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Q&A - What are the main factors driving globalisation?

Tuesday, October 27, 2009
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Whilst there are many factors that have contributed to globalisation, it is the actions of businesses that have done most to accelerate the process in recent years.

Influential commentator Hamish McRae has stated that businesses are the “main driver” of globalisation. Why is this?

• Multinationals (businesses that operate in more than one country) want to increase sales, profits and shareholder value. Globalisation provides that opportunity
• The barriers to international business are lower and falling – it is much easier to expand into new territories
• Governments want to encourage domestic businesses to expand overseas (it results in a flow of profits back into the domestic economy) – so there is lots of help available for businesses looking to expand overseas

Businesses themselves though are not the only drivers of globalisation.  Consider factors such as:

Picking up on two examples from the drivers above:

Lower transport costs

• Costs of ocean shipping have come down, due to containerisation, bulk shipping, and other efficiencies
• This helps to bring prices in the country of manufacture closer to prices in the export market

Digital communication

• The Internet has dramatically lowered the cost of transmitting and communicating information
• Expressed in 2005 US dollars, the charge for a three-minute New York-London call has dwindled from $80 in 1950 to $0.23 in 2007
• Digital communication has stimulated global trade in “knowledge products” – e.g. software, outsourced services & media content

There are several alternative approaches for a business looking to expand globally – many choose to follow one or more of the following:

• Establish production sites overseas
• Licence technology & other intellectual property
• Joint ventures
• Franchising
• Offshoring / outsourcing
• Selling directly to overseas markets – either with sales agents, distribution agreements or online

The motivations for successful businesses to operate globally are strong, and growing.  For example:

• Higher profits and a stronger position and market access in global markets
• Reduced technological barriers to movement of goods, services and factors of production
• Cost considerations – a desire to shift production to countries with lower unit labour costs
• Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost)
• Avoidance of transportation costs and avoidance of tariff and non-tariff barriers
• Extending product life-cycles by producing and marketing products in new countries

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