Globalization refers to the process of integration across societies and economies. The phenomenon encompasses the flow of products, services, labor, finance, information, and ideas moving across national borders. The frequency and intensity of the flows relate to the upward or downward direction of globalization as a trend.
There is a popular notion that there has been an increase of globalization since the early 1980s. However, a comparison of the period between 1870 and 1914 to the post-World War II era indicates a greater degree of globalization in the earlier part of the century than the latter half. This is true in regards to international trade growth and capital flows, as well as migration of people to America.
If a perspective starts after 1945—at the start of the Cold War—globalization is a growing trend with a predominance of global economic integration that leads to greater interdependence among nations. Between 1990 and 2001, total output of export and import of goods as a proportion of GDP rose from 32.3 percent to 37.9 percent in developed countries and 33.8 percent to 48.9 percent for low- to middle-income countries. From 1990 to 2003, international trade export rose by $3.4 to $7.3 trillion (see Figure 1). Hence, the general direction of globalization is growth that is unevenly distributed between wealthier and poorer countries.
A primary economic rationale for globalization is reducing barriers to trade for the enrichment of all societies. The greater good would be served by leveraging
This economic rationale for global integration depends on supporting factors to facilitate the process. The factors include advances in transportation, communication, and technology to provide the necessary conduits for global economic integration. While these factors are necessary, they are not sufficient. Collaboration with political will through international relations is required to leverage the potential of the supporting factors.
Globalization from 1870 to 1914 came to an end with the World War I as various countries pursued isolationism and protectionism agendas through various treaties—the Treaty of Brest-Litovsk (1918), the Treaty of Versailles (1918), the Treaty of St. Germain (1919), and the Treaty of Trianon (1920). U.S. trade policies—the Tariff acts of 1921, 1922, 1924, 1926, and the Smooth Hawley Tariffs of 1930—raised barriers to trade. These events contributed to the implosion of globalization for more than forty years.
Toward the end of World War II, forty-four countries met in an effort to re-establish international trade. The milestone is referred to as Bretton Woods, named after the New Hampshire country inn where the meeting was held. Results of Bretton Woods included the creation of the International Monetary Fund (IMF), the World Bank, and subsequently, the General Agreements on Tariffs and Trade (GATT).
In 1948 the International Trade Organization (ITO) was established as an agency of the United Nations, with fifty member countries and the Havana Charter to facilitate international trade but it failed. As a result, GATT rose to fill the void as a channel for multilateral trade negotiations and recognition of "Most Favored Nation" status that applied the same trading conditions between members that applied to other trading partners with "most favored" partner standing.
GATT involved a number of different multilateral rounds of trade negotiations to reduce trade barriers and facilitate international trade. In the first round, the twenty-three founding members of GATT agreed to 45,000 tariff concessions affecting 20 percent of international trade worth $10 billion. Many of GATT's trade rules were drawn from the ITO charter. Subsequent trade rounds involved more members and additional issues, but the basic foundation of GATT remained the same.
In the second round, the Kennedy Round of the mid-1960s, the focus continued with tariff reductions.
In the third round, the Tokyo Round (1973–1979), 102 countries participated to reform the trading system, resulting in tariff on manufactured products reduced to 4.7 percent from a high of 40 percent at the inception of GATT. Important issues revolved around anti-dumping measures, and subsidies and countervailing measures. The reduction of trade barriers enabled about an average of 8 percent growth of world trade per year in the 1950s and 1960s.
In the fourth round, the Uruguay Round (1986 to 1993), 125 countries participated to develop a more comprehensive system.
On April 15, 1995, in Marrakesh, Morocco, a deal was signed to create the World Trade Organization (WTO), which replaced GATT with a permanent institution that required a full and permanent commitment. The WTO encompasses trade in goods, services, and intellectual property related to trade with a more efficient dispute settlement system.
The increase of globalization surfaced many complex and controversial issues as economies and societies became more interdependent with greater frequency of interactions between one another. A number of important trends make up globalization including: (1) location of integration activities; (2) impact upon poorer societies; (3) flow of capital; (4) migration of labor and work; (5) diffusion of technology; (6) sustainability of the natural environment; (7) reconfiguration of cultural dynamics; and (8) development of organizational strategies for global competition.
Many authors specialize in exploring each issue with much greater depth. The purpose of reviewing the different trends in this essay is to provide some highlight concerning the interrelated complexities underlying globalization.
The extent of globalization unfolds in an uneven fashion to the degree that the question is raised whether international trade is more focused on regional rather than global integration. Trading blocs, such as the North American Free Trade Agreement (NAFTA), the European Union (EU), the Asia-Pacific Economic Co-operation (APEC), Mercosur (South American trading bloc), the Association of South East Asian Nations (ASEAN), and the East Africa Community (EAC), support regional cooperation between geographical neighbors.
Georgios Chortareas' and Theodore Pelagidis' research findings on openness and convergence in international trade indicate that intra-regional trade increased more than global trade in most situations. They stated that "… despite the positive international climate resulting from important reductions in transportation costs, the development of new technologies and trade liberalization markets continue to be determined, to a large extent, regionally and nationally…"
Within NAFTA, intra-regional exports rose from 34 percent in the 1980s to more than 56 percent in 2000; exports between Asian country members amounted to 48 percent in 2000; and exports within the EU were sustained at about 62 percent.
An example of limitations to fair market access for developing countries is that developed countries subsidize agricultural producers with about $330 billion per year, which creates a significant disadvantage for poorer economies without such subsidies. The impact is exacerbated because 70 percent of the world's poor population lives in rural communities and depends heavily on agriculture. Hence, one of the concerns with uneven distribution of globalization is its impact on poorer economies by perpetuating systems of inequality.
A challenge to globalization is that inequality arises from imbalances in trade liberalization where the rich gain disproportionately more than the poor. Ajit K. Ghose examined the impact of international trade on income inequality and found that inter-country inequality increased from 1981 to 1997, in a sample of ninety-six national economies, but international inequality measured by per capita GDP declined. The ratio of average income for the wealthiest 20 percent compared to the poorest 20 percent rose from 30 to 74 from the early 1960s to the late 1990s.
In 2004, one billion people owned 80 percent of the world's GDP, while another billion survives on a $1. However, during the same period, when average income is weighted by population, income inequality dropped by 10 percent in the same period. Also, global income distribution became more equal with other measures such as purchasing power parity or the number of people living in poverty.
The World Development Indicators for 2004 showed a drop in absolute number of people living on $1 per day from 1.5 billion in 1981 to 1.1 billion in 2001 with most of the achievements taking place in the East Asia region. Thus, the impact of globalization on inequality is a complex issue depending on the particular measures. More specific examination needs to account for other contributing factors, such as how regionalism increases concentration of trade between countries that are wealthier and leaving poorer countries at the margin.
The flow of capital relates to both regionalism and inequality issues. Two forms of capital flow are foreign direct investments (FDI) made by business firms and investment portfolios, diversified with foreign assets or borrowers seeking foreign funding. Data from the World Bank indicated that FDI grew from an average of $100 billion per year in the 1980s to $370 billion in 1997. Net private capital flow amounts to about $200 billion in 2004.
Also, some economies have significant remittance flows from labor migration, which were approximately $100 billion in 2003 and $126 billion in 2004 for ninety developing countries. Some Caribbean countries receive more than 10 percent of their GDP from remittances. While developing countries are the primary recipients of remittances, transaction costs can amount to 10 to 15 percent per transaction. Reducing such obstacles would benefit poorer countries with heavy dependencies on remittances. The flow of money across national borders relates to the migration of both labor and work.
An important dimension of globalization is the migration of people. While the proportion of migration was greater during the earlier mercantilism period, sovereign border controls to a large extent create a filtration process for migration. About 175 million people lived in a different country than their birth country in 2000. They can be separated into three categories: 158 million international migrants, 16 million refugees, and 900,000 asylum seekers.
An important global trend in the future is the movement of labor from developing to developed countries because of the latter's need for labor with an aging population. Family-sponsored migration makes up 45 to 75 percent of international migrants who mainly originate from developing countries to countries in Europe and North America.
Even before 9/11, legal migration of labor needed to overcome substantial bureaucracy in the border control process. The number applying for entry into developed countries often far exceeds the number permitted. Due to extensive legal processes, some migrants enter illegally, while others become illegal with expiration of legal status.
Anti-terrorism measures imposed shortly after the 9/11 attacks resulted in a minor shift in the flow of migrants away from the United States toward other developed countries. With the aging of baby boomers in many developed countries, future globalization of migrant labor flows is receiving more attention, especially in education, health care, retirement funding, and housing, as well as meeting workforce needs to sustain business competitiveness.
Although migrant labor often entails the movement of people in search of work, a related globalization trend is the migration of work to different geographical location. While multinational corporations (MNCs) often seek low-cost labor, innovation advances in computer technology, satellite communication infrastructures, internet developments, and efficient transportation network enable companies to distribute work in ways not possible before.
Compression of time and space with internet technology allows for the distribution of work to take place around the world with global virtual teams. The phenomena of outsourcing and offshoring expand on the earlier sourcing of low-cost manufacturing. During the 1960s and 1970s, MNCs migrated to low-wage labor to manufacture products that entailed significant labor costs.
Expansion of MNCs in the 1990s encompassed highly skilled workers, service work, and global virtual teams. Firms started to outsource information technology (IT) functions as early as the 1970s, but a major wave of outsourcing started in 1989 with the shortage of skilled IT workers in developed countries. At the same time, the trend of shifting work around the globe to leverage the different time zones began with the financial industry's ability to shift trading between the various stock exchanges in New York, Tokyo, and Hong Kong, and London.
Technological innovations in computers and the internet enabled other industries, such as software engineering, data transcription, and customer service centers to also shift work around the globe. Higher education and high-skill health care jobs are also embarking on global outsourcing.
In 2001, outsourcing expenditures amounted to $3.7 trillion and the estimation for 2003 is $5.1 trillion. The impact of global outsourcing is not just a relocation of jobs, but also a dampening of employee compensation levels in more developed economies. For example, in 2000, salaries for senior software engineers were as high as $130K, but dropped to about $100K at the end of 2002; and entry-level computer help-desk staff salaries dropped from about $55K to $35K. For IT vendor firms in countries like India, IT engineering jobs command a premium Indian salary that is at a fraction of their U.S. counterparts. In sum, migration of labor and work create complex globalization dynamics.
Innovations in telecommunication, information technology, and computing advances make up key drivers to support the increase of globalization. In 1995, the World Wide Web had 20 million users, exploded to 400 million by late 2000 and had an estimated one billion users in 2005. However, the rapid growth and adoption of information technology is not evenly diffused around the world.
The gap between high versus low adoption rates is often referred to as the digital divide. In 2002, the number of users per 1000 people was highest in Iceland at 647.9; others in the top five ranks of internet users included Sweden at 573.1, the United States at 551.4, Denmark and Canada both at 512.8, and Finland at 508.9. In comparison, countries at the low end of internet use were Tajikistan and Myanmar at 0.5 per 1000, Ethiopia at 0.7, the Congo at 0.9, Burundi at 1.2, and Bangladesh at 1.5.
The digital divide reflects other disparities of globalization. Globalization of computer technology also entails a growing trend of computer crimes on an international basis, which requires cross-border collaboration to address it. Additional globalization trends related to computer technology include developments in artificial intelligence, high-speed connections such as wireless applications, and integration with biotechnology.
The impacts of globalization on environment sustainability are hotly contested, with major environmental protests held at international economic meetings or prominent multilateral trade forums. The United Nation's 1987 publication of the Brundtland Report (named for Gro Brundtland, Prime Minister of Norway), galvanized international attention on sustainable development. A major assumption was that the degradation of the environment in developing countries was due primarily to poverty.
Some advocates of globalization consider free trade to be a solution to alleviate poverty and subsequently, reduce pollution. However, the arguments depend upon corporate social responsibility, managerial knowledge of environmental sustainability, and a level of ignorance in the developing community.
Critics find that often large MNCs have greater financial resources than some developing countries, which can be used to compromise and derail regulatory regimes from protecting the environment. For example, while a MNC may not produce or sell certain environmentally damaging products in a country with tight regulatory controls, they may find their way to markets with fewer environmental regulatory constraints—"pollution havens." This line of logic leads to the notion of globalization becoming a "race to the bottom" as countries compete with lowering of environmental standards to attract foreign capital for economic development.
One of the landmarks on environmental globalization is the Kyoto Accord, an international treaty to reduce greenhouse gas emissions based on exchanging limited pollution credits between countries. After lengthy multilateral complex negotiations, the Kyoto Accord was concluded in December, 1997 for ratification by national governments. On February 16, 2005, the date for the Kyoto Protocol to take effect, 141 nations ratified the agreement. Even though the United States is the world's largest polluter in volume and per capita output of greenhouse gases, the Bush administration refused to ratify the Kyoto Accord.
Culture is another area of complex controversies with globalization. Competing perspectives about how globalization affects cultures revolve around the debates of cultural homogenization versus cultural diversification. The optimistic view of cultural globalization is that cultural diversity focuses on freer cultural exchanges with broader choices and enrichment of learning from different traditions. People have greater choices of globally produced goods, in addition to local offerings, without being bound by their geographical location. Alternatively, critics of cultural globalization present evidence demonstrating the depletion of cultural diversity through processes referred to as "Disneyfication" or "McDonaldization."
Furthermore, not only is cultural diversity diminished but cultural quality is as well with mass produced goods being directed toward a common denominator. The criticisms are related to a sense of "Americanization" of the world, rather than globalization. The process involves a sense of far-reaching, anonymous cultural imperialism. Debates from each perspective are intense with substantial evidence that also reveals complex ties to social and political dynamics within and between national borders.
Cultural globalization continues into the foreseeable future with many more controversial dynamics related to three important issues: 1) the impact of extractive industries on the socio-economic, cultural exclusion and dislocation of indigenous peoples and their traditional knowledge; 2) international trading of cultural goods and knowledge; and 3) inflow of immigration impacts on national culture, which creates a tension between a sense of threat to the national culture and migrant demands for respect to their traditions in a multicultural society.
The multiple dynamics of globalization—regionalism, inequality, financial flows, migration of labor and work, technological innovations, environmental sustainability, and cultural dynamics—form a turbulent and complex environment for managing business operations. While seven trends were highlighted to provide a brief sketch of interrelated complexities and controversies globalization, it also surfaced other significant issues.
Global concerns revolve around terrorism, rapid transmission of pandemic diseases and viruses, the rise of China's and India's economies, an aging population in wealthier northern countries versus younger growing populations in the southern hemisphere, and advances in biotechnology are intricately embedded in globalization processes.
Globalization entails both opportunities and threats for creating and sustaining competitive strategies. Emerging economies offer resources in terms of labor, as well as expanding market opportunities. However, geopolitical relationships and backlashes from perceptions of cultural imperialism, such as the tensions between the United States and the European Union during the Iraq war create challenges for business operations.
Global managers have a wide range of options to deal with globalization. Organizational strategies for international operations involve two related demands—the need for local orientation and the need for integration (as shown in Figure 2). Firms with low need for local orientation, but high need for integration require a global strategy that centralizes core operations with minor modifications for local adaptation. However, firms with a need for high local orientation, but low need for integration, require a multinational strategy that decentralizes significant operations to respond to local market conditions. Firms integrating a high need for both local orientation and organizational integration should strive for a transnational strategy.
In addition to selecting a strategy for global competition, managers also need to make decisions regarding the internationalization process. Two processes are important. First, the development of innovations in a home market and as products moves along the product life cycle stages, firms can take products entering into the plateau of a mature stage to new international markets. Often the flow moves from developed to developing countries.
Second, stages of internationalization with foreign entry modes that involve increasing resource commitment and risks start with exporting to licensing or joint ventures to wholly owned subsidiaries. The stage approach to internationalization takes time, which is a challenge within a global environment where information moves around the world in nanoseconds.
Alternatively, Kenichi Ohmae argued that the speed and complexities of globalization require firms to rethink their internationalization process because incremental stage models are too slow. Given the rate and quantity of knowledge flows in global competition, firms are likely to face competition in their home markets, with comparable innovations to their own before they are able to establish a foothold in the international market.
The incremental stage models are too slow for competing in an increasingly integrated global economy. Ohmae suggested that firms form global strategic alliances with partners established in three major markets—North America, Europe, and Asia, particularly Japan. Development of global competitive intelligence and innovation among the partners provide for rapid market development and the establishment of strategic positions in multiple locations.
Basically, globalization into the twenty-first century creates a fundamentally different competitive environment that shifted from incremental internationalization processes to almost simultaneous deployment of innovations. This internationalization process also shifts the work of global managers from managing a field of expatriates to collaborating with strategic partners across national borders and managing global off-shore outsourcing vendors in multiple geographical locations.
Globalization is a culmination of complex and controversial trends that include degree of geographical integration, inequalities, financial flows, labor and work, technological innovations, environmental sustainability, cultural dynamics, and organizational strategies for global competition. Given a historical perspective, globalization has fluctuated over time and many indicators support a trend of increasing globalization since the 1980s.
While the United States is the dominant superpower in the global economy, the rise of both China and India is an important consideration for international business. Global managers have options for strategies and structures, as well as different internationalization processes. In sum, globalization creates a competitive arena where MNCs evolve into global networks with collaboration and controversial differences as necessities to sustain a competitive strategy.
Diana J. Wong-MingJi
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