Globalisation refers to the increasing international interdependence amongst economies over a period of time. There are a number of characteristics that occur in globalised economies which are mentioned below.
Characteristics of globalisation
One of the main characteristics of globalisation is the increased trade in both goods/services. This is evident when looking at graphs showing the increase in world exports and imports over a 50 year period of time.
In addition to this, the mobility of labour and capital is much improved now. The main example of this is the free movement of people within the EU. As such, it is much easier for domestic firms to hire European workers, thus increasing their access to higher skilled workers.
Factors contributing to globalisation
Increasing number and influence of global companies
There has been a large increase in foreign direct investment by firms over the past 50 years. This has led to an increase in the number of businesses that are owned by an entity in another country. For example, brands such as Apple and Samsung make up the majority of phone sales in the UK, despite Apple having its headquarters in America and Samsung having its headquarters in South Korea. This is an example of the increasing influence global companies are having in UK markets.
Improvements in transport infrastructure and operations
Individuals and small businesses are now able to ship their products internationally due to improvements in transportation. This has resulted in firms and individuals gaining access to much larger markets from a range of international countries.
Improvements in communications technology and IT
The rise of the internet has meant that goods/services can be now sold online. What this means for businesses is that they can have their headquarters in one location, but can still sell to people in other locations around the world. This reduces costs massively for firms as they are not restricted to selling their products in only locations where they have businesses placed. For example, Asos is a very popular fashion retailer that manages to sell to consumers all around the world without actually owning a physical store and therefore they don’t have to deal with the costs associated with this.
In addition to this, technological improvements have also allowed firms to communicate with customers from all around the world, with the majority of businesses now on social media such as twitter. This has allowed brands such as Nike to accumulate millions of followers who they can now interact with and advertise their products to.
Trade liberalisation and trading blocs
The increase in trade amongst countries has been down to the trade liberalisation that has taken place over the years, helped by the introduction of the world trade organisation and trading blocs such as the European Union. Both of which encourage free trade amongst countries. As such, the interdependence of countries has increased massively. For example, a recession in one country is likely to affect all of their trading partners. This is because a recession causes aggregate demand to decrease and therefore the demand that domestic consumers have for imports also decreases. As a result of this, trading partners are likely to experience a fall in the demand for their exports, thus damaging their economy also. As such, countries will go a long way to help countries in their trading bloc that are undergoing bad economic conditions due to the knock on effect it may have on their country, as shown by the Greece bail out by the EU. Not only are countries in the European Union interdependent in terms of trade, but the common currency of the Euro increases this interdependence. If one European country experiences a recession then the Euro is likely to fluctuate, changing the conditions of trade for all countries within the European Union.
Impacts of globalisation and global companies
Lower prices and increased living standards
With globalisation has come an increase in specialisation caused by comparative advantage. Comparative advantage is the theory that countries should specialise in the goods/services that they can produce at the lowest opportunity cost. This specialisation has resulted in a decrease in the price level of goods/services available to consumers.
In addition to this, trade liberalisation has caused an increase in international competition within markets. As a result of this, firms now have to become more efficient in order to lower their costs and compete in the market. Overall, this has put downwards pressure on prices, thus benefiting consumers. The lower prices caused by both of these factors has increased the number of goods/services that consumers can afford, thus increasing their standard of living.
Increased interdependence of economies
The increase in trading blocs and overall trade amongst economies has led to an increase in interdependence. As a result of this, there is a much greater risk of external shocks caused by the economic conditions in other countries. This was seen in the financial crisis in 2008 whereby the banking crisis that started in America spread to a several different countries.
Greater consumer choice
Through comparative advantage and trade liberalisation, consumers now have a much greater choice of goods/services to buy. In addition to this, technological advancements have meant that most of the goods/services that are bought can be done so online. As such, consumers can now buy international goods which can be shipped to their location.
Increase in negative externalities
One of the downsides of globalisation has been the effect it has had on the environment. As a result of increased global output, the amount of negative externalities such as pollution have been increased. As a result of this, many resources in which consumers rely on have now become much scarcer. Although this is the case, there has been an increase in the number of countries willing to work together in order to reduce the severity of these negative externalities, as demonstrated by the Paris Climate Agreement.