Impact of globalization on a developed and developing economy

Introduction

Globalization is used to describe variety kinds of related but separate, political, sociological, economic and business phenomena. In general terms, globalization refers to the increasing global interdependence of national economies and development of worldwide business competition, activities, and markets (Stonehouse, 2005). The most common definition and the one which usually used in international business is economic globalization, which means an international integration of tendency, such as information, labor, technology, products and capital (Ball 2010).

Multinational corporations (MNCs), which majority supported by the industrialized countries’ governments, and international financial organizations such as the International Monetary Fund (IMF), the World Trade Organization (WTO), the World Bank and the International Finance Corporation (IFC), are the foundational agents in economic globalization. In addition, an accelerative number of small and medium-sized enterprises are involved in global business operations as partners in this processing (Ahmad, 2001).

This paper wills analysis the processing of economic globalization, listing the drivers with evaluating the values, and then assessing the impacts on a developed economy and a developing economy respectively.

Drivers of globalization

Globalization increased the interconnections of economic between countries. Accord to the theory of Ball (2010) and Cavusgil (2008), there are five major kinds of drivers:

Political: government eliminates barriers to trade and foreign investment. International firms both exporting and building production facilities in different countries to open new markets. Much of the industries in formerly communist nations are privatization to participate in the global competition.

Technological: Customers could learn more about foreign goods and have more right to choose by the advances communications technology. Small companies become competing global by using the internet and network computing, which also leads a large number of companies to make transactions with E-commercial systems.

Market: As companies globalize, they also become global customs. When firms saturated the home markets, they begin to send branch companies into foreign markets. There are 84% of world’s largest companies expect that global markets will generate the majority of their growth in the next five years (Dow Jones survey Cited in Ball, 2010).

Cost: Economies of scale reduce the unit cost by globalize product lines. These costs include production, development and inventory costs. The company can move production or other parts value chain to low-cost country by take local advantages.

Competitive: Globalization leads intensity increasing competition for whole corporations all around the world. New companies, abundant from newly industrialized and developing countries, have entered global markets in automobiles, computers, and electronics in order to obtain more competitive edge.

These drivers which are the dominant force for economic integration have variety impacts on different economics depend on the particular situation.

Developing economy

Positive impacts

Globalization can enhance socioeconomic development in the developing economies. A large number of researches have estimated the impacts of globalization on the long-run growth of output and agree that international trade and globalization are important factors for a developing economy to build a positive economic system. They point out that higher globalization policies can leads countries to have higher Steady State Growth Rates (SSGR) (Rao, 2009). Focusing on the FDI inflows, more advanced technology and manager method involved in the developing countries could directly accelerate the local economic growing (Marques, 2009). The extent of financial flows seemed to supplement the developing economies’ shortages of capital and to encourage their investment in some aspects such as the construction of infrastructural facilities (Spence, 2010).

Besides, globalization leads growth of international business and Increasing competitive in the developing countries. The general principle in globalization is that the most competitive one is the most efficient (Knight, 2008). As the WTO and other organizations have Impact on the construction sector in developing countries during globalization, which help developing countries’ economic to grow, ” by allowing competition to break down the inefficiencies of industries that were hidden behind various barriers to trade” (Ball, 2010, p.20). In order to be more competitive in world markets, local corporations must obtain advanced commercial technology in the form of purchase of capital goods, direct investment, and the right to use the international company’s skill or knowledge. This process of liberalization leads governments to acquire more capability of competition for markets, social utilities and services (Spence, 2010).

Finally, globalization provides developing economy more and better jobs. According to the comparative advantage theory, trade and FDI should take advantage of the plentiful labor in developing economy and so “trigger a trend of specialization in domestic labor-intensive activities and, ultimately, an expansion in local employment” (Rugman, 2009, p.5). FDIs cause positive employment impacts “both directly and indirectly through job creation by suppliers and retailers; they also produce a tertiary employment effect by generating additional incomes and thereby increasing aggregate demand” (Lall, 2004, p.75). Spiezia (2004, p.154) measures the exported and imported of labor-intensities and non-traded goods, and concludes that “in 21 out of 39 sampled developing countries an increase in the volume of trade resulted in an increase in employment”. He also finds that the impact of FDI on employment could increases per-capita income in general.

In addition, globalization could decrease poverty. Indeed, the majority of developing countries, particularly fast-globalizing countries such as India, China, and Vietnam, experienced a significant decrease in the proportion of their population which is living below the poverty line. The World Development Indicators shows that the proportion of extreme poverty people in China fell from 56 to 31 percent between 1981 and 1999. In contrast, that countries rejected globalization, Including Myanmar, Sierra Leone and Ukraine are always the most impoverished countries in the world (Ball, 2010).

Negative impacts

The major negative impact on developing countries is globalization will lead a developing economy to “greater volatility” with reducing economic growth in short-time, particularly in the capital markets. The financial linkages of developing countries with the worldwide economic system have significantly increased in recent decades (Prasad, 2003). With the financial globalization, the proliferation of financial crises among developing economies are often viewed as “a natural consequence of the growing pains” (Prasad, 2003). The Asian financial crisis, thousands of firms went bankrupt during the recession in developing countries. As the global financial market continue to be unpredictable, opening up to capital markets can “exacerbate such existing domestic distortions and lead to catastrophic consequences” (Aizenman, 2002, p.4319).

The expanding foreign-owned corporations in local economy came to be viewed as a threat to autonomy by a large number of governments with the reduction of tariffs and the elimination of quantitative restrictions. The economic strength of large companies is even larger than the local governments in many developing countries. For instant, the annual revenue of Wal-Mart is higher than the GDP of Poland, Israel and Greece (Cavusgil, 2008). The MNCs can lobby the government or sponsored the selection in order to benefit from changing the local economies and social structures (Knight, 2008). They can also affect the legislative process, benefit from government agencies. Besides, the MNCs also threat the survival of domestic firms due to the low competitiveness of domestic enterprises (Langmore, 2004). As a result, some traditional customs and industries are disappearing.

Hoang (2006) argues that globalization leads to exploitation of labor in the developing countries due to the developed countries take the advantage of cheap labor. As all these foreign investment in the developing countries are pursuit of profits, some experts argue that a large number of MNCs employing child labor and paying slave wages. These sweatshops also provide miserable working conditions in Dongguan, China and Africa (Stonehouse, 2004).

According to the theory of Beine (2008), globalization leads to brain drain in developing countries. It has opened country easily for free movement of labors, especially experts and professionals. This problem is mostly in developing countries such as India, China and Africa where some of the qualified personnel immigrate to developed countries to get jobs due to poor economic conditions and lack of good financial policies in their motherland.

Developed economy

Positive impacts

Globalization is much better for developed economic growth. On average, countries that globalized more, the experienced growth rates could be higher, especially true for actual economic integration in developed countries with the liberalization on trade and capital. There is also evidence, that “cross-border information flows promote growth” (Drehera 2006, p.1080). Besides, with a fully integrated market of services, labor, capital and goods, increased internationalization leads to larger income and sales, which in leads to greater profit potential especially in exploiting emerging markets (Sledge, 2006). The multinational firms from developed nations realize much performance benefits from globalization and pay more sales’ tax to their government.

Globalization also accelerates the MNCs to expansion with more performance. Firms always organize their “value-adding actives” according to availability of land resource, labor cost levels, skills, and capital quality, they could benefit from much lower unit cost levels and often get huger quality manufacturing when take a location advantages during globalization (Stonehouse, 2004). For instant, IT outsourcing could cut operational costs and stay competitive especially it leads to a 24-hour functioning of firms (Marques, 2009). Furthermore, during increasing expansion, the subsidiaries of foreign companies are becoming important roles in the industrial and economic life in many developed economies. As growing rapidly in Foreign Direct Investment and exporting in the developed countries, globalization has a positive effect on Industrial competitiveness (IC) (Zhang, 2010), which also means that MNCs could get more industrial productivity by increasing integration with the global economy through FDI and trade. The MNCs also can benefit from a diversification of risk by invest in variety kinds of nations.

Furthermore, by setting labor-intensive and heavy industry into in developing countries and regions, developed economics put pressure on the local capital markets to upgrade. MNEs form developed countries are becoming increasingly knowledge-intensive rather than labor-intensive (Narula, 2000). MNEs increase international competitiveness with continuous innovation in high-tech researches and production new high-tech products. Developed countries are shifting their industrial structure to tertiary-industry during globalization. For instance, U.S. has set information technology, aerospace technology, defense and biotechnology industries as its pillar industry (Hecker, 1999).

Economic globalization also creates more conditions for transnational flow of high-skilled labor. The important determinants for the migration decision of individuals are economic factors. As rapid rates of economic development, which based on high technology industrialization, more and more MNCs demand for imported high-skilled labor (Skeldon, 2005). So developed countries attract a large number of foreign talents to immigrate in and make important contributions to their economics. As human resources have become the most important factor in competition, developed nations could acquire more productivity (Beine, 2008).

Negative impacts

Globalization could increase the unemployment rate and widen the gap between rich and poor in the developed countries. The major threat obvious from globalization is that trade with the Third World, which provides cheaper labor, will undermine the wages of less-skilled workers, and even leads to their intense unemployment, such as in Western Europe. From economic theory, which provides clear evidences for the situation that trade can increase the rewards of skilled workers while reducing the pay of the unskilled workers when they are facing international competition, importing skilled labor tend to displace unskilled workers (Irwin 2000). Rodrik (1997) fears that those who can adapt to economic change, such as capital owners, skilled labor, and experts, will increasingly edge out those who cannot, such as unskilled and semi-skilled workers. Mckay (2004) points out that the gap between rich and poor could be accelerated because of the increasing redundancy of low-skilled people.

Similar as developing economics, globalization leads developed nations more interdependent. That means the developed economies suffer more from economic disruptions as the risks become more global. Globalization encourages free trade, which involves an increased cash flow, and then the redistribution of capital could become more liquidity. As Bagai(2010) argues that there are more widely risks than before due to the financial markets and institutions have more capability to disperse than past. Furthermore, the increasing financial innovation by developed countries leads the financial managers more possibility to underestimate the risks. The subprime crisis illuminates are “errors of omission” due to the financial managers ignore the regulatory discipline (Spence, 2010).

Conclusion

(2176 words)Globalization has became one of the most controversial political and economic issues recently. As Marx said “globalization process is inevitable as progressive and praiseworthy” (Jellisse,2009, p.35). However, globalization is a dual-edged sword. With MNCs set their workforce from overseas to obtain inexpensive labor, developing countries obtain higher employment rate, thus improving their economies and living standard. But it has also thrown up new challenges like growing volatility in financial market and brain drain. As regard the developed economics, globalization accelerates the MNCs to expansion and industrial upgrade and shift. Because the globalization process is leading by developed countries, although it leads to increase the unemployment rate, developed countries gain more benefits from international trade and investment such as take local advantages and shift their industrial structures. In all, as globalization can be managed by governments cooperating global, expanding trade by collectively reducing barriers and working together to fulfill the optimization of resource distribution, both developed and developing countries can deploy to reduce poverty and raise living standard at last (Stonehouse, 2004 ).