Impact of Economic Globalization on Business, Economic Development, Trade and Investment

Globalization in Economics: Impacts on Economic Development, Trade and Investment

Globalization has become an increasingly prominent feature of the world economy in recent decades. This article provides an in-depth look at the meaning of globalization, its major drivers, and its impacts on economic growth, development, income inequality, international trade, and investment.

Table of Contents

• Introduction to Economic Globalization

• Drivers of Economic Globalization

• Impacts of Globalization on Economic Growth

• Globalization and Economic Development

• Globalization's Effects on Income Inequality

• Role of Globalization in International Trade

• Globalization and Foreign Direct Investment

• Benefits and Drawbacks of Economic Globalization

• Key Takeaways

Introduction to Economic Globalization

Economic globalization refers to the increasing integration of national economies through cross-border flows of goods, services, technology, and capital. It involves the spread of economic activities across political boundaries and the opening up of domestic markets to foreign competition.

Some key examples of economic globalization include:

• The growth of global financial markets and cross-border capital flows

• The expansion of foreign direct investment by multinational corporations

• The reduction of barriers to international trade through tariff cuts and free trade agreements

• The outsourcing of business functions to other countries

• The spread of technologies and ideas across borders

The pace of global economic integration has accelerated since World War II, driven by advancements in transportation, communications, and information technologies. Globalization has interconnected the world economy more tightly than ever before.

Drivers of Economic Globalization | Example of Globalization

Several key factors have enabled the process of global economy and the increasing interdependence of the world economy:

Technological Progress

Advances in transportation, communications, and information technologies have dramatically reduced costs and barriers associated with the international exchange of goods, services, capital, and ideas. Cheaper air freight, real-time digital communications, and the internet have made cross-border interactions much faster and more efficient.

Trade Liberalization

Countries have progressively lowered tariffs and eliminated non-tariff barriers to trade through multilateral, regional, and bilateral trade agreements. The General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), have been instrumental in promoting trade liberalization. Free trade agreements like NAFTA have also accelerated globalization.

Foreign Direct Investment

The global expansion of multinational corporations and their investments in facilities and operations overseas has fueled the internationalization of production and business activities. Countries have eased restrictions on foreign direct investment (FDI).

Improvements in Infrastructure

Investments in ports, roads, airports, power grids, and telecom networks in developing nations have facilitated their participation in global trade and investment flows. Better infrastructure reduces the costs of transporting goods and transmitting information across borders.

Impacts of Globalization on Economic Growth

Globalization has contributed to increased international trade and financial flows, which have largely boosted long-run economic growth rates around the world. Key ways in which globalization has accelerated growth include:

• Access to larger markets: By lowering trade barriers, globalization enables firms to reach larger markets beyond domestic borders. This provides greater scope for specialization and economies of scale.

• Spread of technologies: The transmission of technologies and innovations across borders has allowed countries to achieve productivity gains and faster growth. Developing countries can import advanced technologies.

• Increased capital flows: Financial globalization provides developing nations access to external capital like foreign direct investment, which augments domestic savings and investments. This expands productive capacity.

• Greater competition: Exposure to international competition creates incentives for domestic firms to become more efficient and innovative in order to remain competitive. This dynamic effect raises productivity.

However, the growth benefits of globalization are not necessarily evenly distributed within and across countries. There are also risks associated with potential economic shocks spreading more quickly across globally integrated economies.

Globalization and Economic Development

Globalization has generated significant opportunities for economic research and development but has also created new challenges for developing countries seeking to gain from global markets.

Positive impacts on development:

• Export opportunities for developing country firms, especially in manufacturing and services

• Inflows of advanced technologies, management expertise, and training

• Access to larger flows of external finance through global capital markets

• Ability to leverage infrastructure in other countries by linking into global value chains

Potential drawbacks:

• Increased volatility and exposure to external economic shocks

• Risks of marginalization of least-developed countries with weak institutions and infrastructure

• Perpetuation of commodity dependence in countries reliant on exports of raw materials

• Possible hollowing out of domestic industries unable to compete with imports

• Risks of losing control over domestic economic policies

An important challenge is translating integration into global markets into genuine development progress by building domestic productive capacities. This requires complementary investments in human capital, institutions, and infrastructure.

Globalization's Effects on Income Inequality

The distributional impacts of globalization across and within countries have been contentious issues. In principle, the overall gains from trade arising from specialization and exchange should make it possible to compensate any losers and still be better off. But increased economic inequality has accompanied globalization in practice:

• Inequality between countries: Accelerated growth in emerging markets like China and India has narrowed income gaps with advanced economies. But least developed countries at early stages of development have not kept pace and moved to economic downturn.

• Inequality within countries: Globalization has been associated with rising skill premiums in advanced and developing countries, as demand has grown for workers with higher education and specialized skills that are complementary to accessing global markets. This has exacerbated wage disparities.

• Winners vs. losers: Low-skilled workers in advanced economies face wage pressures from having to compete with cheaper labor abroad. However, higher-skilled workers, owners of capital, and consumers benefit from access to more affordable goods and new export opportunities.

• Geographic disparities: Urban, trade-oriented regions within countries often see bigger gains from globalization than more rural areas reliant on traditional industries vulnerable to import competition.

Addressing inequality requires complementary policies for redistribution, skills upgrading, and assistance for adversely affected communities to help spread gains more evenly.

Role of Globalization in International Trade

A defining aspect of globalization is the exceptional growth of international trade flows relative to GDP. Merchandise exports worldwide grew by an average of 6 per cent per year in real terms from 1990 to 2000, twice the rate of world output. Key ways globalization has transformed trade include:

• Rapid growth in trade in intermediate goods: Complex global value chains have emerged, linking production across multiple countries. Inputs and semi-finished products now crisscross borders for assembly and processing.

• Expansion of trade in services: Services account for rising shares of both exports and foreign investment for many countries. Transportation, travel, financial services, IT services, and intellectual property have become tradable across borders.

• The emergence of China as an export powerhouse: China leveraged its comparative advantage in low-cost manufacturing to become the largest global exporter, with world export market share rising from less than 2% in 1990 to around 14% in 2015.

• Proliferation of free trade agreements (FTAs): The surge in bilateral and regional trade agreements has further boosted international commerce, with over 300 FTAs now in force. These complement global trade rules under the WTO.

Globalization and Foreign Direct Investment

An integral feature of economic globalization has been the expansion in cross-border investment flows as multinational corporations (MNCs) set up production, distribution and service facilities overseas. Key patterns include:

• Global FDI outflows rose from under $200 billion in 1990 to over $1.5 trillion in 2020, vastly outpacing growth in international trade and output.

• Almost two-thirds of global FDI outflows now originate from developing and transition economies like China and India.

• Over 80 per cent of the value added of MNCs is linked to their foreign affiliates rather than their domestic production.

• Services account for two-thirds of global FDI stock, including finance and ICT services, along with wholesale and retail distribution services.

• Intra-company transfers of resources, technology and personnel within multinational networks account for a huge share of global trade and investment.

Foreign investment and associated technology spillovers can provide a key boost to developing country growth. But countries need sound institutions and skilled workforces to maximize benefits.

Benefits and Drawbacks of Economy Globalization

Globalization generates both advantages and disadvantages:

Potential benefits include:

• Faster diffusion of technologies and management best practices that raise productivity

• Greater economies of scale and cost savings from producing at optimal locations accessible to broader markets

• Increased competition promotes efficiency and innovation for greater economic goals

• More investment resources flow to developing countries, raising growth

• Expanded opportunities for exporting firms

• Cheaper imports increase purchasing power and living standards

• Globalization has also the capability to promote communications and connections and provide social and cultural enrichment

Potential drawbacks include:

• Volatility from closer integration spreads economic shocks faster

• Risk of marginalization for countries and regions with poor infrastructure

• Lower labor costs and adjustment costs as production shifts locations

• Distributional impacts like rising income inequality described earlier

• Constraints on policy autonomy from global rules and regulations

• Environmental degradation from transport emissions and industrial pollution

On balance, most economists argue that the growth and development benefits outweigh the costs for most countries over the long run. However, realizing the gains from globalization often requires complementary policies for workforce adaptation, social safety nets, and environmental protection.

Key Takeaways

• Globalization involves growing economic interdependence between countries through cross-border flows of goods, services, capital and technology.

• Key drivers include technological progress, trade liberalization policies, foreign direct investment, and infrastructure development.

• Globalization has contributed to higher economic growth worldwide through channels like expanded trade, investment flows, and technology diffusion.

• However, distributional impacts have included rising inequality both across and within countries. Developing countries also face risks of marginalization.

• Globalization has enabled increased international specialization and trade, especially in intermediate goods and services.

• Foreign direct investment flows have surged as multinational corporations globalize production networks.

• Globalization generates advantages such as increased competition, economies of scale, faster innovation, and financial resources for developing countries. But it also creates challenges like external shocks, distributional tensions, and environmental impacts.

Frequently Asked Questions

What are the main indicators of economic globalization?

Key quantitative indicators of globalization include the shares of trade, foreign investment and capital flows in national output, as well as the proportion of incomes earned by multinational corporations overseas. Declining international transport costs and tariffs, as well as the growth of global value chains, also signify deepening economic integration.

What are the benefits of globalization for developing countries?

Developing countries can benefit from globalization through exports to larger overseas markets, inflows of advanced technologies and managerial expertise, and increased inward foreign direct investment, which brings capital, skills and jobs. However, realizing these gains requires building domestic capacities in infrastructure, institutions, and human capital.

Does globalization benefit some groups more than others within countries?

Yes, the income gains from globalization are often unevenly distributed within countries. Groups that tend to benefit more include higher-skilled workers, large corporations, and urban regions with strong trade ties. Lower-skilled workers and rural communities face greater pressures from import competition and may be disadvantaged by globalization.

How has digital technology impacted globalization?

Digital technologies like the internet, artificial intelligence, 3D printing, and blockchain are transforming global economic integration. They enable more services to be traded globally and facilitate the coordination of geographically dispersed supply chains. Digital platforms allow even small firms to access international markets. The share of digitally deliverable services in global trade has risen sharply.

What role has China played in globalization?

China's unprecedented economic growth and large labor force have made it a major driver of globalization. By leveraging its comparative advantage in manufacturing to become the "factory of the world", China now accounts for around 14% of global merchandise exports. China is also increasingly influential in international finance, investment and innovation. The Belt and Road initiative aims to extend China's regional infrastructure connections and trade ties, further accelerating globalization.