posted on 06-06-2019

Globalization

Updated May 14, 2020

What Is the Definition of Globalization?

Countries have built economic partnerships that include trade, investment, capital flow, labor migration, and technology. Globalization is a term used to describe the integration of national economies through these partnerships. This is also called the ‘global economy’.

Part of globalization is the breakdown of businesses into components. This creates opportunities for multiple businesses – located at various spots around the world –  to participate in the production of a single good or service. It also provides the opportunity for a single business to operate in multiple countries, also known as a multinational company.

Effects of Globalization

Globalization removes barriers between national economies to encourage the efficient flow of goods, services, capital, and labor. This kind of economic flow can provide job opportunities and access to goods and services in underdeveloped countries. 

On the flip side, developed countries have seen jobs and the production of goods move out of local economies and across borders (also known as offshoring). Even so, companies can often outsource more cheaply and therefore cut operational costs. 

Globalization doesn’t only apply to the economic flow of goods and services. It has legal, cultural, and political implications such as:

  • International laws to enforce fair practices around globalization. 

  • Political tension around international relations and trade.

  • The impact of westernization. Some would even argue this has a disruptive impact on cultures around the world. 

One thing remains true about globalization: Consumers are now anyone and everyone. Companies have access to a wider audience and consumers have access to more than one option for products, services, and investments. 

When Did Globalization Begin?

People have been trying to find a way to trade, profit, and connect across borders for centuries. You could trace globalization all the way back to the Silk Road in 130 B.C. The 19th century’s Industrial Revolution is considered the first major wave of globalization, however, when transportation like trains and steamboats began connecting the world. The telegraph suddenly made it possible to instantaneously reach people hundreds of miles away. Factories implemented concepts like the assembly line for mass production. 

World War I brought a halt to this first wave of globalization, with borders closing and trade ceasing. This was followed by the Great Depression, one of the worst US recessions. After the war, it was free trade, championed by Europe and the US – and combined with advances like the car, plane, and shipping – that brought globalization back into play. When the Soviet Union collapsed in 1991, it removed a major barrier and globalization was able to take over.  

As the world made technological advancements and the Internet was introduced, globalization picked up its pace. Large multinational corporations can now serve customers, source from suppliers, and even gain the business of international customers with just a few clicks.

Examples of Globalization

Free trade, travel, and communication across countries are all examples of globalization. 

Globalization can efficiently organize a company’s services and production wherever the labor offers the lowest costs. China and Mexico have a large supply of manufacturing laborers who can make parts for products more cheaply and efficiently than manufacturing laborers in more developed countries. Assuming the quality is good enough, companies may see higher profits from the company outsourcing the manufacturing.

Pros and Cons of Globalization

Globalization is complex and offers advantages and disadvantages for each country, company owner, and individual. 

Pros of Globalization: 

  • Companies can outsource the production of goods and certain services for a cheaper price, reducing operational costs. 

  • Outsourcing can take advantage of highly-skilled labor that produces 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 higher).

  • Access to millions of consumers 

  • The chance to build up underdeveloped countries’ economies 

  • The opportunity to forge alliances with other nations and spread power through money. 

Cons of Globalization:

  • With greater expansion, 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 from local markets or local managers. 

  • The quality of products or services may suffer. For example, sales of a product may decline if the manufacturing of the product moves to a foreign country (where the production quality is significantly worse).

  • In underdeveloped countries, multinational corporations can exploit workers and communities by taking advantage of the law.

  • If companies outsource, there is a danger of job loss for local economies.

  • An over-reliance on just-in-time resourcing where on-hand stock is at a minimum creates a heavy reliance on complex supply chains which can be vulnerable to economic and natural disasters.

Businesses must recognize that their success depends on efficiency and scalability. This means being able to quickly mobilize global resources and reach world markets. In the 21st century, this translates to globalization, though businesses should also recognize the dangers of globalization when it’s not well-managed and regulated.

Who Manages Globalization?

Several organizations play a key role in globalization, but the major players include:  

  • The World Bank and the International Monetary Fund (IMF) deal primarily with issues of free trade in developing economies, as well as with international monetary policy. This includes 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 in removing trade barriers and reducing the cost of trade. The lowering/removal of tariffs and quotas that restrict free and open international trade has helped to globalize the world economy, but transportation and communication technologies have had the strongest impact on accelerating the pace of globalization.

Being connected with people and companies around the world is exciting, but it’s equally exciting to see profits. As the global economy grows at a rapid pace, countries need to consider the overall impact of globalization within their local economies – and strive for balance.