Chapter 26, Business and The International Economy
Learning Objectives: To understand the impact of globalization on business activity
This last chapter discusses how globalization impacts international businesses.
Goods and services are produced and sold in multiple parts of the world nowadays.
This is called Globalization - the process by which businesses or other organizations develop international influence or start operating on an international scale.
We also have the emergence of multinational businesses - companies that have their headquarters in one country but branches/offices and factories in other countries:
A variety of factors have led and boosted globalization nowadays:
- Communication Technology has been developing and breaking down language and geographic barriers.
- International Transportation/Logistics has become much more efficient allowing for faster and cheaper movement of goods.
- Trading Blocks and Free Trade Agreements have been on the raise facilitating trade between countries:
NAFTA, MERCOSUR, European Union...
- Trade Tariffs have also been decreasing overtime and countries been following the trend of facilitating the flow of imports.
- Laws and Regulations for the setup and operations of multinational companies have been loosen up by countries.
This combination of factors has allowed globalization to quickly develop over the last decades.
The main outcomes of increased globalization in today's world are:
Greater trade (exchange of goods and services) between countries;
Greater movement of people among different countries;
Countries economies are now dependent on each other (e.g. China cannot live without selling its goods to the US and the US cannot afford stop buying goods from China either);
The development of globally recognized brands;
Various goods and services are available almost anywhere in the world (e.g. Coca-Cola).
In your opinion, is globalization a positive phenomena for businesses and societies?
There are opportunities and threats of globalization to businesses:
Opportunities to Businesses | Threats to Businesses |
Access to international markets (↑ sales) | Local businesses suffer from international competition |
Access to cheaper labor (↓ costs) | Multinational business' profits can be negatively impacted by exchange rate fluctuations |
Opportunity for economies of scale (↓ costs) | Overall increase in competition to both local and multinational businesses |
Competition leads to higher efficiency (↓ costs) | More investments in marketing and distribution is required for competing internationally |
Likewise, societies can benefit as well as face limitations from globalization:
Benefits to Society | Threats to Society |
Multiculturalism due to various products/services available to consumers | Multinational business relocation generate job losses in the home country |
↓Prices and ↑Quality of products due to increased competition | Environmental damages caused by multinational businesses in host countries |
Lower unemployment rates due to multinational businesses | Local culture might be diminished (e.g. fast food in Mongolia) |
Growth of local businesses benefit the local society | |
To-Do-List:
Activity 26.1 (p. 329)
Chapter 26, Business and The International Economy
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