Globalisation and its effects

Overview

How falling transport and communication costs have driven globalisation, role of trade liberalisation in causing increased globalisation and contribution of multinational corporations to the process of globalisation.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is globalisation?

   Model answer

   Globalisation is the increasing integration of national economies into a single world economy through the growth of trade in goods and services, cross-border flows of capital, labour and technology, and the spread of production processes across several countries. It shows up as a rise in the share of world output that crosses a border and in the degree to which conditions in one economy transmit rapidly to others.

2. 2

   Explain how falling transport and communication costs have driven globalisation.

   Model answer

   Containerisation, larger vessels and cheaper air freight cut the cost and time of shipping goods, so cost differences between countries that were previously swamped by freight charges became worth exploiting. Cheap digital communication allowed firms to coordinate design, procurement and production across continents in real time and made services such as software, accounting and customer support tradeable at all. Together these reduced the effective economic distance between countries, widening the range of activities for which international specialisation pays.

3. 3

   Analyse the role of trade liberalisation in causing increased globalisation.

   Model answer

   Successive rounds of multilateral tariff reduction, the growth of regional trading blocs and the accession of large previously closed economies to the world trading system cut the average tariff facing exporters and, just as importantly, made market access predictable. Predictability matters because firms will only build a supply chain across borders if they can be confident the border will stay open for the life of the investment. Lower and more certain barriers therefore did not simply raise trade volumes but changed the organisation of production, making fragmented international supply chains viable.

4. 4

   How has the liberalisation of capital markets contributed to globalisation?

   Model answer

   The removal of exchange controls and restrictions on cross-border ownership allowed savings to flow to wherever the expected return is highest, financing investment in countries whose own savings are insufficient. It enabled firms to raise funds internationally and to own production facilities abroad, which is the precondition for foreign direct investment. It also linked national financial markets closely enough that interest rates, asset prices and confidence in one country move those in others, which is a source of both efficiency and instability.

5. 5

   Explain the contribution of multinational corporations to the process of globalisation.

   Model answer

   Multinationals organise production as a global supply chain, locating each stage where it is cheapest or most effective and moving components between their own affiliates, so a large share of world trade is now trade within firms rather than between them. They transfer technology, management practice and quality standards to their host countries and to their local suppliers. By marketing the same products worldwide they also harmonise tastes, enlarging the markets in which scale economies can be captured.

6. 6

   How does the growth of trading blocs both promote and limit globalisation?

   Model answer

   Blocs promote it by removing barriers among a group of countries far faster and more deeply than global negotiation can manage, covering standards, services and investment as well as tariffs. They limit it by discriminating against outsiders, so trade may be diverted from an efficient non-member to a less efficient member, and by fragmenting the world into competing rule systems with incompatible standards and rules of origin. Whether the net effect is more or less global integration depends on whether blocs act as building blocks towards wider liberalisation or as walled gardens.

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