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Globalisation - Drivers of Globalisation

Author: Jim Riley  Last updated: Sunday 23 September, 2012

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, particularly if the business is providing a service (e.g. selling software)
  • 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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