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How Globalization Impacts International Investors

“It has been said that arguing against globalization is like arguing against the laws of
gravity” – Kofi Annan, Former Secretary General of the United Nations

Globalization has impacted nearly every aspect of modern life. While some U.S. citizens
may not be able to locate Beijing, China on a map, they certainly purchase an
overwhelming number of goods that were manufactured there. According to a 2010 Federal
Reserve Bank of San Francisco report, approximately 35.6% of all clothing and shoes sold
in the United States were actually manufactured in China, compared to just 3.4% made
domestically.

In this article, we will look beyond the everyday implications of globalization and towards
the economic implications that impact international investors.

Globalization Benefits World Economies

Most economists agree that globalization provides a net benefit to individual economies
around the world, by making markets more efficient, increasing competition, limiting
military conflicts, and spreading wealth more equally around the world. However, the
general public tends to assume that the costs associated with globalization outweigh the
benefits, especially in the short-term, which has caused problems we’ll explore in the next
section on protectionism.

The Milken Institute’s Globalization of the World Economy report highlights many of the
benefits associated with globalization, while outlining some of the associated risks that
governments and investors should consider. But, in aggregate, there is a consensus among
economists that globalization provides a net benefit to nations around the world and
therefore should be embraced on the whole by governments and individuals.

Some of the benefits of globalization include:

 Foreign Direct Investment. Foreign direct investment (“FDI”) tends to increase at


a much greater rate that the growth in world trade, helping boost technology transfer,
industrial restructuring, and the growth of global companies.
 Technological Innovation. Increased competition from globalization helps
stimulate new technology development, particularly with the growth in FDI, which
helps improve economic output by making processes more efficient.
 Economies of Scale. Globalization enables large companies to realize economies
of scale that reduce costs and prices, which in turn supports further economic
growth, although this can hurt many small businesses attempting to compete
domestically.

Some of the risks of globalization include:

 Interdependence. Globalization leads to interdependence between nations, which


could cause regional or global instabilities, if local economic fluctuations end up
impacting a large number of countries relying on them.
 National Sovereignty. Some see the rise of nation states, multinational or global
firms and other international organizations as a threat to sovereignty. Ultimately,
this could cause some leaders to become nationalistic or xenophobic.
 Equity Distribution. The benefits of globalization can be unfairly skewed towards
rich nations or individuals, creating greater inequalities and leading to potential
conflicts both nationally and internationally as a result.

Tariffs & Other Forms of Protectionism

The 2008 economic crisis led many politicians to question the merits of globalization.
Since then, global capital flows fell from $11 trillion in 2007 to a third of that figure in
2012. While some of that may be cyclical in nature, many countries implemented tariffs
and other forms of protectionism designed to contain risk in their financial systems and
make crises less damaging, although this comes at the cost of forgoing the benefits we’ve
seen.

In the U.S. and Europe, new banking regulations were introduced that limited capital flows
in order to reduce the risk of contagion. Tariffs have also been put into place to protect
domestic industries seen as vital, such as the 127% U.S. tariff on Chinese paper clips or
Japan’s 778% tariff on imported rice. In developing countries, these figures are even worse,
with Brazil’s tariffs being some four times higher than America’s and three times higher
than China’s.

The election of Donald Trump in the United States and the British vote to leave the
European Union - known as the 'Brexit' - have also contributed to the anti-globalization
movement. These trends have been driven by anti-immigration sentiments in Europe,
although elections occurring in 2017 have proven to be largely pro-globalization rather
than anti-globalization.

But, as Kofi Annan said in the quote above, globalization may be inevitable over the long-
run, but there are many bumps along the road in the short-run. These bumps are often
spurred by economic crises or some of the negative consequences of globalization, but in
the end, the world has always managed to learn that protectionism can make a bad situation
worse.

The Bottom Line

Globalization has impacted nearly every aspect of modern life and continues to be a
growing force in the global economy. While there are a few drawbacks to globalization,
most economists agree that it's a force that's both unstoppable and net beneficial to the
world economy. There have always been periods of protectionism and nationalism in the
past, but globalization continues to be the most widely accepted solution to ensuring
consistent economic growth around the world.

Bibliography: https://www.thebalance.com