Globalisation increases cross-border connections through trade, investment, production and information.
Must know
- Trade and FDI are distinct flows.
- Technology and liberalisation reduce barriers.
- Gains and losses differ between stakeholders.
Must know definitions
Globalisation: the growing economic interdependence of countries, reflected in freer movement of goods, services, capital, labour and technology across borders.
Transnational company (TNC): a firm that owns or controls production of goods or services in more than one country.
Foreign direct investment (FDI): cross-border investment establishing a lasting interest and significant influence in an enterprise, conventionally indicated by at least 10% of its voting power. Full ownership or majority control is not required.
Trade liberalisation: the reduction or removal of barriers to trade, such as tariffs and quotas.
Trading bloc: a group of countries that agree to reduce trade barriers between participating members.
Transfer pricing: the pricing of transactions between parts of the same multinational group. Manipulating these prices can shift recorded profits into lower-tax jurisdictions (see 4.3.5.4).
Explain and apply
Mechanism in brief: An overseas investment can finance production and spread skills through workers and suppliers. These links can raise productivity and income, while profit repatriation sends some returns abroad.
Distinguish: FDI inflows are not export revenue; aggregate gains can coexist with losses for displaced workers.
Use the extract: Identify the channel of integration and whether FDI builds new capacity or transfers ownership; trace effects on local workers and suppliers.
1. Characteristics of globalisation
Increase in trade as a proportion of GDP
Globalisation is the growing economic interdependence of countries worldwide, shown by the increasing free movement of goods, services, capital, labour, and technology across borders.
- Historically, trade has often grown faster than output. A joint IMF, World Bank and WTO report published in 2017 found that global trade in goods and services grew by about 6% a year in real terms between 1960 and 2007, roughly twice the rate of real GDP growth. This is a dated historical pattern, not a rule applying to every later period or every country. Real growth comparisons should also be distinguished from nominal trade-to-GDP ratios.
- This reflects deeper specialisation along the lines of comparative advantage, as countries such as China and India have become increasingly integrated into global supply chains for both goods and services (e.g. manufacturing, call centres, software).
- Because economies now sell more to, and buy more from, each other, they have become more interdependent — a downturn in one major economy transmits quickly to others, as seen when the 2008/09 credit crunch spread rapidly across the globe.
trade liberalisation and falling transport/communication costs → exporting and importing become easier and cheaper → trade grows faster than GDP → trade as a % of GDP ↑ → economies become more interdependent
Increase in the importance of TNCs and FDI
A transnational company (TNC) (or multinational corporation, MNC) is a firm that owns or controls production of goods or services in more than one country.
- As globalisation has progressed, TNCs have grown in number, size and global reach, increasingly coordinating production across borders to exploit cost differences and access new markets.
- This expansion can be financed through foreign direct investment (FDI): cross-border investment establishing a lasting interest and significant influence in an enterprise, such as a subsidiary or joint venture. It does not require full foreign ownership.
- Rising FDI flows are both a cause and a symptom of globalisation: as capital controls have been relaxed and cross-border investment liberalised, FDI between countries (e.g. inflows financing growth in China and Malaysia) has increased substantially.
Increase in migration between countries
Migration is the movement of people across national borders to live and work, and rising migration is a further characteristic of globalisation.
- Falling transport costs and better information (via the internet) have made it easier and cheaper for workers to move in search of higher wages or better opportunities, contributing to freer movement of labour alongside goods, services and capital.
- Migration allows labour to move towards where it is most productively employed, supporting the efficient allocation of resources internationally.
2. Causes of globalisation
Factors contributing to increased globalisation in the last 50 years
| Factor | Explanation |
|---|---|
| Trade liberalisation | Reduction/removal of trade barriers such as tariffs and quotas, promoted by organisations like the World Trade Organisation (WTO), which advocates free trade and has driven down protectionism globally |
| Increased number and size of trading blocs | A trading bloc is a group of countries that agree to reduce trade barriers between members; larger and more numerous blocs mean more trade is conducted on a liberalised basis |
| Political change | Breakdown of the Soviet system and the opening up of China brought former closed, centrally-planned economies into the global market, hugely expanding the pool of countries engaged in international trade and investment |
| Reduced cost of transport and communications | Containerisation made shipping goods far cheaper and faster (standard-sized containers cut loading time and labour needed); the internet and IT ("death of distance") made communication and coordination across borders near-costless |
| Increased significance of TNCs | As TNCs have grown, they have spread technology, coordinated global production chains and used marketing to build global brands, itself accelerating trade and FDI flows |
trade barriers ↓ (trade liberalisation, larger trading blocs) + transport/communication costs ↓ (containerisation, internet) → cost of trading internationally ↓ → volume of trade and FDI ↑ → globalisation deepens
FDI by TNCs
TNCs undertake FDI for several reasons:
- To take advantage of lower wage costs and/or weaker environmental regulation abroad.
- To gain access to a trading bloc (avoiding its external tariff).
- To exploit raw materials unavailable at home.
- To benefit from lower corporate taxes.
The effects of this FDI on recipient countries can be wide-ranging and are not uniformly positive. New investment can generate a multiplier effect on GDP as the initial spending circulates through the economy, and it typically raises employment as the TNC hires local workers.
| Area affected | Possible effect of inward FDI |
|---|---|
| GDP | Multiplier effect from new investment spending raises national income |
| Employment | New jobs created directly and indirectly (via supply chains) |
| Balance of payments | Financial account inflow on arrival; but potential current account outflow later as profits are repatriated |
| Public finances | Extra tax revenue from higher output and employment, though this can be eroded by tax incentives or transfer pricing |
| Environment | Possible environmental damage if the TNC is attracted by weak environmental regulation |
3. Effects of globalisation
Benefits and costs of globalisation
Globalisation generates a wide range of possible benefits and costs, and the net effect for any given country depends on how these are distributed.
- On the benefits side, freer trade allows countries to exploit comparative advantage, supporting economic growth, while larger markets let firms achieve economies of scale, and stronger competition from foreign firms lowers prices and raises consumer surplus.
- On the costs side, the same competitive pressure that lowers prices can also displace workers when production relocates to lower-wage countries, and weak employment or environmental regulation abroad can permit the exploitation of workers — for example, debate persists over whether sweatshop jobs represent exploitation or a relatively better-paid alternative to informal-sector or agricultural work in developing countries.
- TNCs can also erode a government's tax base through transfer pricing (shifting profits to low-tax jurisdictions — covered fully at 4.3.5.4), and their economic weight can let them pressure governments into policies that favour large corporations over the wider public interest.
| Benefits of globalisation | Costs of globalisation |
|---|---|
| Economic growth: comparative advantage raises output and living standards | Displaced workers: structural unemployment when firms relocate abroad (e.g. UK shipbuilding and mining industries declined as production shifted to lower-cost countries) |
| Increased tax revenue: from higher growth and employment | Loss of tax revenue from transfer pricing, as TNCs shift profits to low-tax countries |
| Economies of scale: firms grow larger, lowering average costs (e.g. marketing and risk-bearing economies for TNCs operating across many markets) | Exploitation of workers: poor pay/conditions where employment legislation is weak (sweatshop debate) |
| Lower prices and higher consumer surplus: from greater competition and economies of scale | Environmental impact: increased trade and production linked to deforestation, water scarcity and land degradation, though rising incomes can also increase environmental concern |
| More choice: greater access to foreign goods and services | Increased income inequality within countries may arise if gains accrue disproportionately to owners of capital or particular groups of workers. This depends on labour markets and redistribution. Separately, Oxfam reported in January 2016 that the richest 1% held more global wealth than the remaining population in 2015. That is an illustration of global wealth inequality; it does not establish that globalisation caused within-country income inequality. |
| Higher living standards: driven by higher GDP | Influence of TNCs on domestic policy: large firms may pressure governments to adopt corporation-friendly policies |
economies of scale ↑ and competition ↑ → average costs ↓ → prices ↓ → consumer surplus ↑ and choice ↑, but production relocation → domestic structural unemployment ↑ and, if regulation is weak abroad, worker exploitation ↑
A country's experience of globalisation is often uneven: trade imbalances can persist between economies (e.g. the US current account deficit alongside China's current account surplus), and within countries the gains and losses are rarely spread evenly, contributing to the income inequality noted above. A common slip in exams: not confusing globalisation's benefits/costs with the separate case for/against protectionism — globalisation is the broader phenomenon, while protectionist restrictions are one possible policy response to its costs.
Judge local value added, job quality and adjustment costs. Aggregate gains can coexist with losses for displaced workers, and an acquisition does not necessarily add the same productive capacity as a new plant.
Rapid recap
Integration: lower barriers, technology and transport links expand trade, capital flows and international production.
Benefits: larger markets, specialisation and new productive investment can raise productivity, jobs and choice. Buying existing assets alone is not equivalent to creating new capacity.
Judge: trace domestic wages, tax receipts, local supplier links and technology transfer alongside displacement, external costs and profit outflows. Aggregate gains can coexist with losers.
Diagram cue: use AD–AS only if an output/capacity channel is central.
Related chapters: Unit 4 chapter 2 (p. 10) · Unit 4 chapter 16 (p. 73)