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GLOBALIZING BUSINESS

1. GLOBALIZATION

1.1. DEFINITION

Globalization encompasses diverse aspects such as cross-border flows, interdependence, and

the trans nationalization of governance. The definitions vary among theorists, with sceptics

favoring more precise conceptions, while globalists tend to embrace broader definitional

standards.

In this context, we define globalization as the process of reducing and eliminating barriers

between national borders, promoting the smooth flow of goods, capital, services, and labor.

Tom G. Palmer defines globalization as the reduction of removal of government-imposed

restrictions on cross-border exchanges. It involves the creation of a more interconnected and

intricate global system of production and trade.

According to Thomas L. Friedman, the world is “flattening”, implying that globalized phenomena

like trade, outsourcing, supply-changing, and political influences have permanently transformed

the world, bringing about both positive and negative consequences.

1.2. ROOTS

19th Century: Industrialization fueled globalization, enabling cost-effective mass production.

Imperialism played a pivotal role in shaping this era’s globalization.

Early 20th Century: World War I marked the decline of modern globalization. The Bretton Woods

conference set the stage for international commerce and finance frameworks.

Continued globalization: Multinational corporations from the US and Europe drove global

expansion. The exchange of science, technology, and products worldwide, along with significant

inventions, further fueled globalization.

1.3. DRIVERS

Post-WWII, a notable decrease in barriers to the free movement of goods, services, and capital

is evident. Key institutions such as the International Bank for Reconstruction and Development
(World Bank) and the International Monetary Fund have played a pivotal role in promoting

liberalization.

Trade negotiation rounds, initially facilitated by the General Agreement on Tariffs and Trade

(GATT), have resulted in a sequence of agreements aimed at eliminating constraints on free

trade. The World Trade Organization (WTO) succeeded GATT and continues to foster the

reduction of trade restrictions.

After World War II and during much of the Cold War, the world was divided into two distinct

economic and political blocs: the free-market capitalist nations (North America, Western Europe,

Japan and Australia) and the socialist bloc led by the Soviet Union, encompassing communist

Eastern Europe. This division made global business nearly impossible.

Prominent countries like China, India, and Brazil operated under autarchic regimes, limiting

international economic interactions. However, a significant shift occurred with China’s increasing

openness to the world, initiated in 1972 and intensified in the 1980s. The pivotal moment came

with the fall of the Berlin Wall in 1989, marking the end of the Cold War and paving the way for a

more interconnected global business environment.

Western industrial nations committed to dismantling barriers hindering the free flow of goods,

services, and capital across borders. This commitment was reflected in the establishment of the

General Agreement on Tariffs and Trade (GATT), later extended by the World Trade

Organization (WTO) to cover services. Additionally, enhanced protection for patents, trademarks,

and copyrights was implemented. This concerted effort led to a significant reduction in tariffs.

Furthermore, countries globally have been progressively removing restrictions on foreign direct

investment (FDI).

Revolution in communication, information processing, and transportation technologies.

1.4. REGIONAL INTEGRATION

Recent years have seen a significant trend in the global economy towards regional economic

integration. This involves agreements among countries in a specific geographic region to reduce

and eventually eliminate both tariff and non-tariff barriers to the free flow of goods, services, and

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factors of production among themselves. Regional agreements aim to expedite the reduction of

trade barriers compared to the pace achievable through the World Trade Organization (WTO).

A prime example of successful regional economic integration is the European Union (EU), where

member countries have established an integrated market, sharing a common currency, the Euro.

However, recent events have raised concerns about disintegration within the EU.

Other notable examples of regional economic integration include:

I. Canada, Mexico, and the United States implemented the North American Free Trade

Agreement (NAFTA).

II. Argentina, Brazil, Paraguay and Uruguay initiated MERCOSUR as a step towards

creating a South American Free Trade Area (SAFTA).

III. Discussions have taken place about establishing a Free Trade Agreement of the

Americas (FTAA).

IV. Southeast Asia: ASEAN countries have been actively pursuing regional integration.

V. There are ongoing efforts towards creating a free trade area on the African continent.

2. EMERGING MARKETS

2.1. FROM GLOBALIZATION TO EMERGING MARKETS

Globalization has facilitated economic growth beyond the traditional growth triad (North America,

Western Europe and Japan), leading to a shift in the world economy towards the developing

world and the rise of emerging markets. However, defining “emerging markets” proves

challenging as it remains an open and ambiguous category.

2.2. CONCEPT

The terms “emerging markets”, “developing markets”, and other related concepts essentially

describe a common reality. An emerging market country can be defined as a society undergoing

a transition from a dictatorship to a free market-oriented economy. This transition is marked by

increasing economic freedom, gradual integration into the global marketplace, a growing middle

class, improving standards of living, social stability, tolerance, and enhanced cooperation with

multilateral institutions.

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The Big Emerging Markets (BEM) include Brazil, China, Egypt, India, Indonesia, Mexico,

Philippines, Poland, Russ, South Africa, South Korea, and Turkey.

2.3. SHARED CHARACTERISTICS

Emerging markets share common characteristics that aid in their identification and definition.

These include a high percentage of agrarian population and GPD, a high percentage of unskilled

labor indicative of labor availability, a growing urban population, abundant natural recourses,

corruption risks, an unequal distribution of wealth, reflected in a high GINI index, unstable

political systems, limited openness to foreign trade, and financial instability with the associated

risk of capital flight.

Other notable features of emerging markets encompass low savings and investment capacity,

high inflation rates, lack of legal security, difficulties in foreign exchange marked by soft

currencies and debt concerns, dependence on Foreign Direct Investment (FDI) subject to

controls and limitations, and the looming political risk of nationalization. Despite these

challenges, emerging markets are often export-oriented and characterized by rapid GDP growth,

earning them membership in the “7% club”.

Furthermore, emerging markets experience the impact of technological transfer, volatility in

economic conditions, and demographic shifts marked by fertility rates and like expectancy

changes, signaling a demographic revolution. There is a concurrent growth in educational levels,

integration with international markets, and deep social changes, often accompanied by tensions

and migrations. The emergence of a growing middle class is also a notable aspect of these

dynamic economies.

The Gini index, an international standard of measuring inequality, is employed to assess wealth

distribution. With values ranging from 0 (perfect equality) to 1 (perfect inequality), a score of 0

signifies perfect wealth distribution among the population, while a score of 1 indicates that all

national wealth is concentrated in the hands of a single individual.

3. GLOBALIZATION AND THE CRISIS

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Globalization caused a rise in global growth and an increase in international trade, resulting in a

positive sum gam for numerous countries. However, it has also let to growing trade imbalances.

Emerging markets now boast current account surpluses, with the USA functioning as the

spender and borrower of last resort. This dynamic has contributed to a significant escalation in

commodity prices.

Additionally, there has been a shift of income towards countries with high saving, leading to a

rise in global savings and subsequently causing a decline in long-term interest rates. The

availability of cheaper money has simulated phenomena such as property bubbles and a quest

for higher yields among lenders, often involving riskier investments.

3.1. GAINS FROM GOBALIZATION

The grains from globalization, particularly though the lens of the traditional approach, are

multifaceted and revolve around the exploitation of comparative advantage, specialization, and

trade.

 Exploitation of Comparative Advantage. Globalization allows countries to produce

goods and services in which they have a comparative advantage. This means that

countries can focus on producing goods or services that they can produce most

efficiently, either due to natural resources, technology, or labor skills.

 Gains from Specialization and Trade. Specialization allows countries to allocate their

resources more efficiently, leading to increased productivity and higher output levels. By

trading goods and services with other nations, countries can access a wider variety of

products at lower costs than if they were to produce everything domestically.

o Globalization, by promoting specialization and trade, creates welfare gains for all

participants in trade and exchange. Consumers benefit from access to a wider

variety of goods at lower prices, while producers can tap into larger markets for

their products.

o Advancements in transportation technology have reduced the costs of moving

goods and people across borders. This has increased the opportunities for

extended trade, allowing countries to access markets and resources from around

the world more easily.

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  Every country has a comparative advantage in some type of economic activity. By

recognizing and exploiting these advantages, countries can maximize their economic

potential and contribute to global prosperity.

3.2. FAULT-LINES FOR GLOBALIZING WORLD

Fault-lines for a globalization world represent areas of tension and challenge that emerge as the

process of globalization unfolds. These faults-lines reflect underlying issues that have the

potential to disrupt global economic, social, and political stability.

I. Globalization and Inflation. In the 1990s, there was a period of great stability preceding

significant economic disruptions. The surge in demand for commodities during this period

led to increase prices, contributing to inflationary pressures.

II. The Paradox of Inequality Within Countries. Globalization has often failed to benefit

the poor, leading to pressures on real wages and relative living standards for large

segments of the population.

III. Changing Balance of Power in the World Economy. Globalization has led to politically

unwelcome shifts in ownership and production patterns.

IV. Widening Global Trade Imbalances. Globalization has exacerbated global trade

imbalances, with some countries running large trade surpluses while others accumulate

significant deficits. These imbalances have consequences for capital flows, currency

values, and global economic stability.