Globalization

DEFINITION
• The shift toward a more integrated and
interdependent world economy
• The IMF defines globalisation as
–“the growing economic interdependence
of countries worldwide through
increasing volume and a variety of cross-
border transactions in
• Goods and services
• International capital flows
• Rapid and widespread diffusion of
technology”.
• The globalisation process includes
–1) globalisation of markets,
–2) globalisation of production,
–3) globalisation of technology, and
–4) globalisation of investment
 Characteristics
The important characteristics of globalisation are as
follows:
• Rapid growth in international financial
transactions;
• Fast growth in trade, especially among
multinational corporations (MNEs);
• Surge in foreign direct investment, largely
contributed by MNEs;
• The emergence of global markets; and
• The diffusion of technologies and ideas through
rapid extension of a globalised transportation and
communication system.
 LEVELS OF GLOBALISATION
1) Globalization at the world level.
•consists of two distinct phenomena—the globalization of
production and globalization of finance.
2) Globalization at the level of a specific country.
•the extent of inter linkages between a country’s economy and the
rest of the world.
3) Globalization at the level of a specific industry.
• the degree to which a company’s competitive position within that
industry in one country is interdependent with that in another
country.
4) Globalization at the level of a specific company/firm.
•the extent to which a company has expanded its revenue and asset
base across countries and engages in cross-border flows of capital,
goods and know-how across subsidiaries.
 Factors facilitating globalization
• 1) Trade barriers have fallen
• 2) Political reforms have opened -up new
frontiers
• 3) More developing countries have joined the
bandwagon of global business
• 4) New technologies and business spanning
continents have emerged
 Multinational Enterprise (MNE) and
Globalization
• Business in the present global society are
carried on by MNE,
– Most based in developed countries.
• Identifiable features of these businesses:
– Operation in many host countries
– Often conduct R & D activities apart from
manufacturing, mining, extraction and business –
service operation.
– Cutting across national borders
– Direction from a company planning center,
distant from host country
 MNE: Diversified Operations
• Vertical integration
– Backward integration
• Produce intermediate goods or inputs that go into the
production of finished goods.
– Forward integration
• In the direction of final consumer market.
• Horizontal integration
– Sets up subsidiary to produce the identical products in
the host country.
• Conglomerate integration
– Diversification into nonrelated markets
 Issues related to MNEs
• 1) Adapting to the trends and events of the
host country
• 2) Accountability to a larger society
• 3) Promoting free trade and protecting
domestic industry
• 4) Protecting the environment
 Advantages of MNCs
• 1) Better access to worldwide markets
• 2) Best access to capital investment
• 3) Transfer of advanced technology
• 4) Benefit of large-scale operations worldwide in R & D
• 5) Local supplier development
• 6) New jobs for labor
• 7) Advanced training for Labor
• 8) New products for consumers
• 9) Exports contribute favorably to the host nation’s BOP
position
 Disadvantages of MNCs
• 1) Loss of national sovereignty
• 2) Political interest of the home nations of
MNCs may be served by them
• 3) The host nation may lose its control over its
own economy
• 4) Exploitation of host’s natural resources
• 5) Indulging in harmful environmental acts
• 6) Host nation’s industries may be destroyed
due to unfair competition by MNCs.
 MNCs in India
• In the post – liberalization era, India has
witnessed the arrival of large number of MNCs
that has a huge impact on the growth rate.
• MNCs represented a diversified portfolio of
enterprises representing different nations.
• American companies accounted for around 37%
of the turnover of the top twenty firms operating
in India.
• Many other countries show interest to work with
India:
– Britain, Italy, France, Finland, South Korea.
 Foreign Capital
• Foreign capital, MNCs and globalization are
closely interrelated.
• MNCs act as source of foreign capital.
• Foreign capital and technology are very
important to develop the untapped natural
resources for developing countries.
• Factors that call for foreign capital:
– To sustain a high level of investment
– To bridge the technology gap
– Exploitation of natural resources
– Initiating growth by undertaking initial risk
– Developing basic infrastructure
 Kinds of Foreign Capital
• Foreign capital consists of 2 form:
• 1)Private foreign investment
–Direct foreign investment :
• FDI
–Indirect foreign investment
• Portfolio investment / FII
• Foreign aid
 FDI vs. FII
FDI FII
• FDI is primarily a long- • FIIs are essentially
term investment. short term
• Is limited to investment investment.
in capital assets. • Mostly associated
• Helps in the generation with the host
of income and country’s financial
employment in the market.
host country.
 Foreign aid
• Foreign aid
– All official grants and concessional loans in currency or
in kind, which are broadly aimed at transferring
resources from developed to less developed nations
on developmental and/ or income distributional
grounds.
• Apart from grants and concessional loans,
developing countries also sometime receive direct
supplies of agricultural produce such as wheat or
industrial raw materials to meet temporary
shortages in the economy.