What Are the Benefits, Costs and Challenges of Globalization?

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Globalization means a world without international borders, or with borders having reduced significance. In this article, we define globalization and set out the benefits of globalization for individual businesses, and economies as a whole. In addition, we look at some of the challenges for countries that go down the globalization route.

What is the definition of globalization?

In the broadest terms, globalization is the spread of products, services, people, and activities across national borders and across cultures. Sometimes it is used to refer to a more specific phenomenon in economics — the spread of “free market” policies across the world economy.

Thought of in this way, globalization is still a work-in-progress. For example, in some countries, there are trade sanctions in place which prevent economic engagement with other countries. But at the root of this concept is international trade: This is not a new phenomenon – it’s ancient, in fact. For example, the incense trade route between the southern arabian peninsula and the Mediterranean began in roughly the 7th century BCE.

In the modern age, the terms of global trade are largely governed by agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) between eleven major Asia-Pacific countries, and the work of international organizations, such as the World Trade Organization. Through these agreements, countries usually agree to reduce import tariffs on goods which make the cost of importing those goods higher than they would otherwise be.

Below we will consider some of the major benefits presented by globalization, both for an individual country’s economy, and for individual businesses.

What are the benefits of globalization for economies?

As globalization is imperfect and at various stages of implementation, it is hard to make a universal claim about its benefits.  However, some of the potential benefits of globalization to economies include:

Increased choice

No individual country could produce the sheer variety of goods that can be produced globally. Through globalization, consumers in one country can have access to goods and services that they would never otherwise have access to;

Higher quality goods

As each nation concentrates on its own specialty industries, there is far less ‘re-inventing the wheel’. For example, every country does not need to waste its scarce resources producing its own version of the smartphone when one can be imported from a country that specializes in this product;

Increased competition

The presence of increased competition in a country’s economy from foreign companies means a more efficient market and lower prices for consumers. Suppliers of goods and services need to keep their prices low to stay competitive;

Economies of scale

As globalization provides companies with a much bigger effective market in which to sell their goods, they can scale up their production. As the level of production increases, their margin on each good or service provided can increase as their fixed costs remain the same, or become incrementally smaller;

Increased capital flows

Capital is able to flow into developing economies providing a significant form of finance that businesses in that economy would not otherwise have access to;

Increased labor mobility

By allowing individual workers to move to other countries, the global economy can better match supply and demand. Countries that are excellent in educating certain professionals can export those professionals to other countries which do not have the same specialty. For example, New Zealand must import a significant number of skilled agricultural workers every year to harvest its crops.

Improved international relations

Countries that have a positive trade relationship with each other, have an incentive not to get into conflict. On a global scale, this should reduce the likelihood of armed conflict between countries.

What are the benefits of globalization for individual businesses?

Putting aside the possible benefits of globalization for individual economies and the world economy as a whole, what are the potential benefits for individual companies of expanding globally?

Cost savings

By outsourcing certain functions, such as payroll and HR to countries where this can be provided at a lower cost, an international enterprise can increase its overall profitability;

International recruitment

If you struggle to find the right talent in your own country, you may be able to source workers in another country where there is significant capability in that area;

Specific market opportunities

You may have identified specific countries where there is an opportunity to corner the market with your product or service. Moving into that market can be an important growth opportunity for your business;

Spreading risk

Individual countries are vulnerable to economic events and fluctuations specific to that country. By expanding into multiple countries, an enterprise can spread this risk and ensure that they don’t place ‘all their eggs in the same basket.

What are the potential disadvantages of globalization for economies?

While there are some clear benefits to globalization, there may also be costs associated with this for individual economies, depending on how it is implemented. Some of the disadvantages of globalization that have been identified include:

Possible monopolization of multi-national companies

 Large enterprises from developed countries may move into smaller developing nations and take over the market. Their specialization and efficiency in providing a particular good or service may mean that local producers in a developing country are knocked out of the market;

Structural unemployment

If a country is no longer competitive in the production of a particular good, this may mean that its production rapidly moves offshore, and workers are left unemployed. While it may be possible to re-train these staff and deploy them to a more efficient market, this lag can take years, resulting in a significant rise in unemployment and inequality;

Inter-dependence

Individual countries become dependent on other nations for their supply chains. If there is a disruption to this chain, they may no longer be able to produce the good themselves;

Tax avoidance

It may be that some companies are able to avoid paying taxes that one might expect that company to pay in a given country through legal tax arrangements.

It is worth emphasizing that all these potential disadvantages are ones that apply to the economy as a whole, they are not costs for individual businesses.

Conclusion

While there is an ongoing debate on the pros and cons of globalization for individual nations, and the world economy, the benefits of expanding globally for individual businesses are clear.

New Horizons Global Partners provides global consulting services to support your globalization mission. Our specialists can advise on tax, compliance, and legal issues and implement the outsourcing or staffing solutions that best suit your company.

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