Globalization: Benefits, Costs, and Risks in a Globalized Economy

Globalization: A Shift Towards a More Integrated World Economy

Globalization of Markets

• National markets merge into a single global market.
• Trade barriers are reduced or eliminated.
• Tastes and preferences converge.
• Firms promote the trend by offering the same products worldwide.

Globalization of Production

• Goods and services are sourced from locations around the globe.
• Firms take advantage of national differences in the cost and quality of factors of production (land, labor, capital).

Benefits of Globalization

• Lower prices for goods and services
• Greater economic growth
• Higher consumer income
• More jobs

Critics of Globalization

• Job losses
• Environmental degradation
• Cultural imperialism of global media and multinational enterprises (MNEs)

Factors Driving Globalization

• Declining trade and investment barriers
• Technological advancements (transportation, communication)

Institutions Regulating the Global Marketplace

World Trade Organization (WTO)

• Polices the world trading system established by the General Agreement on Tariffs and Trade (GATT).
• Ensures that nations follow the rules.
• Promotes lower barriers to trade.

International Monetary Fund (IMF)

• Manages the international monetary system.

World Bank

• Measures levels of economic development.

Political Economy and Globalization

• Democratic revolution
• Shift towards market-based models
• Deregulation: Removing legal restrictions on markets and private enterprises.
• Privatization: Transferring state property to private investors.

Government Intervention in Globalization

Political Arguments

• Protecting the interests of certain groups within a nation.
• Protecting jobs, industries, and national security.
• Retaliating to unfair foreign competition.
• Protecting people from dangerous products.
• Furthering foreign policy goals.
• Protecting human rights.

Economic Arguments

• Boosting the overall wealth of a nation.
• Infant industry argument: Protecting an industry until it can compete internationally.
• Strategic trade policy: Using tariffs, subsidies, quotas, and other measures to gain an advantage in international trade.

Foreign Direct Investment (FDI)

• Occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country.
• The firm becomes a multinational enterprise (MNE).
• The flow of FDI refers to the amount of FDI undertaken over a given time period.
• The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time.
• Types of FDI: Greenfield investments, acquisitions, mergers.
• FDI is shifting towards services.

Benefits of Inward FDI for a Host Country

• Resource transfer effects
• Employment effects
• Balance-of-payments effects
• Effects on competition and economic growth

Costs of Inward FDI

• Adverse effects on competition
• Adverse effects on balance of payments
• Loss of national sovereignty and autonomy

Government Restrictions on FDI

• Encourage outward FDI: Insurance, tax incentives.
• Restrict outward FDI: Limit capital outflows, taxes.
• Encourage inward FDI: Incentives to invest, ownership restraints.
• Restrict inward FDI: Ownership restraints, performance requirements.