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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Globalization

What is Globalization?

Globalization is the integration of national economies through trade, investment, capital flow, labor migration, and technology.

Pros and Cons of Globalization (with Examples)

Pros of Globalization

Globalization results from the removal of barriers between national economies to encourage the efficient flow of goods, services, capital, and labor. 

Thomas L. Friedman describes the "flattening" of the world economy through globalized trade, outsourcing, supply-chaining and political liberalization. Technology allows businesses, such as large multi-national corporations, to serve customers, source from suppliers and even gain the business of customers from competitors on a world-wide basis

The breakdown of businesses into components along its value-chain creates opportunities for multiple businesses located at various spots on the globe to participate in the production of a single good or service. This global network, even for a single enterprise, is part of globalization.

You can think of globalization as an efficient way of organizing services and production among countries where the labor offers the lowest cost for the job. For example, China and Mexico have a large supply of manufacturing laborers that can make parts for products more cheaply and efficiently than that of manufacturing laborers in more-developed countries. Assuming the quality is good enough, this may lead to higher profits for the company that is outsourcing the manufacturing.

Companies may also favor outsourcing to take advantage of highly-skilled labor that can produce higher-quality products or services. For example, a Japanese car company may manufacture cars in the US where they are sold, but much of the design and engineering of the vehicles is still done in Japan where the quality of such work is high.

Cons of Globalization

As companies expand around the world, more and more economic decision-making has been taken away from local control. As a result, decisions about a company's plans, including expansions, relocations, or closings are increasingly made independently of the considerations of local markets or local managers. For example, if a local market's tastes or preferences in a product changes, it may take longer for a global company to adapt and develop new products and services for those consumers.

The quality of products or services may also be affected as companies utilize other global markets. For example, if a company decides to outsource its customer service to a foreign country that doesn't speak the domestic language clearly, some customers may become frustrated and cease doing business. Sales of a product may also suffer if the manufacturing of the product moves to a foreign country where the production quality is significantly worse than it was before.

As globalization becomes more socially and politically visible, it may also become a source of contention for companies' brand image if they choose to outsource in other countries. Increasingly, consumers may favor buying from companies that make the products in their own country, as it may appear to imply more domestic jobs and prosperity.

Why it Matters:

 

 

Increasingly, businesses must recognize that their success depends on efficiency and scalability – being able to The definition of globalization on InvestingAnswersquickly mobilize global resources and reach world markets. Most economists agree that globalization is the key to growing businesses in the 21st Century.

Several organizations have either been created or have evolved into key roles in the process of globalization. The World Bank and the International Monetary Fund, for instance, deal primarily with issues of free trade in developing economies and with international monetary policy, including debt and trade balances between developing and industrialized countries. 

The World Trade Organization, along with the General Agreement on Trade and Tariffs (GATT), has been involved with removing trade barriers and reducing the cost of trading. While this lowering or removal of tariffs and quotas that restrict free and open trade among nations has helped globalize the world economy, transportation and communication technologies have had the strongest impact on accelerating the pace of globalization.