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 lasting multilateral 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 scale: Many 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 controls in 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 fresh comparative 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.