Monday, 23 May 2011



The aim of this essay is to untangle the main factors that have promoted the globalization of business. In this essay, l will attempt to define globalization and to discuss the theory of international production including the various factors that have promoted the globalisation of business. I will conclude that the factors that have promoted the globalization of business so far as the technological changes that have occurred, the paradigm shifts in ideologies, economic liberalisation policies and the effects of migration trends.
Globalisation is a phenomenon that gained popularity in the early 80’s and has shaped the structure of what the global village is this day. Stiglitz (2002) defines globalization as the closer integration of the countries and peoples of the world brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders. Wolf (2005) suggests that globalization is a long run process with powerful forces behind it. Hill (2009) argues that globalization refers to the shift toward a more integrated and interdependent world economy, citing the decline in barriers to the free flow of goods, services and capital since the end of World War II and the wave of technological change as key factors.

The eclectic theory of international production brings together three dimensions to the globalisation of business. The “why” approach which explains competencies that TNCs need in-order to penetrate foreign markets, the “where” approach that underpins the location theory. The location theory explains the notion that TNCs only invests in favourable markets in terms of optimum market size, tariff barriers, costs, skill intensity and investment incentives. The third dimension is the “how” approach which focuses on the internalisation theory. It explains why TNCs opt to maintain control of key functions and what to outsource in these markets (Alderson, 2004). Alderson (2004) in summary argues that TNCs will relocate if and when ownership and location conditions are in its favour and it is in the interest of the TNC to internalise in the global markets. The following are the factors that have promoted global business within the context of this theory.

Technological change is the first factor that has promoted the globalization of business through advances in information technology, communications and transportation logistics. Hill (2009) argues that technological changes since World War II have transformed the global audience through leading to the emergence of the World Wide Web and the creation of the global village through advances in transportation logistic. This resulted in the development and popularization of mass media and communication technologies such as cell phones, credit cards and e-commerce which has transformed the way we do business today (Totir et al, 2011).

Advances in transportation logistics have been pivotal to the development of commercial jet aircraft, super freighters including the concept of containerization which significantly lowered costs and transformed transportation logistics (Hill, 2009). Technology has had a causal effect on the emergence of new process industries as well as the demand for more complex technical skills (Nascia, 2009). It has facilitated information and knowledge gathering techniques (Arnheiter, 2010). Developments in technology has resulted in the globalization of production, financial markets, transnational institutions and the unfolding shifts in demographic patterns of the global economy (Dickens, 2009).

James (2001) argues that countries that have embraced technological changes such as India and Japan became more competitive in foreign markets (James, 2001). The World Bank report (2010) on world development indicators from 1960 to date summarizes that technological advances have led a cumulative causation in the global economy linked to economic growth, improved standards of living and poverty reduction in developing countries. The Indian industry has in the last two decades proactively responded to market demands due to the introduction and effective application of new technological capability (Krishnan, 2010).

The shift in ideology is the second factor which facilitated globalization of business. The shift from the traditional conception of sovereignty based on nation states and governments as the supreme and ultimate authority in a society accelerated after 1980 (Eroglu, 2010). The privilege to engage in global business shifted to international institutions, transnational corporations and individuals. The geo-economic shift of centrally planned economies to transitional economies was another significant factor when more than 30 countries from the former Soviet Union shifted towards market based systems (Hill, 2009). The Uruguay Round finalized in 1993 adopted key deregulation measures culminating with the formation of World Trade Organisation to institutionalise and internationalise global trading systems (Hill, 2009).

More significant ideology shift by China, other states in Southeast Asia and Latin America continue to move progressively towards greater free market reforms (Hill, 2009). Hoare (2008) argues that since China set about reforming its economy a decade ago, its economy has continued to grow at the rate of 9,5% per annum. The fall of the Berlin Wall and the completion of the European Single Market in 1992 eased trade and investment between countries in the EU as markets were opened (Dickens, 2010).

The third factor that facilitated globalization is the economic liberalization of global financial markets, privatization and foreign direct investment (FDI). This was facilitated by policy prescriptions from the International Monetary Fund (IMF) which forced governments through liberalization and privatization to relinquish control of economic policy instruments (Eroglu, 2010). The OLI framework developed by John Dunning (1977, 1981) is one of the models of foreign direct investment which guided TNCs to decide which markets to operate in (Barbra-Navaretti et al, 2004). FDI promoted free trade which allowed workers in poor countries to get a living wage and helped alleviate global disparities in income and life chances (Sort, 2001).

Demand for Foreign Direct Investment has grown largely due to privatisation measures and deregulation of the financial markets. Over the past decade FDI flows into India have averaged around 0.5% of GDP against 5% for China and 5.5% for Brazil. FDI inflows to China now exceed US $ 50 billion annually. It is only US $ 4billion in the case of India (Goyal, 2006). TNCs also developed social networks and a global network of knowledge workers (Hill, 2009) which facilitated the development of value chain production networks such as Dell and Air Bus.

Restructuring of Hong Kong’s banking industry contributed positively to regional economic development by channelling funds from outside the region to countries in the East Asia Pacific region (Arestis, 2001). The World Bank (2006) annual report argues that ounce considered the periphery of the global economy; emerging economies are transforming to become the main drivers in the global economy (World Bank, 2006). China has since surpassed Japan in 2010 to become the world’s second-largest economy, capping the China’s three- decade rise from Communist isolation to an emerging superpower (Bloomberg News, 2010).

The other factor that promoted globalisation of business is the increased demand for labour migration across borders in response to shifts in global patterns. Economic liberalisation policies caused disparities in skill intensity which precipitated the increased demand for foreign labour (Taran et al, 2003). Migration is a key factor which has been linked to globalisation (OECD, 2000). Wickham et al (2008) argues that rapid expansion of high-technology industries in Ireland in the 1990s lead to a shortage of suitable labour resulting in mass migration and the recruitment of migrants an integral of Ireland’s human resources strategy. However, despite advances in the globalisation of business, migration remains a volatile issue with many countries opting to impose restrictive policies and as a result in the policies on migration lagging behind on the global arena.

This essay explored the main factors that have since promoted the globalisation of business. It looked at the theory of international trade and how it has facilitated the policy on globalisation to support the emergence of TNCs. The essay concludes that globalisation of business has been mainly spurred by technological changes particularly in the digital era, shifts in global ideologies particularly the former soviet bloc countries and the China’s shift from a command economy towards market based reforms. Economic liberalisation policies and foreign direct investment drives led by the International Monetary Fund (IMF) and the global migration trends which have facilitated human skills development and capacity to drive these reforms.
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