Globalization is the ever-increasing process of integration of local and regional markets into one unitary market of products, services and capital. The main results of this process have been an increase in the interdependence of traditionally national markets on the macroeconomic level and the internationalization of corporate processes, especially production, distribution, and marketing, as well as the adoption of international business strategies on the microeconomic level.
Economists recognize the early signs of globalization in historical phenomena, such as the increased economic activity in the Age of Discovery in the 16th and 17th centuries, which led to the founding of the British and Dutch east India companies; and the new economic opportunities enabled by the scientific discoveries of the 18th and 19th centuries, followed by the 20th century’s breaking ground on the Information Age.
The World Bank identifies three waves of globalization, which happened between 1870 and the 21st century. The origins of the process are attributed to the falling costs of transport and the lowering of the politically-driven trade barriers. Trade in commodities developed into trade in manufactured goods. Initially land intensive production became labor intensive. Mass migrations for work became an everyday phenomenon, traveling becoming easier with the development of the more advanced transport technologies. The telegraph allowed more distant countries to benefit from the capital available on the stock exchanges, as stock exchange institutions were brought to new locations, contributing to the growth of financial markets.
Two world wars blocked international trade as individual countries turned protectionist. The situation persisted up till the 1980s, by which time the international exchange between the developed countries was largely freed from the barriers, leaving the developing world outside of the free trade market. It was during the second phase of globalization, when the countries started to specialize in production and the businesses started to function around agglomerations and clusters, that economies of scale started to matter.
A discussion on the wealth inequality and the rising poverty in the developing countries started, resulting in the postulates to allow all the nations to participate in the benefit of a free trade. Interestingly enough, the inequalities of the early globalization era in the 19th century were largely related to the ownership of the land, crucial both for the commodity trade and for the manufactures. However, the inequalities during the second phase of globalization showed a more systemic nature, being driven by the protectionist policies of the developed world.
The third wave of globalization brings the “death of distance” in a traditional geographical sense. It does not matter anymore whether the whole business process is situated at the same location, as the service and non-core functions, thanks to communication technologies, can be successfully performed even on different continents.
The third wave of globalization created off-shoring locations in central and eastern Europe and the new, previously developing, economic empires of India and China. Although some of the former developing countries broke their way to the free market and compete successfully for the investments, others remained marginalized and are becoming even more excluded from the benefits of the world economic growth, than ever before. One of the most striking examples of poverty levels and inequality are in the region of sub-Saharan Africa.
The relationship between economic, social, political and cultural aspects of globalization is visible in the main determinants of globalization, which can be attributed to various spheres of human activity. They include but are not limited to
- digitization, which enables easy distribution of data, information and knowledge paired with a parallel advancement and accessibility of communication channels, especially the Internet;
- development and internationalization of mass media, which creates certain convergence of consumer patterns (e.g., mass accessibility of TV such as MTV makes the icons of contemporary pop culture such as McDonald’s or Barbie the symbols of capitalist world, which developing societies demand, aspiring to the Western style of life; moreover increasing capital consolidation in the sector of media enables the formation of media empires, like Rupert Murdoch’s, which allow a relatively small group of opinion-makers to influence whole societies);
- increasing cross-border and overseas migration trends, caused by people’s urge to improve their lives and economic standing;
- longing for freedom in those countries, which suffer internal oppression either from the ruling class or from any other form of political or economic regime; this enables the democratization political systems and in consequence the introduction of economic liberalization and popularization of the free market philosophy (e.g., the spectacular transformation of central and eastern Europe countries from centrally planned economies to the free market);
- advancing skills of global management allowing entrepreneurs to operate in the wider geographical scale (a new category of companies, called transnational corporations, is both a consequence of globalization processes and a response to increasingly tighter competition, stimulating global dispersion of corporate influence, management methods, production patterns and technologies);
- convergence of various economic orders toward a free market and liberal economy and, in consequence, a creation of the unified economic model—the only acceptable economic philosophy;
- technological advancement and dynamics of innovations with their net effects such as a quicker use up of limited Earth resources; this in consequence creates new organizational behavior patterns (i.e., business sustainability, where business models are created on the basis of energy savings and social responsibility);
- new rules of international labor division and, in consequence, creation of geographical competence centers (e.g., information technology [IT] services in India);
- centralization of purchasing by global clients and the economy of scale, which is a direct motivation for global expansion (unit production costs are significantly decreasing with a growing share of B&R, marketing and promotion costs in a total cost of production);
- standardization of production and services being a consequence of adopting certain strategies on the global market (a classical example of such standardization is presented by the quality measurement norms—series ISO—certified by independent bodies such as TUV; getting a certificate, which is determined by adopting standard procedures in the organization, often determines whether the company can obtain good contracts as the big companies with large international networks of suppliers and distributors often select partners for co-operation on the basis of quality certificates possessed);
- less restrictive trade tariffs;
- strategies adopted by transnational corporations, which aim at gaining more competitiveness on a wider market and which change the rules of labor division as well as internationalization of production process as a result of the complex network of relations between corporate branches in many countries.
Among the strategic decisions of enterprises, two have significant gravity in terms of their ability to force further globalization. First, mergers and acquisitions that contribute to enlargement of organizations per se. Second, off-shoring, or locating some business functions and processes in countries that offer cost reductions without compromising on the quality of the service.
Enterprises forced to compete in a tighter and more challenging market seek strategic assets, which are often purchased through takeovers of other companies or through various forms of mergers. Increased mergers and acquisitions activity can be characterized not only by an increased volume of transactions, but also by its significant dynamics (measured by scale of change as compared to the previous year). It is one of the main stimulators of globalization and a response to more demanding and challenging conditions for competition (companies are looking for foreign markets, which are often less saturated than those of the enterprises’ origin, however, as foreign markets accept more players and in due course become a global market, entrepreneurs must compete through taking over the strategic assets). In 2006 the value of assets acquired by purchase or through takeovers reached $88.5 billion globally in almost 7,000 transactions.
Off-shoring (or near-shoring in the case of locating operations in the countries in a close proximity to the home country) is a strategic trend stimulating foreign direct investments. Enterprises are largely driven by a paradigm of cost reductions these days.
They can achieve it by locating their service functions and non-core activities in the countries that offer significantly lower labor costs and a decent level of skills at the same time. Key criteria used in making such decisions are: local economic and political stability, infrastructure, labor market and the level of education, language attainment, and the real estate market. A typical off-shored operation includes call centers and shared services centers, hosting mostly the IT, administration and accounting functions. As such investments bring many new jobs, they contribute to the growth of local economies.
The most competitive locations, in terms of labor costs and overall investment climate, attract great numbers of investments and as the local market saturates, wages start to increase in a natural way— stimulated by the demand-supply situation. At the same time, local governments tend to encourage the investments in the more complex and sophisticated processes to benefit from a transfer of knowledge and perhaps technologies as well. More sophisticated jobs require higher wages and as the local markets develop toward maturity, as the hosts for off-shoring operations, enterprises move on to the new, less-saturated locations, where they can benefit from the lower costs again. This specific form of colonization is also a part of the globalization loop, where transnational corporations are the reason and the result of the process at the same time.
Last but not least, a change in the very nature of competition remains to be mentioned as a key driver of globalization. Geographic regions compete for resources, for example for the capital and external financing opportunities on the global market. Together with liberalization of capital transfers, new opportunities for obtaining external financing for the projects became available. Companies do not need to apply to banks anymore; they can raise the capital directly on the market, for example through the emission of stock. This phenomena changed the core role of the banks as the sole capital providers. Banking institutions now need to diversify their activity in order to stay competitive. Regions also compete for the investments, specifically foreign direct investments (FDIs), which bring new technologies and jobs.
Globalization should be analyzed in the macroeconomic context—as an aggregated phenomena taking place in the global scale, and in its microeconomic context—at the level of individual enterprises, adopting certain development strategies and making strategic decisions (e.g., locating elements of a value chain in the countries with local advantages or centralizing them in one location).
Economic globalization stimulates a significant institutional evolution. Global institutions are set up to manage certain aspects of activity in the global marketplace. They are equipped with both political and economic tools to control and influence the global market players. The most important include the World Bank, International Monetary Fund, and World Trade Organization.
Commodity, Financial, And Labor Markets
Globalization of various types of markets, i.e. products, services, or financial markets can be characterized by various scale and dynamics, although most clearly it can be observed on the financial markets. It is stimulated by the huge scale of capital being transferred worldwide through the rapidly growing intermediary institutions, e.g., investment funds. The transfer most often happens in virtual terms only, with the use of electronic money and a variety of new financial instruments. For that reason financial markets operate in a fairly autonomic way, relatively independently from the real sphere.
Independence from the real sphere coupled with the inter-relatedness of the whole financial system globally carries the risk of the “domino” effect. A domino effect occurs when dangerous economic trends, such as financial system crises, transfer from one market to another, infecting them. The reason for this is a high sensitivity of the local markets toward the changes in direction of capital flows and a high level of interrelatedness of the whole system.
It is worth noticing that although financial globalization is caused by an increase in the volume of world trade, financial markets globalize much quicker than the market of products. Moreover, the phenomena of financial markets leadership over the market of commodities can be observed in the relation of foreign direct investments toward export. Foreign direct investments show much higher dynamics than the trade volumes.
There are also significant differences in the pace and dynamics of foreign direct investments regionally. To an extent, it is a good measure of the share in the globalization process that respective countries have. For example, there was significant growth of foreign direct investment volume globally in the beginning of the 1970s. However, a change of FDI numbers in the European Union (EU) countries was more dynamic than its overall global trend. A closer look at foreign direct investments trends by region reveals the decreasing attractiveness of the United States and Japan as targeted FDI locations for the benefit of the emerging markets of central and eastern Europe and the former Soviet Union.
The EU countries, both EU-15 and the EU after enlargement, have significant share in world foreign direct investments volume. Although investments in the EU-15 countries, as well as in central and eastern Europe are quite dynamic, the CIS countries (the Commonwealth of Independent States) have recently become more and more attractive for investors (this applies especially to Ukraine and Belarus, although both countries are known to be difficult to navigate because of bureaucracy and low transparency). It is expected, though, that business attention will be naturally drawn to this part of the world, with the maturity of the currently attractive CEE markets getting more advanced and their labor costs increasing as a natural consequence of economic prosperity.
Data from the individual countries provides further information. Within the EU-15 countries, which overtake the United States and Japan by the total volume of FDIs attracted, individually only France and Germany show FDI growth significant enough to be considered a driving force for the whole EU. In the CEE and CIS regions, a similar role is played by Poland, the Czech Republic, and Russia.
Among the reasons for the globalization of financial markets is the fact that more countries guarantee the exchange of currency (as a result of liberalization of the capital trade) and have deregulated their financial sectors (for example through the cancellation of interest rate limits and opening of the domestic financial sector to foreign capital). This, among other reasons, is happening because of the technological advancement, which on one hand, allows doing transactions on a wide geographical scale and in the real time, while on the other hand, makes them difficult to control, mainly due to the very liquid nature of money.
The fact that there are no significant transport costs related to the trade with use of electronic money, is not unimportant.
Liberalization of capital flows may pose a substantial threat for the stabilization of domestic, local economies, for example a risk of spread of financial crisis, as already mentioned before. The scale of those threats is subject to a wider discussion on the pace and degree of opening the local, national markets for international capital. Economists seem to agree that a high quality of local financial system, determined, among other things, by the existence of effective institutions and measures of the bank governance, is fundamental for this process to be safe for the local economies.
The scale of globalization within countries or regions can be measured in a few ways. For example, the freedom of financial transfers, related to a possibility of investing on the foreign markets, is measured by the Investment Freedom Index, which is a part of a wider Economic Freedom Index. It illustrates how regions differ in globalizing their economies. The majority of the EU countries saw the Index increasing in the last decade, contributing to the overall growth of investment freedom in the EU, which is now at a similar level to the United States. However, global investment freedom decreased in the last decade, mainly because of the situation in countries such as Bolivia, Burma, China, Ecuador, Nigeria, Venezuela, and Zimbabwe. In the central and eastern European countries, the Investment Freedom Index shows a tendency to grow. The wider measure of the Economic Freedom Index is growing on the global scale (5.52 percent in the last 10 years). The main driving forces behind this growth are: growing fiscal and monetary freedom, the freedom of trade, and the decrease in state interventionism.
The markets of commodities and services are the second important sphere where globalization processes can be observed. Globalization in those markets is stimulated by the common membership of countries in the WTO (World Trade Organization), which ensures that liberal rules are adopted by its members in the trade exchange.
The Trade Freedom Index, which measures globalization of the markets of commodities and services, is increasing, showing growth of 22.16 percent in the last decade globally, 11.14 percent in the EU-15 countries and 21.24 percent in the central and eastern European countries and the Commonwealth of Independent States. It decreased only in Japan (–1.23 percent).
The labor market is not immune to globalization, however, it subdues to the process more slowly, although mobility of a labor force is a significant factor in internationalization of domestic economies. It is easily observed in the trans-national corporations, where higher management is characterized by significant mobility.
The freedom to work on the different international markets and the freedom to employ international staff, measured by the Labor Freedom Index, has grown globally only by 0.36 percent since 1997. In some cases such as Finland, Germany, and the United States, it actually decreased (–10.47 percent, –8.78 percent, and –0.85 percent, respectively).
Globalization can be measured by indexes specially constructed for the purpose, such as the KOF Index. Economic globalization, one part of the index, is measured by the scale of financial transfers, which include trade volumes, foreign direct investments, portfolio investments, and wages paid to foreign employees—all as a percentage of gross domestic product (GDP) of a country, and by the scale of restrictions such as tariffs, hidden import barriers, taxes, and import duties. Financial transfers and trade barriers are getting more flexible and loose, leading to growing index values. Economic globalization can be therefore considered to be an ongoing and constantly developing process.
A single interpretation of globalization would be difficult to offer. The complexity of the process with its net effects is visible in a simple analysis of its benefits and costs. Positive results of globalization may include
- easier participation in international trade and exchange, which enables an export driven economic growth;
- wide access to information and knowledge sharing, which decreases the isolation of whole societies and individuals;
- deconstruction of national monopolies, through new market entries and the enrichment of local economies with new technologies.
On the other side, it is difficult to ignore the costs of globalization, such as
- increasing divergence between the high-income and the low-income countries (the GINI coefficient, measuring inequality in income distribution and/or expense, confirms that the rich countries become even richer, while the poor ones face being marginalized);
- lack of solutions to global poverty and no guarantees for economic stabilization (the number of people living on less than $1 per day is constantly increasing);
- negative social effects related to migrations, e.g., ethnical conflicts and solidifying differences in the economic standing and social status of the immigrants.
One of the obvious aspects of globalization is a deconstruction of the traditional, geographical structure. The distinction between the European Union, the Americas, and Africa, seems to be less significant now, as from the economic perspective, the countries that show the highest participation in globalization come from various countries, e.g., Argentina, Bangladesh, Brazil, China, Columbia, Costa Rica, and India.
Last, but certainly not least, ethical and theoretical doubts cannot be ignored. Noam Chomsky points to the report of Goodland and Dale—the World Bank economists—who discussed the fact that globalization changes the market architecture as understood in conventional economic theory. Individual enterprises, compared to islands in the ocean of the market, where none of them have enough power to influence demand and supply and therefore the price, are growing bigger because of the international expansion and a growth in transactions done within the same organizations (e.g., capital groups, subsidiaries, etc.). Those enterprises resemble continents more than islands. This changes the nature of transactions on the market, which effectively become similar to those that are centrally managed, mainly due to the fact that expanding enterprises are interconnected through complicated international capital structures. Often, a majority of transactions happen within the same capital group or in effect within the same company, operating in the various markets and continents. Market consolidation and an ongoing concentration of capital, together with creation of the huge capital groups, makes governance one of the key problems of contemporary management.
Shrinking of the business environment, caused by the common participation of countries in the trade, based on the liberal rules of capital transfer, paradoxically makes the market tighter and more demanding in terms of competition. Due to the existence of the global market with less and less restrictive rules for economic activity, the distance between the market players is diminishing, which becomes a reason for growing tensions and conflicts.
Paradoxically, what has been overlooked is that the conditions are not those of a “free market” anymore, and despite that many still pursue the liberal philosophy. Joseph Stiglitz describes the hypocrisy and systemic imperfections of the international institutions such as the International Monetary Fund, the World Trade Organization, or the World Bank. They were expected to improve the standing of the developing countries and de facto, in many cases, they caused a negative result (e.g., increasing poverty, the unsolved problem of wealth distribution).
The distribution problem, according to Joseph Stiglitz, is related to the representation rules and a structure of power in the international institutions—there can be no just distribution if the only interest groups represented are those from the commercial, business, and financial environments, while the consumers and taxpayers are largely marginalized. According to Joseph Stiglitz, the institutional background of globalization became the seed of destruction, as the original ideas behind the creation of those institutions and the logic of Keynesian economy were already abandoned in the 1970s.
A theoretical discussion, related to the changing conditions for economic activity, focuses around the paradigm of the “new economy.” The notion was coined in the context of attempts to explain the reasons for the long-term growth in the United States in the 1990s. It describes the economy characterized by massive technology advancement and a development of communication and information techniques enabling the growth of labor productivity. The net result of those factors combined together is a noninflationary growth of wages with a parallel stabilization or even a fall of unemployment (due to the quick pace of creation of new jobs in new areas of production).
Accepting the new conditions for economic activity provokes a natural question of whether the traditional economy has tools enabling a proper description of a new reality. Moreover the question remains, whether it is true that the economic laws are unchangeable and only technologies become new. Perhaps the observed changes in economy demand a brand new theory, which could describe and explain them. The key problems of the new economy include the specifics of new products on the market and so-called network effects. The products of information technology generate benefits proportionally to the number of users. This means that once a given product wins its position on the market, demand for competing products will start to weaken.
The issue of the usefulness of the “invisible hand” paradigm remains also to be determined. The fact that it treats employees’ creativity as an exogenous variable does not seem adequate under the conditions of the new, knowledge-based economy, where the share of the knowledge employees create is getting bigger and bigger. Under such circumstances, the paradigm of creative destruction seems to prevail.
The main question related to the new economy, however, is the character and persistence of a positive combination of macroeconomic factors. It seems that in the view of current slowdown of the American economy and the continuously strong economic growth of the central and eastern European countries, the question remains especially valid.
Cultural globalization is often defined as a homogenization of the norms, standards, and behavioral patterns resulting from consumerism and the influence of American pop culture. It is characterized by three features: it is technologically driven, it is empowered by economic liberalization and the opportunities for international exchange created by free trade, and to a large extent it is dominated by the United States.
It seems that two industries are specifically responsible for the international transfer of behavior patterns and other cultural artifacts: the music industry and film industry. Music became a forerunner of globalization due to its unique ability to be understood without translation—when free trade was still a long way off in the communist countries with centrally planned economies, young people were already imagining Western lifestyles because of music broadcasts from foreign radio stations. Second, the film industry started to increase its output, influencing the public initially through cinemas, then through more and more sophisticated communication channels, i.e., television, cable, and satellite broadcasts, and recently through the Internet. When paired with sociologically underpinned aspirations of people—having one’s own television set or a satellite dish is a sign of prestige and better economic standing—broadcasting forms a powerful platform for influencing a wide international audience.
The critics of globalization per se point to the fact that cultural homogenization destroys national identities. Moreover, global culture is accused of being mainly consumption driven. The key question in the current debate over cultural globalization is whether it carries a common, global set of values and what might they might be. One of the concepts proposes democracy as a universal, globally demanded standard, built upon longings for freedom, which can be considered a truly common value. The spread of democracy to countries originally under heavy state control and various forms of oppression, such as communism, is often mentioned as a positive outcome of globalization.
- Noam Chomsky, The Prosperous Few and the Restless Many (Odonian Press, 2002);
- Drexer, “Does Globalization Affect Growth? Empirical Evidence from a New Index,” Applied Economics (v.38/10, 2006);
- Yehuda Hayuth, “Globalisation and the Port-Urban Interface: Conflicts and Opportunities,” Ports, Cities, and Global Supply Chains (2007);
- Andrew Herod, Geographies of Globalization: A Critical Introduction (Wiley-Blackwell, 2009);
- John S. Hill, International Business: Managing Globalization (Sage, 2009);
- Globalization and the State Trade Agreements, Inequality, the Environment, Financial Globalization, International Law and Vulnerabilities (Palgrave Macmillan, 2009);
- Globalization: A Reader (Routledge, 2009);
- Karl Moore and David Lewis, The Origins of Globalization (Routledge, 2009);
- Joseph S. Szyliowicz, “Globalization and Transportation Security,” Handbook of Transportation Policy and Administration (CRC, 2007);
- Organisation for Economic Co-operation and Development, OECD Factbook 2007, Economic, Environmental and Social Statistics (OECD, 2007);
- Stiglitz, The Roaring Nineties (Penguin Books, 2003).
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