The Organization for Economic Cooperation and Development (OECD) defines globalization as a term that
"is generally used to describe internationalization of markets for goods and services, the means of production, financial systems, competition, corporations, technology and industries. This gives rise to increased mobility of capital, faster propagation of technological innovations and an increasing interdependency and uniformity of national markets ”.¹
Unfortunately, globalisation also comes with challenges. Let's take a look at how globalisation impacts businesses internationally.
Impact of Globalization on Business
Globalization can be described as the internationalization of the business environment.
As a result of globalization, businesses are operating on a global scale. Businesses and international trade are more connected than ever. This integration also leads to interdependence, as businesses now rely on their international partners or counterparts. Globalization portrays a shift towards a more integrated and interdependent world economy. It is a process of adaptation that disrupts the traditional processes of economics and culture. Globalization is a continuously changing process rather than a specific state that industries eventually reach.
Globalization has impacted business in many ways. It allows for the easier movement of labor and capital across countries and within countries. Globalization has also given rise to the growth of multinational corporations (MNCs), which are large companies that operate globally.
Deloitte and Royal Dutch Shell are examples of MNCs.
Relationship between Globalization and International Business
Globalization represents the connectivity and integration of businesses around the world. One of the ways it impacts international business is by increasing global competition. Global entrants enter international markets, which can challenge certain local businesses.
Globalization increases the amount of foreign direct investment (FDI), which helps the development of global brands worldwide. Globalization also allows for the increased spending on innovation and development across the international sphere.
Globalization also allows for certain saturated markets and industries to expand globally. A lot of developed countries face the risk of slow growth rates and saturated markets. To encourage the growth of these businesses, companies can expand their operations internationally as a result of globalization.
Globalization also encourages the increase of investment in emerging markets. Emerging markets become attractive to companies that experience slow growth rates in other markets, as their emerging counterparts tend to experience higher growth rates.
Finally, globalization allows for the development of many e-commerce businesses. Due to internet and digital world, many companies now have access to a wide range of resources that can help them compete in the global market.
Globalization is different from internationalization. Internationalization refers to the way in which a company expands to influence international markets, while globalization is the entire process through which local economies connect with those of other countries.
Positive and Negative Impacts of Globalization
Globalization has both positive and negative impacts.
Advantages and positives
The positive impacts of globalization are:
The easier movement of labor and resources increases opportunities for businesses and individuals.
The creation of jobs as a result of the expansion of large global companies (MNCs).
Consumers get to enjoy a wider variety of local and global goods and services.
Increased FDI in emerging economies.
The sharing of knowledge becomes easier.
Countries joining the World Trade Organization (WTO) making it easier to communicate and conduct business globally - easing international trade.
Companies get to enjoy higher growth rates by expanding to international markets, rather than staying solely in saturated markets.
Cultural diversity can be increased by globalization as people gain insights into different cultures and lifestyles.
Negative impacts
The negative impacts of globalization include:
The entrance of large global companies into new markets can drive smaller local businesses out of business.
Globalization can be more profitable for MNCs than for other small, local businesses, as MNCs have access to more resources and funds.
Globalization can also result in the opposite of cultural diversity, where countries globally become more and more similar and lose parts of their unique traditions due to internationalization.
Could lead to the exploitation of certain groups, as companies outsource their labor to certain countries where the cost of labor is lower.
Migration can lead to possible social tensions.
Challenges of Globalization in Business
Globalization comes with its own sets of challenges.
Main challenges
Other than the negative impacts listed above, one of the main challenges with globalization is exploitation. Certain MNCs have been accused of paying unfair wages (very low wages) to decrease the prices of their products and stay competitive. In addition to unfair wages, exploitation also takes form in terrible working conditions and the exploitation of the environment as a result of pollution and damage.
Another main challenge of globalization is that certain risks and policy uncertainties remain. There exists an inequality of income, outcomes and opportunities. The OECD explains that the income of the richest 10% of the population is about nine times as much as the income of the poorest 10% of the population.
Solutions to globalization challenges
There are a couple of objectives the OECD has set out to tackle these challenges. The first one is to prioritize people-centered growth. The aim of this would be to avoid the possibilities of exploitation of people and the environment by creating a new form of global integration through programs like gender inclusion, migrant integration, strengthening ties between rural and urban areas and implementing strict climate objectives.
The second objective is to stop tax evasion and corruption by promoting transparency and cultural integrity.
The final objective is to allow trade and investment to work for all by supporting small and medium-sized businesses. This plan would also allow for the empowerment of people by giving them access to certain skills and training they need for jobs in sophisticated sectors
Business Considerations from Globalization - Key Takeaways
- Globalization portrays a shift towards a more integrated and interdependent world economy. It is a process of adaptation that disrupts the traditional processes of economics and culture.
- Globalization is a continuously changing process rather than a specific state that industries eventually reach.
- Globalization leads to interdependence.
- Globalization encourages international trade and competition and can benefit both emerging and developed markets.
- There are positive and negative impacts of globalization.
- The main challenges with globalization are exploitation and policy uncertainties.
- The OECD has set out three objectives to tackle these problems. These policies include promoting transparency and cultural integrity; empowering small businesses and people; and promoting a new form of global integration to avoid exploitation.
¹ OECD, https://stats.oecd.org/glossary/detail.asp?ID=1121
² OECD, https://search.oecd.org/social/challenges-and-solutions-for-globalisation.htm
³ OECD, https://search.oecd.org/social/challenges-and-solutions-for-globalisation.htm
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