Globalization: Definition, Examples, Pros & Cons
What is Globalization?
Globalization is the process where nations become increasingly dependent on each other, generally for goods and services. This is seen by an increase in interaction and integration between nations people, companies, and governments.
In economics, globalization refers to the increase in global trade, the creation of multinational firms, and the advancement of offshoring. This has led to increasingly co-dependent nations that rely on each other for goods and services. At the same time, globalization has made economic resources more competitive. Consumers no longer have to rely on their local store for goods. They can get similar goods that span from China to Brazil. However, this has put pressure on small local businesses that rely on local trade. As international competition is frequently cheaper, they end up losing custom to price sensitive consumers.
- Globalization is the process of integration between nations people, businesses, and government.
- Key characteristics of globalization include increasing trade, growth of multinational companies, and offshoring.
Whilst consumers have more choice, so to do businesses. As a result of globalization, firms have a large supply of workers, ranging from America to China. They don’t have to choose from those in the local vicinity – the world is their market. So why would firms choose expensive American labor when they can get it for a fraction of the price in China? It is only logical therefore that many jobs have been lost to cheaper regions of the world, which has increased exponentially in recent decades.
1. Cultural Globalization
Throughout the years, cultural norms have spread across the world. Historically, this was due to colonization of nations and the implementation of the empire’s cultural norms. For instance, many nations that were invaded by the Romans were influenced by their culture. Roads were built, sewerage systems created, and perhaps more importantly, children were educated.
In today’s age, cultural globalization has seen many trends spread across the world. American culture has become increasingly present in Asian cities, whilst many Western cities have become brimming areas of multi-culturalism. For example, London is now home to over 270 different nationalities and is widely seen as one of the most diverse places on earth.
With the advancement of travel and opening of boarders, people from all across the world have moved to find a new life, taking their culture with them. This has opened the world up to new cultural norms that have taken root.
2. Diplomatic Globalization
Throughout the 20th century, a large number of global diplomatic organizations have developed. Examples include NATO, the IMF, World Bank, World Trade Organization (WTO), and the World Health Organization (WHO) – among others. The majority of which were created after the second world war.
The aim of such organizations is clear from the nature of their inception – to prevent diplomatic relations deteriorating, thereby leading to a third World War. So far these have been successful. By acknowledging countries grievances and economic issues, these organizations have worked together to find solutions. This ranges from global humanitarian aid following natural disasters, to negotiating treaties between countries.
3. Economic Globalization
With the creation of the World Trade Organization (WTO), and the opening up of trade borders, corporations have expanded exponentially – creating new markets right across the world. For example, McDonalds expanded rapidly in the 1990s, with its international units increasing from about 3,600 in 1991, to more than 11,000 by 1998. At the same time, the number of countries with a McDonald’s outlet increased from 59 nations, to over 114 in the same period.
The relaxing of trade barriers has made it easier and more profitable for firms to offshore and outsource. For example, manufacturing firms such as Ford and General Motors have operations than span from Mexico to China. Not only do they benefit from lower labor costs, but also from lower variable costs such as electricity, rent, and the cost of construction.
With the cost advantages of operating abroad, many firms have adopted a very sophisticated global supply chain. For example, Apple sources its iPhone components from all across the world, including China, the Czech Republic, Germany, the US, and South Korea. With global shipping costs falling, it has made it cheaper and more efficient to source from specialist suppliers that are situated abroad.
4. Banking Globalization
Through technological advancement, it has become increasingly easier to do business abroad. Consumers can transfer money from their US account, to their German account in a matter of seconds. This particularly exploded in the 1980s and into the 90s as computing software made waves in the financial services industry. Trades could be done in seconds rather than minutes, and the availability of information increased rapidly.
As technology advanced, it made it more lucrative and appealing to expand into foreign markets. Emerging markets also saw an opportunity and reduced barriers to entry and the red tape, inviting some of the biggest banks to invest. With the fall of the Berlin wall and the end of Communism in Russia, the world was open for business.
As a result of financial deregulation in the 1980s, among many other factors, banking has developed into a global industry seen today. For example, HSBC is one of the largest banks in the world, operating in 64 countries – ranging from the UK, to China, to Canada.
This was driven by a number of acquisitions which includes its purchase of US-based Marine Midland Bank in 1987. It later followed with a number of acquisitions in South America including the Banco Bamerindus in Brazil for $1 billion in 1997. In the same year, the bank also acquired Roberts SA de Inversiones of Argentina for $600 million. A couple years later, it also expanded its US position by purchasing the Republic National Bank of New York for over $10 billion – becoming a truly global organization.
5. Technological Globalization
Technological advances throughout the years have contributed to globalization as much as any other factor. Phones have helped connect businesses internationally. The internet has allowed people to buy international products from their phone and start their own online business. And platforms such as Facebook and YouTube can influence trends throughout the world.
The advancement of technology has allowed for a more interconnected world. American TV shows are viewed across the globe, with American politics and culture also spreading. The likes of YouTube, TikTok, and Instagram, have all changed society.
More importantly, technology has spread through the globe. As a result of globalization, intellectual property has been shared throughout the world. So what would have been kept exclusively in the US is now distributed globally for each individual to benefit. Ideas, theories, and lessons do not have to be confined to the classroom, but can be shared across towns, cities, and continents.
Advantages of Globalization
Globalization is not a new concept. It is one that has been around for centuries, as empires have expanded and brought their culture to new lands. However, globalization as we know it today is very different. Instead of forced globalization, nations have come together voluntarily to work together, create peace and benefit from a number of advantages that globalization provides.
1. Lower Prices
As a result of globalization, firms have moved production abroad where labor and production costs are lower. Even after shipping costs are included, it often works out more cost effective to manufacture in China and ship it over to the US. At the same time, this has only been made possible by significant advances in freighting which has also reduced the cost of shipping.
Whilst the firm benefits from higher profits, these costs have also been passed onto the consumer. This is why goods such as washing machines and televisions are but a fraction of the price they once were. Not only are household goods becoming higher quality, but reducing in price at the same time.
Even though lower unit costs lead to lower prices, globalization has meant firms have a much bigger market than before. For example, instead of having a market of 330 million Americans, it may now have a market of over 3 billion. This allows them to benefit from economies of scale, thereby reducing unit prices further.
2. Greater Choice
Globalization allows the consumer to buy not just from their local store, but brands that stretch from Japan, to Germany, to Brazil. In turn, the consumer has a wide variety of goods that they can choose from. For example, Amazon offers a wide variety of goods for sale. Within the vast product range, there are a large number of products that the consumer can choose from. It may be reasonable to assume that there may be only two or three sellers of paper clips. However, there are hundreds of variations and varieties available.
Goods which fit within the ‘niche’ category, actually become a big market on the global stage. Whilst only 1,000 consumers from the UK would be interested in a good, there may be over 1 million across the world. So goods which would be unprofitable with such a small number of domestic customers, are actually more profitable with a large global audience.
3. Greater Competition
Globalization opens up domestic businesses to the world. This means they are not only competing with those inside its own borders, but also thousands of others abroad. For example, 50 to 60 years ago, consumers who wanted a book would have to go into the local store. Perhaps there was only one in the town, so competition was limited.
With the advancement of globalization, consumers can purchase from a wide variety of outlets. Whilst they can still go into town to their local store, they can also purchase it via Amazon. It may be shipped in from the other side of the world from retailers as far and wide as China or Argentina.
4. Better Customer Service
Globalization has created more competition and reduced unit costs. This has meant that firms have had to improve their product offering in order to attract and keep customers. As the average consumer has become wealthier, and the cost of production has fallen – it has meant that firms have more money and incentive to invest in customer service.
This is particularly true for homogenous businesses which rely on customer service as a way of gaining and retaining customers. As a result of the increased level of competition caused by globalization, firms need to provide a unique selling point, which differentiates themselves from their competitors. Apple is a good example of this. The firm offers support to customers through its Genius bar, whilst operating a business model that puts people first. That means customers as well as employees who are motivated to give their best for the firm.
5. Improved Living Standards
One of the most beneficial advances that globalization has made is the significant reduction in global poverty. According to UN figures, this has fallen from 36 percent of the global population in 1990, to 8.6 percent in 2018. The increase in globalization has created new jobs in these countries, creating employment and the associated wealth. Whilst the jobs are nowhere near as highly paid as those in the West, it has helped improve the lives of millions.
Billions and trillions of dollars have been spent in emerging markets and have subsequently boosted the economy of poor nations. Trade liberalization has increased prosperity and attracted such investment and jobs – lifting millions out of poverty.
6. Access to New Talent
Some nations have workers that are more specialized in certain industries. For instance, the US has Silicon Valley and its tech industry. The UK has London as its financial hub. And German is known for its top-class engineering.
Globalization has made it easier for firms to tap into that industry specific expertise – particularly where those skills are lacking in its own domestic market.
Disadvantages of Globalization
Over the recent decades, globalization has brought many benefits. However, it has recently become a source of anger for many across the world. Without doubt, globalization has created a great deal of disruption to people’s lives – even though it has also created great opportunities too many. Yet globalization has a large number of disadvantages – which include:
1. Economic Disruption
Globalization has created significant economic disruption as jobs have moved to emerging markets where labor is cheaper. For example, thousands and millions of manufacturing jobs have moved from the likes of the US, and towards Mexico and China. This has left a vacuum of unemployed individuals.
The argument is that by sourcing employment from abroad, imported goods such as sneakers become cheaper. In turn, consumers have more disposable income for other goods. That demand then translates into new employment for those displaced workers. However, a worker who used to work fitting tires onto motor vehicles does not necessarily have the required skills to transition into the tech industry for example.
2. Too Interconnected
Globalization has created an interconnected economic environment whereby an economic recession in one country can create a ripple effect which impacts another. For example, bad economic data in China frequently moves international markets. At the same time, negative economic growth in Europe effects employment opportunities in the likes of China.
This has led to a turbulent economic environment whereby nations are frequently affected by economic outcomes in other nations. The main contributory factor is the growth of the global supply chain. For example, the iPhone has components that come from the likes of Japan, Taiwan, Germany, and the US. In turn, it in-directly employs workers from those countries. Yet those jobs are dependent on demand for the final product. So if demand for iPhones in the US declines, those jobs become at risk – even if the domestic economy is doing well.
3. Damage to Environment
As a result of globalization, firms have been able to take advantage of lower costs. However, this has meant goods have to travel from much further distances. What might have been an hour trip to the retail store, is now 3 days. Goods are now shipped and flown in from all across the world, thereby emitting CO2 into the atmosphere at a greater rate.
At the same time, the nation’s which many globalized firms operate in are the biggest emitters of CO2 in the world. Regulations are not as strong in many emerging markets, and is one of the reasons that CO2 rates have risen dramatically in recent decades.
4. Homogenous Cultures
Cultural globalization is characterized by a dilution of cultural norms and traditions as these become transformed or absorbed by the dominant culture. This can be as the result of multination media and corporations which homogenous cultural values in order to fit within the norm.
In today’s world, it could be argued that Americanization has spread across the world, with a consumeristic outlook being spread particularly to Asia. However, this may be purely due to the fact that the region has become wealthier.
5. Political Unrest
Globalization has created economic disruption as jobs have moved abroad, whilst displaced workers have found it difficult to return to employment. This has led to millions of unemployed and underemployed workers. At the same time, many regions have seen a large influx of migrants, which has caused social disruption.
Many migrants have taken on low skilled work, which has been seen as many as taking jobs away from domestic citizens. In turn, and for many other reasons, citizens of countries such as the UK, the US, and France, have lost faith with the political system. This has led to significant riots in both France and the US where the middle and working class have felt underserved by the political elite.
6. Lost Tax Revenue
Globalization has made it easier than ever for large multinational corporations to offshore their income for tax purposes. As firms have gotten bigger and larger as a result of globalization, they have been able to hire big accounting firms and legal teams to find ways to avoid tax.
On top of this, it has become increasingly easier for firms to transfer money between nations – whilst they compete to lower corporation taxes to win over big firms such as Apple. As globalization has taken route, nations have had to become more competitive to with over multinational corporations’ business. This means jobs and tax revenues for the country. However, this has also meant that they have had to reduce rates to attract investment,
Globalization is the increased integration between countries people, businesses, and politics. This can be demonstrated through economic, cultural, and political globalization. Examples include trade liberalization, the creation of political unions such as the EU, the UN, and the IMF.
There are three main types of globalization:
Globalization has affected the world in a number of ways. It has created significant levels of worker displacement as employers have moved production to cheaper overseas facilities. In turn, products are cheaper and have improved the wellbeing of residents in those nations.
The drivers of globalization include advances in technology, transportation, and communication, the liberalization of trade and investment policies, and the growth of multinational corporations.
Globalization has led to changes in the labor market, including the offshoring of jobs to lower-cost countries, increased competition for jobs, and the growth of the gig economy.
Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.