Drivers of Globalization

Drivers of Globalization There are two main drivers of Globalization which seem to underlie the trend towards greater globalization. First is the decline in barriers to the free flow of goods, services and capital that is occurred since the end of World War II. And the second driver is technological change in particular areas which has dramatic development in recent years as communication, information, processing, and transportation technologies. Declining Trade and Investment Barriers – Many of the barriers to international trade took place the form of high tariffs on imports of manufacturing goods.

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The typically aim of such tariffs was to protect the domestic industries from foreign competitors. For removing of the barriers for flow of goods, services and capital between nations, GATT (General Agreement on Trade and Tariff) established. Under the umbrella of GATT, eight round of negotiation among the members worked to lower barriers to free flow of goods, services. In addition to reducing trade barriers, many countries have also been progressively removing restrictions to foreign direct investment (FDI).

According to United Nations, 94% percent of 1885 changes made worldwide between 1991 to 2003 in the laws governing foreign direct investment created a more favorable environment for FDI. FDI also has been reflected in a dramatic increase in the number of bilateral investment treaties designed to protect and promote investment between two countries. As of 2003, 2265 such treaties in the world involved more than 160 countries, while in 1980’s only 181 treaties were exist. Such trends have been driving both the Globalization of the Market and Globalization of production.

The Lowering of Barriers to International trade enables firms to view the world rather than a single country, as their market. The lowering of trade and investment barriers also allows firms to base production at the optimal location for that activity. Thus a Firm might design a product in one country, produce component parts in two another countries, and assemble the product yet in another country. According to given below data from World Trade Organization, The Volume of World Merchandise has grown faster than the world economy since 1950.

From 1970 to 2004, the volume of the world merchandise trade expanded almost 26 fold, outstripping the expansion of world production, which grew about 7. 5 times in real terms. As per the given [pic] Due to falling barriers to cross border trade and investment, the growth in world trade seems to have accelerated since the early 1980s. the above summarized data imply several things. First, more firm are doing what BOING does with 777 and 787 and IBM with the ThinkPad, means dispersing parts of their production process to different locations around the globe to drive production costs and increase product quality.

Second the economies of world’s nation-states are becoming more intertwined. As trade expands, nations are becoming increasingly dependent on each other for important goods and services. Third, the world has become significantly wealthier since 1950,and implication is that rising trade is engine that has helped to pull the global along. Foreign Direct Investment (FDI) is playing an increasing role in the global economy as firm increase their cross-border investments. The average yearly out flow of FDI increased from $25 billion in 1975 to a record $1. 3 trillion in 2000. etween 1992 to 2004 the total flow of FDI from all countries increased by about 360 percent, while world trade doubled and world output grew by 35 percent. As per the result of strong FDI flow, by 2003 the global stock of FDI exceeded $8. 1 trillion. In total, at least 61000 parent companies had 900000 affiliates in foreign market that collectively employed some 54 million people abroad and generated value accounting for about one tenth of global GDP. [pic] The Role of Technological Change- The lowering of trade barriers made globalization of markets and production a theoretical possibility.

Technological change has made it a tangible reality. Since the end of World War II, the world has seen major advances in communication, information processing and transportation technology, including the explosive emergence of the Internet and World Wide Web. Telecommunication is creating a global audience. Transportation is creating a global village. Microprocessors and Telecommunications – Over the past 30 year, Global communication has been revolutionized by the developments in satellite, optical fiber and wireless technologies, and now the World Wide Web.

The cost of global communication plummets, which lowers the costs of coordination and controlling a global organization. Thus between 1930 and 1990, the cost of a three minute phone call between New York and London fell from $ 244. 65 to $ 3. 32. by 1998 it had plunged to just 36 cents for consumers and much lower rates were available for businesses. The Internet and World Wide Web – In 1990, fewer than 1 million users were connected to the internet. By 1995 it had rise to 50 million, in 2004,it grew to about 945 million.

In 2007 it grew to 1. 47 billion users which about 25% of world population. [pic] Expanding Volume of Web-based tariff is a growing percentage of cross border trade. The Web is emerging as an equalizer. It rolls back some of the constraints of location, scale, and time zones. The web makes it much easier for buyers and sellers to find each others. Wherever they may be located and whatever their size, the Web allows businesses, both small and large to expand their global presence at a lower cost than ever before. Transportation Technology –

Since World War II, several Major innovations in transportation technology have occurred; In economic terms the most important are probably the development of commercial jet aircraft and super-freighters and the introduction of containerization, which simplifies transshipment from one mode of transport to another. Containerization has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distance. Since 1980, the world’s containership fleet has more tan quadrupled, reflecting in the part the growing volume of international trade and in part the switch to this mode of transportation.

As a result of the efficiency gains associated with containerization, transportation costs have plummeted, making it more economical to ship goods around the glob, thereby helping to drive the globalization of markets and production, between 1920 and 1990, the average ocean freight port charges per ton of U. S. export and import cargo fell from $95 to $29. The cost of shipping freight per ton-mile on railroads in the United States fell from 3. 04 cents in 1985 to 2. 3 cents in 2000.

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