The Globalization Process

Globalization is the process whereby the world and its economic and socio-cultural systems are made more uniform, integrated, and interdependent. Recent technological advancements—the Internet, communications, and transportation—reduce the distances between countries and make the world smaller. The combination of technological and geopolitical forces renders previously closed social and political systems more open and susceptible to change.

A crucial factor in promoting globalization is the reduction in transport and communications costs. The cost of sea freight has dropped by an annual average of 0.4% over the past 40 years, passenger air transport by 2.5% and trans-Atlantic telephone calls by 6.7% [1]. Revolution in telecommunications through fiber optics and satellites allows the development of worldwide networks connecting ten thousands of universities, government agencies, and research institutes with huge databases of computer programs and all kinds of information. Personal computers connected to these networks can access, communicate, and exchange information instantaneously with one another at little or no cost. Information as a part of capital becomes easily accessible and can be used to substitute for workers. Business firms now can move information instead of people across borders to where they can be used cheaply to serve the needs of consumers worldwide.*

Culture is increasingly globalized in the sense that beliefs are increasingly shared, alien social forms adopted and material products more uniform. Culture is defined as a body of customary beliefs such as religion, social forms such as language, and material goods such as food, clothing, and shelter. Globalization of culture is based on the diffusion of lifestyles and products from more developed countries, especially the U.S., via the instruments of worldwide television, music and consumption patterns.

The economy is increasingly globalized by way of globalization of finance, operations by multinational corporations (MNCs), foreign direct investment (FDI), global specialization in the location of production, globalization of the tertiary sector of the economy, globalization of the office function, and global tourism.

Telecommunication advances allow the establishment of a single global capital market. Computers can now monitor and trade in stocks, bonds, national currencies, and other financial instruments listed anywhere in the world instantaneously. Dealers and brokers with offices in New York, Tokyo, and London can trade practically 24 h a day. Communications and fast transportation allow international firms to move money, materials, products, and economic assets around the world in seconds. Economic activities around the world can be directed and monitored from a single location. Firms can outsource or subcontract certain activities, such as banking, credit and customer services, to a low-cost country. For instance, India has become a subcontractor for software programming and customer services for many U.S. software companies. The Internet provides opportunity for firms in developing countries to announce their presence and participation in the world market. The web has truly transformed nationally or regionally segregated markets into a one-world market.

Cheaper and faster transportation and communication open access to new markets, inputs, suppliers and contractors, with whom the buyers and international investors may not otherwise be able to establish relationships, allowing narrower forms of specialization in discrete ("fragmented") production processes. A low-wage developing country may provide only the production or assembly phase of a product. Consider the case of a toy licensed by an U.S. company to a Canadian firm, which together designed the toy. The Canadian firm looked for a cheap subcontractor in Southern China to produce the toy. The labor cost of the Chinese firm was $2 a day. The products were shipped to Hong Kong and other parts of China for inspection by chain stores such as Wal-Mart, K-Mart or Toy-"R"-Us. The Canadian company's subsidiary in Hong Kong arranged the delivery of the finished products to the U.S. by ship. The toy was sold at retail stores for $8, which covered the cost of licensing, production,

* Political power is also increasingly being shaped by taking advantage of the information structure rather than merely by the possession of money, as demonstrated by Governor Howard Dean, one of the Democratic hopefuls, in his campaign for President in the United States in 2003.

materials, shipping, and marketing, and of which the Chinese wage cost was only a tiny portion [2].

Foreign direct investment is instrumental in bringing the developing countries into the globalization process. Foreign direct investment has grown faster than world trade and four times faster than total world output. Although 80% of total FDI originates from the United States, Europe, and Japan, contrary to popular belief, most of FDI goes to developed regions. The United States and Canada alone absorbed 30% of FDI and the U.S. was the largest recipient of FDI from other countries. Of the $119.4 billion of FDI that went to less developed countries (LDCs) in 1997, 75% went to China, Brazil, Argentina, Mexico, South Korea, Chile, Poland, and Thailand; the remaining portion was divided among all other LDCs.

Multinational corporations play a vital role in globalization of the economy by establishing subsidiaries and plants where they find it most profitable. There are over 60,000 MNCs which produced, as of 1998, 25% of global output. In 1997, the top one hundred MNCs controlled 16% of the world's productive assets, and the top three hundred controlled 25% [3]. Many top MNCs are larger than most national economies. Sales of any four of the top 10 MNCs are greater than ghoss domestic product (GDP) of India. Each of the four top MNCs is larger than the economy of Indonesia. Around two-thirds of world trade is handled by MNCs in which one-third is within these companies (i.e., trading and transfers of resources, products, and technology among their subsidiaries and branches across national boundaries). In 1997, they employed 100 million people directly, which accounted for 4% of employment in the developed countries and 12% of total employment in developing countries. Multinational corporations are able to compete on a worldwide scale effectively since they can operate with greater information efficiency, sharing information with their subsidiaries and branches via the Internet, satellites and fiber-optic communication systems. They have an advantage on information over competing national firms since they know the worldwide markets, products, consumer preferences, characteristics of national labor forces, and business opportunities. In addition, MNCs possess a huge amount of capital, great technological capability, highly effective managerial skills, and overall economies of scale, and play a major role in innovation and technology transfer between the more developed countries (MDCs) and LDCs. Multinational corporations play a leading role in forming tightly-knit global value chains in which they establish specific procurement and distribution systems that include certain sourcing countries of their choice. This raises the minimum entry level and makes it difficult for many new aspiring industrializing countries to participate in the production chains.

Multinational corporations assess the economic value of each regional location in the world economy. Availability of natural resources no longer forms an important basis for comparative advantage and specialization. Substitutes for many raw materials (called transmaterialization) have been developed. For instance, metallic elements are being replaced by advanced engineering nonmetallic materials such as composites. Examples include graphite or glass embedded in plastic, and ceramics made of clay and silicon. Transmateriali-zation changes the nature of resources. The nature of the finished products is being changed as fewer material components and more intelligent components are being used in new products. This is called the dematerialization process. Examples include computers, telephones, videotape digital recorders, plasma television sets, flat screen high definition television and other smart products such as robotic vacuum cleaners. Furthermore, new man-made materials are being developed due to recent advances in materials science and engineering. These new materials are generated by new industrial processes and new industries such as super polymers, composites, fiber optics, and fine ceramics. The result is a decrease in investment of natural resources and an increase in investment of manufacturing and services by private investors. Today, of the estimated stock of FDI, petroleum and mining accounts for only 40% while manufacturing and services make up more than 50%.

In combination with the development of new materials is a new production process which is based on multipurpose, reprogrammable equipment and systems. The process is called the computer-integrated manufacturing system (CIM) using robotics, automated transfer, industrial lasers, new techniques for precision forming and shaping, and flexible manufacturing systems (FMS). It provides opportunity for much greater flexibility, small lot production, minimal inventories, rapid market response, and product adaptation, while maintaining or even enhancing economies of scale in the use of plants or equipment.

With brain power replacing mechanical power in products, improvement in transportation and communications, and the creation of new man-made materials, there is less need for firms to be located at the source of raw materials. As a result, more final goods are being produced at the point of consumption. This explains why in 1998, 75% of FDI went to developed countries. Multinational corporations decide where to locate an operation or a factory in response to characteristics of the labor force, skill level, prevailing wage, attitude toward unions, government environment for business, tariffs, and transportation rates. This decision is made within the context of an overall optimal allocation of resources according to comparative advantage of each activity in each location. Thus, an MNC might close some factories in a high cost country and move them to locations in a low cost country if this enhances its competitive edge.

The path of economic development as seen in terms of output and employment structure is normally from agriculture to manufacturing to services. As FMS are increasingly adopted, new products are opened and new markets for quite different target groups of consumers are developed. Computer-integrated manufacturing system and FMS require a new management technology based on worker and customer participation in the production process. Since customers demand quality products, only they can evaluate them. Thus management technology must be customer-driven instead of product-driven. This calls for a new system of customer-integrating services called integrated process management (IPM). With the creation of the Internet, a global customer integrating service for even a specialty product can be easily implemented. Consequently, the service sector is growing fast in all countries.

Services account for a greater proportion of employment and output than manufacturing and agriculture in industrialized countries. Trade in business services grows at a much faster rate than production of manufacturing or primary commodities. In 1995, services trade amounted to over 1.5 trillion dollars. When MNCs operate overseas they utilize legal counsel, insurance, accounting, business consulting, advertising, medical care, licensing, designs, and computer services. The U.S. is the leading exporter of services. U.S. service exports are more than three times as much as automobile exports, at $200 billion in 1996. The major services exported by the U.S. are entertainment (movies, music, television programs), education, particularly university education, medical and legal services, business management, business consulting, banking services, accounting, insurance, computer software development, real estate development, stock and commodity brokerage. However, many large American entertainment firms, such as MGM/UA, Universal Studios, 20th Century Fox, and Walt Disney, are owned by foreign investors.

One of the most notable effects of globalization is expanding tourism across the globe. Many developing countries rely on tourism as a major export and foreign exchange-earning industry. Among these are China, Mexico, Thailand, and Turkey, to cite a few. In these countries, tourism grows much faster than the manufacturing industry and its share in their GDP has steadily increased over time. For instance, tourism accounted for 10% of the GDP of Thailand in 1995. Due to improvement in communications, transportation, and information technology, tourism has become the largest global industry, with world travelers spending about $15 trillion in gross output in 1995. It employed 250 million people and produced 14% of world GDP [2].

Negotiating Essentials

Negotiating Essentials

Always wanted to get a better deal but didn't have the needed negotiation skills? Here are some of the best negotiation theories. The ability to negotiate is a skill which everyone should have. With the ability to negotiate you can take charge of your life, your finances and your destiny. If you feel that others are simply born with the skill to negotiate, you should know that everyone can learn this wonderful skill.

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