Globalization is defined as the extension of trade, commerce and culture of an economy across different nations. It allows economies to exchange domestic products, services, technologies, ideas and other resources globally.
It facilitates developed nations to make foreign direct investmentsForeign Direct InvestmentsA foreign direct investment, or FDI, is a financial investment made by an individual or an organization in a business based in another country. In such investment, an organization or an individual owns a minimum of ten percent of the shares of a foreign firm. (FDIs) for utilizing cheaper resources of developing countries. The process increases employment opportunities, productivity, living standards and earnings of emerging economies.
- Globalization is the process of cross-border exchange and free flow of resources between different countries of the world.
- It involves the worldwide integration of technology, ideas, knowledge, capital, human resource and culture.
- Many companies go global or outsource their business operations to reduce their operational cost. Doing this helps in acquiring economical labor and wider resources available in foreign countries.
- Globalization is a crucial concept in economics as it has many pros and cons. It has been criticized for the uneven distribution of wealth and power amongst a few companies, dominating the international market.
Globalization establishes domestic organizations in foreign countries through the free movement of capital, trade, information, culture, people, etc. Moreover, it is a business expansion phenomenon allowing mobilization of resources amongst nations to ensure their optimum utilization for global growth.
Often domestic markets have limitations like high cost of productionCost Of ProductionProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost. , expensive labor, inadequate raw materials, and strict laws. Shifting the business unit to a more economical and resourceful country is often considered more feasible by businesses leading to globalization. When companies step outside of their geographical boundaries, they experience a different culture. International laws usually govern global business units.
The history and origin of globalization can be traced back to the 1st century BC when Chinese luxury products made it to Rome using the Silk Road. Later Asia and Europe started importing and exporting silk and spices. However, it was post World War I that global trade was refrained to safeguard the interest of the local traders. Later, the US, after World War II, promoted international trade for boosting the falling global GDP.
After the Industrial Revolution in the 19th century, the formal infrastructure for cross border trade activities was developed, facilitating the free flow of trade. As a result, in 1989, the global GDP rose to 14%. Since then, many nations have entered into trade agreements and treaties to promote international tradeInternational TradeThe trading or exchange of products and/or services across international borders is referred to as international trade. It frequently includes other risk factors such as exchange rate, government policies, economy, laws of the other nation, judicial system, and financial markets that impact trade between the two. activities.
- Globalization initiates growth and interconnectivity of various sectors across nations. Its essential features include the cross-border connectivity or integration, free trade environment and interdependency of nations.
- In addition, it facilitates global business expansion, cross-culture diversification, lower tariffs and taxes on international business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation..
- Migration of workforce and international investmentsInternational InvestmentsInternational investments are made outside of domestic markets and offer portfolio diversification as well as risk management opportunities. As a result, an investor can diversify his portfolio and extend his return horizon by making international investments. create job opportunities, enhanced goods and services as well economic development.
- The vast concept of globalization is often explained by classifying into sections by educational instituties and government bodies such as the IMF. The four more major sections include –
- capital movement,
- movement of people,
- dissemination of knowledge.
Let us look at some real-world examples of globalization in different sectors to understand why it is such an important concept in economics.
Globalization in business
With the World Trade Organization (WTO) and United Nations (UN) allowing international trade reforms and agreements on tariffs, it has become easier for the domestic entities to go global. Additionally, due to the FDIs, many companies can now find a firm footing in the international markets.
For instance, this report indicates that by 2028, the global handbag market is expected to reach $78.46 billion. The industry is dominated by renowned global manufacturers like Calvin Klein Inc. and Louis Vuitton Malletier. In addition, the creation of eco-friendly handbags owing to the environmentally conscious consumers has added to the demand spike.
Globalization in Food
When nations connect, they exchange a lot more than the products and services. Food is perhaps one of the strongest segments to have changed due to the interaction of different cultures. People experienced the flavors, cuisines and traditions of other nations, especially through global food chains like McDonald’s and Krispy Kreme. It also led to the fusion of cuisines.
Moreover, the sharing of farming techniques, fertilizers, biotechnology, and agricultural practices among the nations facilitated them to grow non-indigenous crops. Grocery chains such as Walmart have been offering a variety of international food in different nations.
For example, Andean superfood quinoa’s popularity became so intense in American and European countries that their prices went through the roof. As a result, the local people of Bolivia and Peru, where quinoa was a staple food, could no longer afford it.
Globalization in Culture
International cultural fusion has facilitated nations to share their art, music, values, ideas, beliefs, traditions, customs, food, festivals, and languages. Employees and companies operating outside their home country often get exposed to a new culture. The entertainment industry also plays a crucial role in introducing viewers to foreign cultures.
For instance, yoga is considered an Indian tradition, which was anciently confined within the geographical boundaries of India. Today, it is widely practised worldwide for physical and mental well-being. June 21 is observed as the International Yoga Day across the globe, as declared by the United Nations in 2015. Hundreds of countries plan special events for celebrating the day.
Globalization in Technology
Technology is the carrier of development, and it travels from one country to another to upgrade different sectors of the nations. With the emergence of the internet, globalization has reached a new horizon in the field of technology. Since some countries are ahead in technical know-how, it has helped economies solve some of their woes cheaper. For instance: the emergence of 5G technology has been the talk of the town in many countries due to its innovative applications.
- The process opens up new ways for the domestic businesses to transform into multinational companiesMultinational CompaniesA multinational company (MNC) refers to that business entity whose headquarter is in one country, and its branches or subsidiaries extend across the globe in two or more nations. The MNCs aim at maximum revenue generation by spreading business worldwide.. Domestic firms gain exposure to new international markets, hire talented and cheaper human resources, access newer raw material at lower costs.
- Moreover, cross-border business operations often result in cultural integration of two nations, along with their language, art, music, food, values, etc. For developing countries, globalization brings in multiple opportunities for employment and monetary gains, improving living standards.
- With higher investments in developing countries, it leads to infrastructural growth, better products and services that initiates economic growth and greater per capita incomePer Capita IncomeThe per capita income formula depicts the average income of a region computed by dividing the total income of that area by the total population of the region. It is used to figure out the average income of a city, provision, state, country, etc..
- It also promotes global economic balance, international tradeInternational TradeThe trading or exchange of products and/or services across international borders is referred to as international trade. It frequently includes other risk factors such as exchange rate, government policies, economy, laws of the other nation, judicial system, and financial markets that impact trade between the two., social justice and diversification globally, bringing nations closer to each other.
While companies go global, they face numerous hurdles such as language barriers, opposition and competition from the local sellers. In addition, global business expansion requires enormous capital investment coupled with risks like legal compliance or political unrest. On the other hand, it is a pitfall for the local entities that lose their customers to foreign products and services.
Other challenges include the immigration of talented personnel from the domestic region to foreign countries. Also, many successful business organizations migrate to other nations. Sometimes, most of these companies belong to a single industry.
When world economies are interconnected, the economic downfall in one nation may affect the functioning of the other countries. Besides, a handful of leading companies rule the world, resulting in uneven distribution of power and wealth. Moreover, it has often increased labor exploitation in developing nations through poor working conditions, low wages and unethical practices.
Globalization is defined as the practice of free trade across the international market. It paves the way to exchange products, services, resources, ideas and technology from one nation to another.
Globalization has many advantages and disadvantages. It opens up the international markets for local enterprises, providing them with expansion opportunities. However, it is a two-way sword since a higher demand for imported products adversely affects the local businesses. At times, the nation encounter displacement of a whole industry to a different country, creating a scarcity of products and jobs in the home country.
From the corporate perspective, globalization is essential for international business expansion. It fulfills the need for acquiring newer resources available in other countries including the labor at cheaper costs. Moreover, it promotes global economic activities, nurtures developing countries, improves social justice to benefit the world economy.
This has been a guide to what is Globalization in Economics. Here we discuss the top 4 real-life examples of globalization with a detailed explanation. You can learn more about finance from the following articles –