Globalisation Concepts

Globalisation concepts: Resource guide to help understand globalization which refers to the increasing integration of economies around the world, particularly through trade and business.

What is Globalisation

Globalisation refers to growth in international flows of goods, services and especially capital that has taken place between countries.

The aim of globalization is to benefit individual economies around the world by making markets more efficient, increasing competition, limiting military conflicts, and spreading wealth more equally.

International business is known to facilitate the globalization process.

Ways to Globalise

Here are a few ways in which firms globalise.

Foreign Direct Investment: Foreign direct investment (FDI) tends to increase at a much greater rate than the growth in world trade, helping boost technology transfer, industrial restructuring, and the growth of global companies.

Technological Innovation: Increased competition from globalization helps stimulate new technology development, particularly with the growth in FDI, which helps improve economic output by making processes more efficient.

Economies of Scale: Globalization enables large companies to realize economies of scale that reduce costs and prices, which in turn supports further economic growth. However, this can hurt many small businesses attempting to compete domestically.

Macro-economic Reasons for Globalisation

• Exploitation of comparative cost advantages: Absolute advantage, Comparative advantage
• Removal of tariff barriers
• Increasing incomes
• Technology Accessibility.
• Homogenisation of market segments
• Rise in consumer demand
• Capital Mobility
• Increase in economies of scale

The Forces Behind Globalization

• Increased expansion and technological improvements in transportation and communications networks
• Liberalization of cross-border trade and resource movements
• Development of services that support international business activities
• Growing consumer demand for foreign products
• Increased global competition
• Changing political and economic situations
• Expanded cross-national treaties and agreements

Criticisms of Globalization

• Threats to national sovereignty
• Negative costs of economic growth
• Increasing income inequality

Government perspective on International trade

• Political influences
• Economic concern: Promoting industrialisation, Protecting employment, Protecting consumers: horse meat scandal, Protecting national culture

International Trade and Exchange Rate

Determined by the interaction of supply and demand due to:

• Changes in the current account
• Changes in investment flows
• Speculation in the foreign exchange markets

It is caused due to:

• An increase in exports
• An increase in imports
• Change in demand for foreign currencies
• Individuals’ confidence about future levels for the currency

Impact of Globalization on Society

It is important to understand the activities of MNEs, evaluate the major economic impacts of MNEs on home and host countries, to establish the foundations for responsible behavior, to discuss some key issues of globalization and society—ethics and bribery, the environ-ment, pharmaceuticals, and labor issues, and to examine corporate responses to globalization.

Multinational enterprises (MNEs) have their greatest impact on countries when they engage in foreign direct investment (FDI) via wholly-owned subsidiaries and/or joint ventures. Although not all MNEs are huge, the sheer size of many such companies troubles their critics. The global orientation of MNEs also causes many to believe that they are insensitive to national (local) concerns.

There are some who argue that managers are best equipped to serve the interests of their shareholders and that governments should deal with social issues and externalities. Advocates of corporate social responsibility (CSR) believe that capitalism fails to serve the public interest and that managers must be pressured to act responsibly.

Balance-of-Payments Effects of FDI

This is calculated using the formula:

B = (m –m1) + (x – x1) + (c – c1) where B = balance-of-payments effect, m = import displacement, m1 = import stimulus, x = export stimulus, x1 = export reduction, c = capital inflow for other than import, and export payments, c1 = capital outflow for other than import and export payments.

One country’s deficit is another country’s surplus. A country must compensate for a long-term trade deficit by: reducing its capital reserves, attracting an influx of capital via the receipt of foreign direct investment, the purchase of public or private debt by foreign governments or individuals, the receipt of unilateral transfers (e.g., foreign aid).

Host Country BOP Effects

The net import effect (m – m1) is positive if the FDI results in the substitution of local production for imported products and is negative if it results in an increase in imports. The marginal propensity to import represents the fraction of an increase in imports that are due to an increase in income.

The net export effect (x – x1) is positive if the FDI results in the generation of exports but negative if it results in a decline. FDI may also stimulate home country exports of complementary products to the host country.

Net capital flows (c – c1) are usually difficult to assess because of the time lag between (i) the outward flow of investment funds and (ii) the subsequent inward flow of remitted earnings from that investment. Although initial capital flows to the host country are positive, they may be negative in the long run if capital outflows eventually exceed the value of the investment.

Selected Economic Growth and Employment Effects of FDI

Losses to Home Country: FDI outflows may create jobs abroad at the expense of jobs in the home country.

Gains to Host Country: FDI inflows may result in the transfer of capital, technology, and/or managerial expertise, and well as the creation of new jobs.

Losses to Host Country: FDI inflows may deplete premium resources, drive up local labor costs, displace domestic investment, disadvantage local competitors, destroy local entrepreneurship.

Cultural Foundations of Ethical Corporate Behavior

Cultural relativism holds that ethical truths depend upon the groups subscribing to them; thus, intervention in local issues and traditions by outsiders is clearly unethical.

Cultural normativism holds that there are universal standards of behavior that everyone should follow; thus, non-intervention in local violations of global standards is clearly unethical.

While many actions elicit universal agreement on what is clearly right and wrong, others are less clear.

The Effects of NGOs and Multilateral Agreements on Corporate Behavior

Non-governmental organizations (NGOs) actively monitor and publicize corporate practices in order to: educate managers about the environmental and economic consequences of corporate operations and practices, and increase shareholder value.

Multilateral agreements aid in ethical decision-making by dealing with: employment practices, consumer protection, environmental protection, political activity, human rights in the workplace.

However, no set of workable corporate guidelines is universally accepted and observed.

Legal Foundations of Ethical Corporate Behavior

Ethics teaches that people have a responsibility to do what is right and to avoid doing what is wrong. The appropriateness of behavior can be measured in the sense that individuals and organizations must seek justification for their behavior, and that justification is a function of both cultural values and legal principles.

Most civil law countries tend to have a large body of law dealing with business operations; common law countries rely more on precedent than statutory regulations.

The Insufficiency of the Legal Argument: Everything that is legal is not necessarily ethical. The law is slow to develop in emerging areas of concern. The law is often based on moral concepts that cannot be separated from legal concepts. The law may need to be tested by the courts. The law is inefficient in terms of achieving ethical behavior at a minimum cost.

Other Legal Issues:

Extraterritoriality: the extension by a govern-ment of the application of its laws to the foreign operations of its domestic firms. In cases of health and safety standards, differences may not be insurmountable, but in other instances, differences in home- and host-country laws may pose challenging conflicts.

Externalities: the by-products of activities that affect the well-being of people and/or the environment. Although externalities are not reflected in standard cost accounting practices, they must be included in the determination of stakeholder value.

Ethics and Bribery

Bribery consists of payments, or promises to pay cash or something else of value, to public officials and/or other people of influence (foreign officials, political parties, party officials, party candidates).

Bribery affects the performance of countries and companies alike.

Multilateral Efforts to Confront Bribery: Transparency International’s Business Principles for Confronting Bribery (2003). The OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997). The revised OECD Guidelines for Multinationals. The ICC’s Rules of Combat to Combat Extortion and Bribery (1999). The UN Convention Against Corruption (2003).

Ethical Behavior and Environmental Issues

Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs, while taking into account what is best for people and for the environment.

The Kyoto Protocol: signed in 1997, the Protocol is an extension of the UN Framework Convention on Climate Change that obligates signatory countries to reduce their greenhouse gas emissions to 5.2 percent below 1990 levels between 2008 and 2012.

Global warming results from the release of greenhouse gases that trap heat in the atmosphere, rather than allowing the heat to escape.

Ethical Dilemmas and Pharmaceutical Sales

Research-based pharmaceutical firms sell products at high prices so long as their products are covered by patents. Legal generic products comply with patents while allowing for the purchase of drugs at lower costs; unauthorized (illegal) generic products may or may not be reliable. The WTO Agreement on Trade-Related Aspects of Intel-lectual Property (TRIPs) provides a mechanism for poor countries facing health crises to either produce or import generic products. Governments and private foundations enable countries to issue bonds to generate funds needed to purchase vaccines via the International Finance Facility for Immunization.

Tiered pricing: consumers in industrial countries pay market prices for products, while consumers in developing countries pay lower (subsidized) prices.

Ethical Dimensions of Labor Conditions

International labor issues that firms, governments, trade unions, and NGOs must deal with include: fair wages, child labor, working conditions, working hours, freedom of association.

The Ethical Trading Initiative Base Code focuses upon the employment practices of MNEs by getting them to first adopt ethical employment policies and then monitor compliance with their foreign suppliers.

Child Labor Issues: According to the International Labor Organization (ILO), lot of children are working in ways that endanger their health or well-being because of hazards, sexual exploitation, trafficking, and/or debt bondage. Those who argue in favor of child labor claim that in many instances, children are better suited to perform certain tasks than adults, and that if the children were not employed, they would in fact be worse off. While some firms simply avoid operating in countries where child labor is used, other firms work to establish responsible operating policies in those locales.

Ethical Trading Initiative Base Code: ETI is a British-based organization (members include representatives from companies and trade union organizations) that focuses on the ethical employment practices of MNEs.

Corporate Codes of Ethics

In creating its code of corporate conduct a firm should: set global policies that must be complied with wherever the firm operates, communicate the code to all employees within the organization, and to all suppliers, subcontractors, and customers, ensure that its policies are carried out in all instances, report results to its stakeholders.

To sum it up, while FDI is a major source of capital and expertise, it is also a center of controversy regarding its costs and benefits to home and host countries and other stakeholders. Major challenges facing MNEs include the globalization of the supply chain, human rights, employment practices, environmental protection, and consistent standards of ethical conduct. Whereas the legal approach to responsible behavior says that firms can operate according to local laws, the ethical approach says that firms should do whatever is necessary and economically feasible to maximize stakeholder value. Management is charged with maximizing the long-term value of the assets of the share-holders, but it is the role of government to deal with the externalities associated with corporate behavior.

Globalization and Inequality

This article examines the link between globalization and inequality.

According to analysts, globalization has significant impact on inequality among and within countries. The gap between the average income per capita levels of the poorest and the richest nations has increased during the recent eras of globalization as the MNCs and richer nations are taking the benefits of trade and commerce.Through the modern trend of globalization and liberalization, the developed countries has been able to increase their wealth rapidly while the developing countries are complaining of unfair trade practices by rich nations. According to a report titled Globalization with a Human Face submitted in 1999 by the United Nations Human Development, the global markets, global technology, global ideas and global solidarity can enrich the lives of people everywhere, if and only if the benefits are shared equally.

While the present phase of globalization is regulated by the competition in the global markets having focused on profits. It states that these markets are discouraging the nonmarket activities that are vital for human development.

The highly skilled professional elite corporate executives are getting high wages, while the market is very insecure for unskilled labour. The best example of increasing inequality within country is China, where disproportion is rising between the export-oriented regions of the coast and the interior.

According to a report, the income gap between the fifth of the world’s people living in the richest countries and the fifth in the poorest was increased to 74 to 1 in 1997, from 60 to 1 in 1990 and 30 to 1 in 1960.

The decade of 1990s showed increasing concentration of income, resources and wealth among people of various countries Thus, globalization has increase the magnitude of price and/or technology shocks for integration to increase individual economic insecurity in terms of riskier employment and/or wage outcomes.

Useful Links

International Trade Impact on United Kingdom-Smartphone Industry