing and offshoring,
workflow and open source software, the
development of digital, mobile, personal
and virtual technologies, the development
of global supply chains, increase use of firms
which are specialized in doing internal
functions and development of search
engines. He says that all of these flatteners
have helped the world to become more
homogenous and for people to act in a
more similar way and to do similar things.
But Ghemawat on the other hand in his
article ,, Distance still matters’’ says that the
Internet and the development of
communication networks and technologies
have made the world a more narrow and
shrink place, which is scary. He says that
firms usually overrate international markets
because they are driven by the size of
foreign markets, new environments etc and
they don’t want to see the disadvantages of
operating in foreign markets. He goes
against Friedman’s argument that distance
does not play an important role and that
the world becomes more flat, in fact he
uses a framework called the C.A.G.E
framework which stands for cultural,
administrative/political, geographic and
economic distances that have an impact on
doing international business. Cultural
distance includes the differences in culture,
tradition, norms and values among
countries and there are more and more
different the bigger the distance between
countries. These cultural barriers have an
impact on whether firms should open a
business in certain countries/ trade or not.
For example trade is more common
between countries that share the same
currency or share a language than the ones
that don’t. He uses Star TV and its failure in
Asia as an example. Star TV made a mistake
believing that Chinese people would prefer
to watch English language programmes and
films. It didn’t consider the cultural
differences and the totalitarian regimes
present in China which constrict people
from the freedom to watch what they want.
All of this led to blocking of Star TV from
Chinese television. Administrative distance
says that countries which were ex
colonizers/colonies have bigger chances of
trade for ex. Britain- India, Spain- Latin
America, France- West African countries
etc. Political differences also have a huge
impact because at some point governments
are trying to protect domestic business by
restricting trade and FDI especially if: the
certain industry has an important role on
national security ( telecommunications and
aerospace industries), if its considered as
national champion ( symbolizes patriotism
for ex. the strong rivalry between Boeing
and Airbus, is a result of the strong
government intervention and investment
on both sides and their ambitions for
capturing the large-jet market).

Geographic distance includes the physical

size of the country, access to water ( river,
ocean), transportation and infrastructure
communications etc. For ex. when
transporting heavy materials like cement or
 steel transportation costs will increase the
longer the distance between countries. An
option for firms in this case would be to
engage in FDI and have access to target
markets that way.

Economic distance includes the wealth and

income of consumers. Both have impact on
business and the levels of trade. Rich
countries for example tend to trade more
with other rich countries because that
increases the per capita GDP. Also if firms
want to exploit their competitive advantage
they would do it with countries that have
the same economic profile as them.

Hence Ghemawat concludes that distance

is still present and firms that want to
operate globally need to be aware of it.

3. Globalization trends?

Globalization is not something new, people

have been trading internationally for decades.
There are two waves of globalization, the first
occurred in 1880 until 1930 and the second is
post World War II and is present beyond
2010. In the 1950s and 60s globalization was
pervasive even among developed countries.
In the 1970s and 80s only developed
countries from the so called Triad ( USA,
Western European countries and Japan) were
engaging in globalization. From the late 1980s
and early 90s developing countries saw that
taking a place in the world economy is a must.
These developing countries also known as
BRIC ( Brazil ,Russia, India and China) have
taken place in global trade and some of them
have managed to become global players.
Globalization has been mostly driven by the
decline in trade and investment barriers since
World War II and rapid improvements in
technology. There are four trends on
globalization:

1. Changes in world output and world trade

In the 1960s the USA dominated the world
economy and trade and US multinational
companies were extremely powerful. But
things have changed and developing
countries like China, Thailand and Indonesia
have managed to step in the picture and
become global economic players.
Developed countries like China, Japan, USA ,
Germany will that dominated will still see
major successes in world exports and world
output but developing countries like China,
India, South Korea will see their role in
global trade and investment increase.

Foreign direct investment

In the 1960s the USA had an enormous
percentage of FDI flows. But developing
nations such as China have also become
important destinations for FDI and has
become a huge competitor to developed
nations like USA.

Types of companies
A MNE is any company that operates ( is
doing business) in two or more countries.
 The global economy has also shifted in the
types of companies involved. Since the
1960s two important trends have emerged.
First the number of non-US multinationals
has increased, companies from UK, France,
Germany have become more important and
there has been a decline in the role of US
firms. For ex. let’s think of South Korea’s
Samsung. The second trend is the growth of
mini-multinationals. For ex. Lenovo has
acquired IBM’S PC division as a part of its
strategy to become a global player in the PC
industry.

Change in world order

When the Russian communism collapsed,

Eastern European and other communist
countries have gotten many opportunities
to develop on an economic level, and all of
them had great potential for foreign
companies because of the size of their
populations. India has been predicted to be
global player in the software industry. This
gives lots of opportunities for growth of
countries but it also brings threats. China
and India for example are now home to a
lot of companies that could either become
significant players in their global industries
or no.