globalisation and business - introduction

What is Globalisation?

‘Globalisation’ means ‘the reduction of the difference between one economy and another’
so that trade within and between different countries is increasingly similar all over the world.
Globalisation has become a big buzz word in the last 10/15 years, but it has been going on for
centuries, and especially since 1945. What has changed is the pace of this trend; it used to be
quite a slow process and in recent years it has become much faster.

Background

In the 17th Century new ship design allowed Europeans to start trading with the rest of the
world in a much bigger way, although trade was still a tiny part of the economy compared to
agriculture.

Later developments in transport, steam ships, the railways and now aircraft, have all
contributed to the development of trade. Aircraft also move people around quickly, so the
sense of the size and distances of the world ‘shrinks’ making us feel that far-away places are
no longer so strange. The internet now allows international communication in a way that was
not possible before; your favourite site could just as easily be in New Zealand as in London.

The WTO has, since 1945, made major reductions to the barriers to trade, and this has led to
an enormous increase in international trade compared with domestic trade. Because world
trade has consistently grown much faster than world GDP, the proportions of domestic versus
international business have changed; much more of all countries’ business is now done overseas
than used to be the case.

Increasing Economic Integration

A second important idea is that of ‘integration’. In the past, an economy was largely self-
contained, and imports and exports were something that happened almost co-incidentally.
Now, economies depend closely on each other for inputs eg raw material and for markets for
outputs.

A recession in one economy (especially a large economy like Japan or the US) affects many
other economies. Consumer markets are the most important in any economy. There has been a
rapid convergence of consumer tastes and buying habits, so the purchases of consumers all
over the world have an increasing amount in common (although there are still many important
differences); a business can sell much the same product in many different markets. A global
brand like ‘Coca-Cola is very good examples of this.

Multinational companies ("MNCs") have existed for many years, but today there are many more
of them and their importance to all economies has become much greater. Their example, and
their success, has led many businesses to change their strategic objectives and their
management thinking so ‘thinking globally but acting locally’ is now much more common; many
businesses used to almost ignore what went on elsewhere.

Factors Affecting Globalisation

The following main factors have fuelled the pace of globalisation:

1. Technological change, especially in communications technology. For example, UK
businesses and data by satellite to India (taking advantage of the difference in time zones)
where skilled but cheaper data handlers input the data and return it by satellite for the start of
the UK working day.

2. Transport is much cheaper and faster. This is not just aircraft, but also ships. The
development of containerisation in the 1950s was a major breakthrough in goods handling, and
there have been continuing improvements to shipping technology since then.

3. Deregulation. From the 1980s onwards (starting in the UK) many rules and regulations in
business were removed, especially rules regarding foreign ownership. Privatisation also took
place, and large areas of business were now open to purchase and/or take-over. This allowed
businesses in one country to buy those in another. For example, many UK utilities, once
government businesses, are owned by French and US businesses.

4. Removal of capital exchange controls. The movement of money from one country to
another was also controlled, and these controls were lifted over the same period. This allowed
businesses to move money from one country to another in a search for better business returns;
if investment in one’s own country looked unattractive, a business could buy businesses in
another country. During the 1990s huge sums of money, mainly from the US, have come into
the UK economy. See, for example, this news story:
http://news.bbc.co.uk/1/hi/business/2250903.stm

5. Free Trade. Many barriers to trade have been removed. Some of this has been done by
regional groupings of countries such as the EU. Most of it has been done by the WTO. This
makes trade cheaper and therefore more attractive to business.

6. Consumer tastes have changed, and consumers are more willing to try foreign products.
The arrival of global satellite television, for example, has exposed consumers to global
advertising. Consumers are more aware of what is available in other countries, and are keen to
give it a try.

7. Emerging markets in developing countries, especially the ‘Tigers’ of SE Asia eg Thailand.

There has been high growth of incomes in these countries, which makes large consumer
markets with money to spend. Indonesia, for example, whilst still not particularly rich, has
some 350 myn consumers. Both India and China are very poor countries, but there are small
middle classes who are doing very well and have money to spend. Although these groups are
small in the context of the country, the overall populations are so huge (over 1 byn) that a
small middle class adds up to many millions of consumers.