Globalization

• What is Globalization?
 Integration and Interdependence

 Integration of Domestic Economy with the World/Global

Economy

 Interdependence of nations

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 Globalization (cont.)
Globalization has several facets including:

1. Globalization of Markets

2. Globalization of Production
 Globalization of Markets
• This refers to the merging of historically distinct and
separate national markets into one huge global market
place.
• Falling barriers to cross-border trade have made it
easier to sell internationally.
• Global Market: Because of the convergence of the
tastes and preferences of consumers in different
nations.
 Globalization of Production
• This refers to the sourcing of goods and services from
locations around the globe to take advantage of
national differences in the cost and quality of factors
of production.
• Factors of Production: land, labour, capital, and
energy
• Low overall cost structure
• Improvement in quality
• Improvement in Functionality
The Global Economy of the 21st Century
• Rapid Changes in Global economy in the past quarter
century
• The volume of cross border trade and investment has
been growing
• Single, interdependent, global economic system
 Growth of Globalization
• Two macro factors for the greater Globalization
1. Declining Trade and Investment Barriers

2. The Role of Technological Change

 Trade and Investment Barriers
• During 1920s and 30s, many of the nation-states
erected formidable barriers to international trade and
investment.

• Barriers: High tariffs (to protect domestic industries

from foreign competition)

• Great Depression of 1930s

Declining Trade and Investment Barriers
• After World War II, advanced industrial nations in the
West committed themselves to remove barriers to the
free flow of goods, services, and capital between
nations.

• General Agreement on Tariffs and Trade (GATT)

• World Trade Organization (WTO)

• Removal of restriction to foreign direct investment

 Results of Declining Trade and
Investment Barriers
• Enables the firms to view the world, rather than a
single country, as their market

• Allows firms to base production at the optimal

location for that activity
 The Role of Technological Change
• Major advances in communication, information
processing, and transportation technology

• Explosive emergence of Internet and World Wide

Web

• Telecommunication is creating a global audience

• Transportation is creating a global village

 The Role of Technological Change (Cont.)

• Microprocessors and Telecommunications

– Revolutionized global communication by development in
satellite, wireless technologies, and internet

– Drastic fall in the cost of communication

• The Internet and World Wide Web

– Allows businesses (both small and large) to expand global
presence at lower cost
 The Role of Technological Change (Cont.)

• Transportation Technology
– Development of commercial jet aircraft

– Reduction of time required to travel from one place to another

– Introduction of Containerization

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 Impact of Globalization
• Both positive and negative impacts
 Merits/Pros/Positive Impacts

 Demerits/Cons/Negative Impacts

 Globalization is not all good and it has its critic

 Antiglobalization Protests
 Positive Impact of Globalization
• Stimulates Economic Growth
– Job creation
– Improved standard of living
• Economies of Scale
– Lower prices for goods and services
• Increased Competition/Better Products
• Foreign Direct Investment
– Transfer of technology
• Foreign Exchange Reserves
• Extension of Market
 Negative Impact of Globalization
• Loss of jobs and income
– Loss of jobs in advanced economies such as USA and UK
because of movement of business activities to the countries
where wage rates are low.

• Exploitation of labour and Environment

– MNCs tend to shift their business to less developed countries
that lack adequate labour laws and environmental regulations

• Spread of Economic Problems

 Globalization in India (LPG 1991)
• 1991 Economic Crisis
 Political Instability
 Gulf War and Rise in Petroleum Price
 Break down of Union of Soviet Socialist Republics (USSR)
 Low Foreign Exchange Reserve

• Loan from IMF

• Liberalization, Privatization and Globalization Policy
(Economic Liberalization Reforms)