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For developing countries, globalization means integration with the world economy. In simple economic terms, globalization refers to the process of integration of the world into one huge market. Such unification calls for the removal of all trade barriers among countries. Even political and geographical barriers become irrelevant.
At the company level, globalization means two things: (a) the company commits itself heavily with several manufacturing locations around the world and offers products in several diversified industries and (b) it also means the ability to compete in domestic markets with foreign competitors. In the popular sense, globalization refers mainly to multi-plant operations.
International Monetary Fund defines globalization as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows and also through the more rapid and widespread diffusion of technology”.
Charles Hill defines globalization as, “the shift towards a more integrated and interdependent world economy. Globalization has two main components- the globalization of market and the globalization of production”.
Interdependency and Integration of individual countries of the world may be called as globalization. Thus globalization integrates not only economies but also societies. The globalization process includes globalization of markets, globalization of production, globalization of technology and globalization of investment.
Globalization encompasses the following:
A company, which has gone global, is called a Multinational (MNC) or a transnational (TNC). An MNC is, therefore, one that, by operating in more than one country, gains through Research and Development (R&D), leading to substantial production, marketing and financial advantages in its cost and reputation that are not available to purely domestic competitors. The global economy views the world as one market, minimize the importance of national boundaries, raised capital and market wherever it can do the job best.
To be specific, a global company has three characteristics:
i) It is a conglomerate of gathering multiple units (located in different parts of the globe) but all linked by common ownership.
ii) Multiple units draw on a common pool of resources such as money, credit, information, patents, trade names and control system
iii) The units respond to some common strategy.
Nestle International is an example of an enterprise that has become multinational. It sells its products in most countries and manufactures in many. Besides, its manager and shareholders are from many nations. The other MNCs whose names can be mentioned here are IBM, GE, McDonald, Ford, Shell, Philips, Sony, and Uniliver.
Globalization does not take place in a single instance. It takes place gradually through an evolutionary approach. According to Ohamae, globalization has five stages. They are:
1) Domestic company exports to foreign countries through the dealers or distributors of the home country.
2) In the second stage, the domestic company exports to foreign countries directly on its own.
3) In the third stage, the domestic company becomes an international company by establishing production and marketing operations in various key foreign countries.
4) In the fourth stage, the company replicates a foreign company in the foreign country by having all the facilities including R&D, full-fledged human resources etc.
5) In the fifth stages, the company becomes a true foreign company by serving the needs of foreign customers just like the host country’s company serves.
6) Thus, globalization means globalizing the marketing, production, investment, technology and other activities.
Economic globalization refers to the increasing economic interdependence of the national economies across the world through the rapid increase in the cross-border movement of goods, service, technology and capital. Whereas, it is centered on the diminution of international trade regulations as well as the tariffs, taxes, and other impediments that suppresses global trade, it is the process which increasing economic integration among countries, leading to the emergence of a global marketplace or single world market. Depending on the paradigm, economic globalization can be viewed as either a positive or a negative phenomenon.
Economic globalization comprises the globalization of production, markets, competition, technology, and corporations and industries. Current globalization trends can be largely accounted for by developed economies integrating with less developed economies, by means of foreign direct investment, the reduction of trade barrier as well as other economic reforms and, in many cases, immigration.
As example, Chinese economic reform began to open China to the globalization in the 1980s. Scholars find that China has attained the degree of openness that is unprecedented among the large and populous nations”, with competition from foreign goods in almost every sector of the economy. Foreign investment helped to greatly increase quality, knowledge and standards, especially in heavy industry. China’s experience supports the assertion that globalization greatly increases wealth for poor countries. As of 2005-2007, the Port of Shanghai holds the title as the World’s busiest port.
Economic liberalization in India refers to ongoing economic reforms in India that started in 1991. As of 2009, about 300 million people-equivalent to the entire population of the U.S-have escaped extreme poverty. In India, business process outsourcing has been described as the “primary engine of the country’s development over the next few decades, contributing broadly to GDP growth, employment growth, and poverty alleviation”.
In general, corporate businesses, particularly in the area of finance, globalization as the positive force in the world. Many economists cite statistics that seem to support such positive impact. For example, per capita Gross Domestic Product (GDP) growth among post-1980 globalizing countries accelerated from 1.4 percent a year in the 1960s and 2.9 percent a year in the 1970s to 3.5 percent in the 1980s and 5.0 percent in the 1990s. This acceleration in growth seems even more remarkable given that the rich countries saw steady declines in growth from the high of 4.7 percent in the 1960s to 2.2 percent in the 1990s. Also, the non-globalizing developing countries seem to fare worse than the globalizes, with the former’s annual growth rates falling from highs of 3.3 percent during the 1970s to only 1.4 percent during the 1990s. This rapid growth among the globalization is not simply due to the strong performances of China and India in the 1980s and 1990s-18 out of the 24 globalizers experienced increases in growth, many of them quite substantial.
Economic liberals generally argue that higher degrees of political and economic freedom in the form of free trade in the developed world are ends in themselves, producing higher levels of overall material wealth. Globalization is seen as the beneficial spread of liberty and capitalism. Jagdish Bhagwati, a former adviser to the U.N. on globalization, holds that, although there are obvious problems with overly rapid development, globalization is a very positive force that lifts countries out of poverty by causing a virtuous economic cycle associated with faster economic growth. Economist Paul Krugman is the staunch supporter of globalization and free trade with a record of disagreeing with many critics of globalization. He argues that many of them lack a basic understanding of comparative advantage and its importance in today’s world.
Globalization is both beneficial and harmful for different stakeholders. Globalization has both benefits and limitation.
(1) Free flow of capital: Globalization helps for free the flow of capital from one country to the other. It helps the investor to get a fair interest rate or dividend and the global companies to acquire finance at lower cost of capital. Further, globalization increases capital flows from surplus countries to the needy countries, which in turn increase the global investment.
(2) Free Flow of Technology: As stated earlier, globalization helps for the flow of technology from advanced countries to the developing countries. It helps the developing countries to implement new technology.
(3) Increase in Industrialization: Free flow of capital along with the technology enables the developing countries to boost-up industrialization in their countries. This ultimately increases global industrialization.
(4) Lower Price with High Quality: Indian consumers have already been getting the products of high quality at lower prices. Increased industrialization, speed up of technology, increased production and consumption level enables the companies to produce and sell the products at lower prices.
(5) Cultural exchange and demand for a variety of products: Globalization reduces the physical distance among the countries and enable people of different countries to acquire the culture of other countries. The cultural exchange, in turn makes the people to demand for a variety of products which are being consumed in other countries. For example, demand for ‘American pizza’ in India and demand for ‘Masala Dosa’ and ‘Hyderabadi Birayani’ and Indian styles garments in USA and Europe.
(6) Increase in Employment and Income: Globalization results in shift of manufacturing facilities to the low wage developing countries. As such, it reduces job opportunities in advanced countries and alternatively creates job opportunities in developing countries. For example Harwood Industries (US cloth manufactures) shifted its operation from US (paying wages $ per hour) to Honduras (wage rate was 48 % per hour).
However, advanced countries can specialize in producing high technology product resulting in enhancement of employment opportunities. For example, Microsoft Cell Phone in USA.
(7) Higher Standards of Living: Further, Globalization reduces prices and thereby enhances consumption and living standards of people in all the countries of the world.
Though the globalization process produces a variety of benefits/advantages, developing countries including, India have bitter experiences. These bitter experiences are due to the disadvantage of Globalization.
(1) Heterogeneity of Problems: A major hurdle in the path of globalization is the absence of a universally accepted set of solution of the problems which have to be tackled. Some of these problems happen to be political and social ones, but even their solutions have economic implications. Frequently, the proposed solutions are such that some countries view them as more harmful than beneficial. Usually, the developed countries are not ready to share the gains of globalization with developing ones on an equitable basis and this hinders a smooth transition to globalization.
(2) Reluctance of Developing Countries: The developing countries, on their part, have the bitter experience of being forced into giving trade and non-trade concessions to the developed countries at the cost of their own interest. They realize that, with them, the developed countries want to have ‘free trade’ and not ‘fair trade’. The developed countries keep finding fresh ‘reasons’ for adding to the trade disadvantages of the developing countries.
(3) Non- Economic Hurdles: Any form of economic integration, by its very nature, necessitates a corresponding compromise of national sovereignty; and it is more so in the case of global economics integration. This poses a very difficult and often unacceptable choice for national governments. For example, a national government may find itself forced to abandon measures for providing food security, or jobs during a natural calamity, etc.
(4) Factor Mobility: Globalization necessitates unhindered international factor mobility. Developing countries feel that unrestricted mobility of capital and finance can be damaging for them; while developed countries are apprehensive about the effects of unrestricted immigration of low wage labor. In other words, while globalization is expected to bring about free factor mobility and factor price equalization, most countries are apprehensive about such phenomena.
(5) Social Security: With globalization, it becomes increasingly difficult for a government (particularly of a developing country) to create and finance a social security system. Such like provisions tend to lose their priority in a market-oriented globalization.
(6) Risks and Uncertainties: Progress towards globalization is also hindered by uncertainties relating to a possible shift in political and economic philosophy of some member countries; the fear of nationalization by the MNCs, the resistances to cultural invasion associated with unrestricted inflow of foreign capital and enterprises, and so on.
(7) Infrastructure: Provision of economical and efficient infrastructure is essential for economic development. However, the responsibility of providing it remains essentially with the government of country. Therefore, there is a risk that a poor country, which is not able to provide infrastructure for inviting foreign investment capital, may remain perpetually poor and suffer from inferior terms of trade in the bargain.
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