|5 Min. Read||Dominic Dithurbide||July 25, 2022|
The term globalization has been in common use since the 1980s. Yet economic globalization traces its roots back to the Silk Road. Established in 130 B.C., the network of trade routes enabled China to open up trade with Europe and the Middle East. This movement of people, goods, capital, and knowledge would ultimately pave the way for the development of a global economy.
The first modern wave of modern globalization began in the early 1800s with the establishment of the gold standard. Centuries of European colonization led to technological advances and worldwide trade, but there was no global price convergence. When England fixed its currency to specific amounts of gold, it became the first international standard currency, and facilitated trading and investment.
However, World War II would greatly disrupt global relations. In the mid-1940s, the United States attempted to rejuvenate international trade by establishing new ground rules. This kicked off a second wave of globalization that is ongoing today.
As you can see, the process of globalization has played a major role in the development of the modern world. But what is it exactly? And what are the advantages and disadvantages of conducting global business this way?
Globalization can be defined as the interdependence of world economies. It’s brought about by the cross-border trade of goods and services, technology, and flow of investment, people, and information. In business, globalization provides access to capital, labor, and resources. An auto manufacturer, for example, may design a car in Japan, produce parts in the United States, and have it assembled in Mexico.
Yet cultural, political, and linguistic differences can make it difficult to enter new markets. To increase the odds of success, companies adapt products to meet the needs and preferences of local buyers through a process known as localization. Think of localization as one piece of a wider globalization strategy. (For more information, read our blog on globalization vs. localization.)
Today, globalization—and the localization it sparks—is growing faster than ever. As we enter a third wave that involves a digital economy, advanced technology, and cybercrimes, it’s vital to understand the impact worldwide.
1. Access to New Markets
Globalization gives businesses the opportunity to expand into new markets, reach international buyers, and increase revenue.
Over time, companies can experience saturation for demand of their products or services domestically. By expanding globally, they can continue growing by meeting foreign demand.
2. Spread of Knowledge and Technology
In order to cooperate globally, companies must share similar technology and a technological structure. E-commerce, for example, allows companies to sell products worldwide through Amazon.com.
Similarly, a centralized base of knowledge allows companies to quickly transfer information and develop innovative solutions. For example, in the healthcare sector that means new medications and medical devices can go to market faster in different countries.
3. Enhanced Global Cooperation and Tolerance
Globalization enhances cooperation by enabling countries to specialize. This allows them to leverage their economic strengths and trade those products for other resources. For example, a country in South America that specializes in sugar cane can export it to a developed country in exchange for manufactured goods.
On an interpersonal level, studies have shown that globalization promotes tolerance, as people are exposed to new cultures and network with others across the globe.
4. Promotes Economic Growth
Studies have found that globalization enhances economic growth by distributing resources more efficiently because countries can specialize in activities with comparative advantages. It also promotes growth indirectly through complementary reforms in terms of capital and financial development.
China, the country with the biggest positive change in globalization, saw a growth rate in 2000 that is 2.33 percentage points higher than in 1975 due to increased integration.
1. Increased Competition
Although free trade can increase a nation’s wealth, it also increases competition. Local businesses must compete with multinational corporations that produce cheaper goods at lower costs, which puts them at a disadvantage.
At the same time, the increase in choices impacts buying behaviors, as customers expect high quality products at low prices. That means companies must continuously adapt to meet demands.
2. Exploitation of Labor and Resources
Wealthy, industrialized nations sometimes enter trade agreements with developing countries in order to exploit weak labor and environmental laws. For example, the United States has been known to use foreign sweatshop labor to produce cheaper goods.
Lack of environmental regulations in some developing countries also allows developed countries to import resources such as precious metals at lower prices. This results in both lasting environmental damage and human rights abuses.
3. Imbalanced Trade
A trade imbalance, also known as a trade deficit, occurs when a country spends more on imports than it makes on exports. This creates a shortfall in capital that the country must make up for either by borrowing money from foreign lenders or permitting foreign investments in its assets.
While lending and investment help promote economic growth, these strategies can be risky—especially for a developing country. Throughout the 1990s, Thailand, Indonesia, and Malaysia ran large trade deficits and relied on foreign capital to make up for it. Yet when the Asian financial crisis hit in 1997, foreign investors backed out, leaving these countries in a precarious financial position.
4. Domestic Job Loss
When industrialized countries outsource labor, it causes a shortage of jobs domestically. Laborers whose skills are no longer in demand experience higher unemployment, and struggle to adapt to the changing labor market.
For example, the U.S. trade deficit with China eliminated 3.7 million jobs between 2001 and 2018, and more than 75% of those losses were in manufacturing.
Despite the challenges, expanding into foreign markets remains one of the most popular ways to grow a business. However, before you can “go global” you need a strategy that addresses the language, cultural, and legal barriers in different nations. Fortunately, MotionPoint is here to help you navigate the intricacies of globalization and develop a localization strategy that ensures business success.
Ready to launch in a new market? Contact MotionPoint today.