The Organisation for Economic Cooperation and Development (OECD) defined globalisation as, 'The geographical dispersion of industrial and service activities (for example, research and development, sourcing of inputs, production and distribution and the cross border networking of companies (for example through joint ventures and the sharing of assets) Economic activity is becoming organised on a global scale giving a new international division of labour, with production, investment patterns and movements and technology transfers all becoming global.
In this strategy, activities are established in many sites spread over the world, based on a country's comparative advantage. A manufacturer striving for the benefits of globalisation aims to secure the supply of inputs by locating production of the resulting outputs in the most favourable locations. Thus, labour-intensive production of components will be situated in low wage areas, while the production of high technology and high value added parts will require a skilled or well educated workforce, and are therefore likely to be concentrated in more capital-intensive locations.
Globalisation could be seen to significantly affect developing economies, such as Ghana and Egypt. For example, according to statistics, there has been a rise in these countries in manufacturing employment and a fall in primary sector employment. Nevertheless, on the other hand, globalisation has resulted in implications for developing countries. For example, and largely on account of a loss of international competitiveness over a long period of time, British manufacturing has declined relative to that of other advanced capitalist countries, shown by the fact that the U.
K has lost more manufacturing jobs than any other European country between 1971 – 1989 (Champion, 1990), a trend that has continued in the subsequent decade. There has a been a shift towards the service sector, away from older industrialised areas and it is often argued that the British economy has now entered a vicious circle of decline (Amin, 1986) The rapid effects of globalisation can be linked to the growth of multi-national firms, since products and services have been increasingly internationalised, seen in the development of globalised supply chains.
In addition to this, the deregulation of capital markets also makes it easier to achieve acquisitions and mergers. This has resulted in the expansion of the trans-national activities of multi-national firms, and particularly in motor cars, oil, pharmaceuticals, airlines and financial services. There has been an accompanying integration and fusion of national markets, in part through free trade zones such as NAFTA, and often reflected in the escalation of foreign direct investment, including in the less developed world.
Reference should also be made to 'cross-border connectivity' – in other words, the development of new information technologies, and the accompanying new ways of buying and selling goods and services. b) Explain the factors that have led to the process of increased globalisation in recent years (40 marks) The process of globalisation is mainly motivated by the desire of corporations to increase profits and by governments intent upon tapping into the potential economic and social benefits that come from increased trade in goods, services and the free flow of financial capital.
Among the main drivers are the following: Technological change- reducing the cost of transmitting information (sometimes known as the death of distance). The internet has allowed information and communication technology to flourish. Internet communications with branches, suppliers, plants, distributors and customers generally do not require a physical presence in another country, while much can be achieved through licensing and franchising. As a result administration costs have fallen as firms from different parts of the globe can trade efficiently and effectively.
Another influential factor is the desire to circumvent tariff and non-tariff barriers by regional trading blocs. For example, the World Trade Organisation (WTO), which replaced the former GATT, was set up to help promote free trade by persuading countries to abolish tariffs and other barriers to open markets. Supporters of the WTO argued that there could be substantial economic welfare gains if there was integration of the world's economy into a single international market.
Based upon Ricardo's Theory of Comparative Advantage, it was argued that free trade was likely to benefit countries. By allowing each country to specialise in full or part production would be concentrated in locations which enjoy comparative advantage. It was further argued that specialisation in one type of export was likely to improve its quality and perhaps reduce production costs. For example, Belgian chocolates are exported worldwide. Their high quality is due to expert skills that their producers developed, a process known as learning by doing.
Their average costs have also been lowered, by the use of specialised labour and capital; through specialised knowledge and research and development and also perhaps through economies of scale. Another potential advantage is particularly relevant for countries which have previously shut out foreign imports. Not only have their consumers been deprived of choice, but their producers, owing to the lack of international competition, may lack the drive to achieve productive efficiency and may have exploited monopoly positions in their home market.
However, the arguments against the abolition of trade and tariff barriers put forward are that the rich countries have tended to maintain protectionist policies (for example, the long delay in the agreed phasing out of the Multifibre Agreement, which makes it difficult for less developed countries to export textiles to the EU), and that poorer countries do not have the type of manufacturing infrastructure and economies of scale to enjoy the benefits of free trade. The growth of multi-national firms has contributed to the rapid increase in globalisation.
Firstly, a multi-national firm can be defined as a company that produces in more than one country. In practice, globalisation has involved MNCs because the scale of their investment is such that the sales of the largest MNCs exceed the entire GDP of many countries. Many MNCs have moved their production from the west to developing countries because they want to benefit from that country's comparative advantage, usually access to much lower labour costs. Due to the low standard of living in many developing economies and lack of government legislation MNCs often locate in areas of high unemployment.
Therefore they are likely to benefit from a continuous cheap supply of labour. In theory, this has led to the international division of labour. National economies have become increasingly integrated, leading to a growth in the number of trading blocs and economic unions. The process has been facilitated by the increased mobility of both physical and financial capital, the latter reflecting the trend towards the abolition of capital controls, the deregulation of financial markets, and the opening up of capital markets in LDCs and in the former Soviet bloc.
Is the deregulation of financial markets a valid argument? I'm not sure how to phrase it. (Done! ) c) Outline the main economic implications of globalisation for the U. K economy (40 marks) The long term impact of the globalisation process is likely to cause further changes to the pattern of trade in goods and services. There will be many economic implications which will decide where Britain's comparative advantage will lie in the increasingly competitive global economy.