What are the Driving Forces behind Globalization?

Globalization can be characterized by four factors; the growing worldwide interconnections, rapid, discontinuous change, increased number and diversity of participants, as well as growing complexity. According to the Dictionary of Economics the term; globalization, is defined as the geographical shifts in domestic activity around the world and away from the nation states. It can also be referred to the interdependence of economies, through the increase in cross-border movement of goods, service, technology and capital. Examples of such integrations can be seen in the growing presence of many multinational companies as they expand into new regions (i.e. McDonalds) and the outsourcing of manufacturing and services.

Drivers of Globalization

The four main areas of drivers for globalization are market, government; cost and competition. These external drivers affect the main conditions for the potential of globalization across industries, which are mainly uncontrollable by individual firms. Market drivers include areas such as common customer needs and transferable marketing, whereby the emergence of global markets for standardized products has enabled corporations to cater demands in new markets with existing products. Government influence is also a major driver, with policies leading to reductions in trade barriers and a shift towards an open market economy. With access to new markets and human capitals, in the area of cost advantage drivers, companies are able to gain new economies of scale by selling at higher quantities, as well as explore the advantage of low cost production through outsourcing and import. In the case of competitive drivers, the growing trade between nations along with foreign direct investment (FDI) has helped to increase interdependence among countries and organizations, as well as exposing firms to new competitors.

This article will now focus on three more specific drivers from these four areas; the lowering of trade barriers in trade liberalization, the cost differences between countries, and the rapidly changing technology such as the internet. Globalization is by no means a new phenomenon; periods of growing interconnections had existed throughout history, such as the Silk Road connecting Europe to Asia. However, unlike many of past waves, globalization today represents much ‘thicker’ relationships that involve many people and interactions in interconnected networks. Hence, the reason for focusing on these three drivers is because they are some of the most important factors that influence and steer the recent wave of globalization. The government’s trade policies help to open the door to their economy, while the difference in cost provides incentives for investment such as overseas companies looking to benefit from low cost economies, at the same time, the rapidly changing technology helps to accelerate the rapid diffusion of free enterprises through new means of communication and improved mobility.

Trade Liberalization

As a way to regulate their international economic position, trade policies has been used by various governments to control what goes in (imports) and out (exports) of the country. Most of the restrictive policies are for imports with the use of barriers such as tariffs and non-tariff barriers, whilst for exports, it tend to be stimulatory. One of the key features and drivers of globalization has been the liberalization of barriers on trade in goods and services. An important motivation for such action is usually related with market access, as many governments reciprocate each other’s liberalization decision, each can benefit from the market access provided for its export industries by the other reciprocating government. For example, since major reforms to liberalize market since the 1978 and trade, China experienced some of the highest GDP growth (around 10%) in the world for decades where millions were lifted out of poverty.

Although there has been a general shift towards trade liberalization around the world, countries still have differing policies and levels of liberalization depending on stages of development, culture and other political factors. One prominent international organization that promotes trade liberalization and brought major reductions in trade barriers is the World Trade Organization (WTO), which has the competencies to both enforce existing trade agreement and to pursue new possibilities of liberalization. Preferential trading agreement can also take place between countries, such as the European Union (EU) and the North American Free Trade Agreement (NAFTA), where members have a common foreign trade policy and substantially reduce internal trade barriers among themselves. Also, though international trade is getting more liberalized, it has not produced similar level of benefit to all countries. For example, the influx of cheap, subsidized agriculture goods from western countries into poorer developing countries in the south after market liberalization, have devastated many local producers and increase in poverty, as it was the case for the Mexican corn famers.

Differences in Cost Between Countries

As a number of factors such as stage of development, location and demography varies between countries, the cost of factors of production: land, capital and labor, will undoubtedly differ as well. These differences also increase international trade and investment, thus further driving globalization. For example, in the southern city of Guangzhou, China, 10,000 laborer’s work legal hours stitching shoes for Nike at $95 a month. Therefore, it gives great incentive for companies such as Nike to outsource manufacturing work to China and other low cost economies, where goods can be made at a fraction of the cost as opposed to industrialized countries.

As seen in the clothing industries, much of manufacturing has moved to the developing world, where there are small barriers to entry, labor intensive and only requires low levels of economic development in the host country. Also, low cost labor does not only apply to low skilled works, a highly skilled professional in emerging economies can still be much cheaper to employ compared to ones in developed countries while producing similar quality of result. For example, the Intel Centrino Duo mobile platform was almost all developed in Intel’s India development center. When the wages increase as the economy grows, production may be moved to another low cost economy. Of course, the variation in cost is not unique only in human capital, but also in many other areas such as raw materials, which can be influence by geographic location of the country. The cost advantage from outsourcing and importing can be negated by shipping and distribution cost, but when the difference is high enough, as it was shown in the huge variation in salaries between China and US; it will still be cheaper to import.

Rapid Change in Technology

Technological advancement in the past few decades have led to major improvements to global connectivity, mobility and communication, which in turn helped to facilitate, drive and be driven by globalization. Examples of technology change facilitating globalization can be seen in all sectors, from agricultural, production lines, to finance.

In particular, one of the most prevalent changes is in information technology, ranging from mobile phones to the internet, where people are able to connect to each other from different localities throughout the world and access all sorts of information. It is based upon the convergence of communications and computer technologies, shifting from analogue to digital systems. For example, a director in the US can conduct a meeting with managers based in India through video conferencing, saving time and money from such long distance travel. For instance, the Bank of America Corp has 400 video-conferencing systems, and the Cleveland banking company saves $200,000 a month in travel expense by using video conferencing according to one of its spokesperson. Although there are concerns of a digital divide between places that are connected and those that not, the recent development in mobile technology can help to overcome obstacles in communication access growth in poor countries that lack fixed line infrastructures.

In another area, innovations in transportation technologies have accelerated geographical mobility, as speed and efficiency of transportation are dramatically lowered. For instance, development in aviation technology from propeller aircraft in the 1950s to jet passenger aircraft by 1960s has cut travelling time by hours, resulting in greater convenience and international mobility. Overall advances in both transportation and communications technologies have made today’s complex global economic system possible by overcome the frictions of space and time.

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