Globalization - Development and Impacts (27.1)
Chapter 27, Business and The International Economy
Learning Objectives: To understand the impact of globalization on business activity
Globalization is the greater cultural, technological, social, and political interaction between countries with fewer barriers and regulations leading to greater trade of goods and services.
A direct consequence of globalization is the development 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 making digital payments and communication (internet) more reliable.
- Improved Transport Links: it has become much more efficient, faster and cheaper to move goods around the globe.
- Trading Blocks and Free Trade Agreements have been on the raise facilitating trade between countries, removing trade restrictions.
NAFTA, MERCOSUR, European Union...
This combination of factors has allowed globalization to quickly develop over the last decades.
In your opinion, is globalization a positive or negative phenomena for businesses?
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 |
Activity 27.1
Based on all of the benefits of globalization, businesses do benefit from becoming multinational companies (MNCs): businesses that have operations in more than one country (home country vs. host countries).
Benefits of becoming an MNC:
For host countries, attracting MNCs can also be a double-edge sword:
Activity 27.3
It is important for us to consider, however, that MNCs can also bring a variety of drawbacks to their host countries.
Let's look into how this comes to happen:
- Increased Competition:
While competition can be beneficial for lower prices and higher quality, MNCs can lead smaller/local businesses to bankruptcy and/or limit their growth.
- Exploitation of Local Labor:
It not uncommon to see large MNCs paying very low salaries to local unskilled workforce while hiring specialized labor from abroad.
- Harm to Local Environment:
The main reason MNCs relocate to developing countries is for cutting costs. Producing as quickly and cheaply as possible with no regards for the environment.
- Exploitation of Natural Resources:
MNCs are in for money. They oftentimes move to countries where they have access to cheap resources.
It can lead host countries to experience scarcity of once abundant natural resources.
MNCs have a lower sense of responsibility when operating in host countries. The environment, resources, and the health and safety of workers become secondary for some multinational businesses.
- Corporate Influence Over Host Governments:
Governments are sometimes influenced by businesses: they are led to making decisions that would benefit the business in expense of society.
- Negative Social Impact:
Culture, food, lifestyle, among other social elements can fade away through the activity of MNCs.
In summary, MNCs can bring both positive and negative impacts to host countries. It all depends on how the investment is handled and the intentions of the MNC. Governments should be aiming to rip the benefits and minimize the negative impacts of MNCs to leverage economic growth.
Business in Action, LG in India
To-Do-List:
Do you think MNCs bring more benefits or drawbacks to host countries? Justify your answer. [8]
Chapter 27, Business and The International Economy
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