Abstract

This paper discusses the cost of globalization, including: the definition on globalization, benefits and constraints of globalization, the modern day causes of globalization, todays emerging markets and how they pertain to globalization, environmental causes of globalization, and finally how immigration and education tie into globalization. The over arching goal of this paper is to help the reader gain a better understanding of globalization, and the cost there of, by using examples of each discussion topic.

Globalization Explained

 

When it comes to globalization, though the term has an extensive amount of usage and lack of precise meaning, we typically define it as something to the effect of continuous interaction between countries or cultures. Globalization is an integration of markets and technologies to develop influences and operations on an international level. Globalization was brought about, coined really, in the 1960s to bring a world scope to ideas and innovations (though merchants and migrants had used the idea for thousands of years).

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When globalization occurs it allows individuals and corporations to reach multiple parts of the world faster and more efficiently. Today’s globalization allows billions of people to interact instantly no matter the distance between them. A good example of this is social media, especially Facebook, which allows us to view the world from a lens of a different culture. Globalization has been an advocator of change in many different areas of our society such as: our culture, politics, environment as a whole, economics and even our technology.

Though globalization is nowhere near meeting the world’s needs and personal welfare, it has paved the way for multinational companies, economic giants if you will, who are willing to face this challenge head-on. These companies have followed the want for profit, allowing them to develop markets so they could find cheaper means of production and so they could exploit themselves through the promises they make.

Benefits of Globalization

 

The term globalization gets a lot of wrath when it comes to democracy; however, there are a few benefits we should exam while thinking about the cost of globalization. Generally speaking, global integration through investment and trade tend to encourage economic advancements. Take

the “East Asian Miracle” for example. Between 1960 to 1990, Asia’s Four Tigers, “transformed themselves from technologically backward and poor to relatively industrialized and affluent economies” (Liang, 2010). Each country was able to develop their GDP at a rate of 6-7% every year for more than 30 years. Appendix A precisely shows the growth of each economy during both the rapid growth eras and the slowing of growth eras.  Without the human power and learning to operate on a larger perspective, it would not have been possible; not to mention the

large-scale exporter the economy had to be. The amounts of growth for these economies were unsurpassed by most all of those economies that were equivalent (or close) in income and efficiently. How they were able to do this comes into question now. It is believed that this growth can be attributed to the export- driven growth and the government’s involvement in finding and assisting: exports, foreign capital, investment, etc.

Another benefit of globalization is that it has led to a better and larger scale of mobilization of capital, thought not every country, or region for that matter, receives it in equal weight. Having capital, as a resource, tends to prompt growth by using higher investment rates, more advanced technology, and allowing easier access to foreign markets. This could happen in one of two ways: 1) through foreign direct investment, or 2) or by having different financial options, such as long term loans, from global capital markets.

Constraints of Globalization

Globalization has just as many constraints as it does benefits. One constraint is that in progressive democracies, it becomes harder for the government to control economic conditions. This makes the leaders of these countries reluctant to gravitate towards globalization because it causes fear of damaging their own economies.

These arguments can and are applied to policies as well. According to Marshall (2015), “if government policy options have become more constrained, then it will matter less to citizens who controls government”. We see this as being evident in political participation, which has dropped considerably as an effect of globalization. Of course, participation depends upon what and how much is thought to be at risk for those involved. In fact, between 1970 and 2007, industrialized countries saw an average voter turnout drop of close to 9%. What is interesting here is while voter turnout dropped during this time, other factors such as FDI stock, equity of stock and trade all increased substantially.

Another constraint of globalization is outsourcing of jobs in more developed markets, such as the US and Canada, to less developed markets. The reason this takes place is because these higher up markets tend to have higher cost of living, which means more pay is required for the employees working in these area. If companies outsource to countries that have a lower cost of living, they save on labor cost. A good example of this is with Japan and the United States with Chinese firms. The US and Japan have been trading partners with China for a long time. Business from the United States has actually be encouraged by the Chinese government by offering tax breaks to firms that export products out of China (Kumar, Medina, and Nelson, 2009). China’s currency has also purposefully been kept low over this time period specifically for business promotion, all while China builds upon its middle class. However, President Trump is changing the game here, in 2018, with the war on trade. The US has become concerned with market access in China, the focus being on tariffs. Though Beijing has been at least attempting to lower the tariffs, being successful in some sectors to the point of being lower than newly emerging markets.

The largest area that China could improve upon is the restrictions that take place on the amount of access foreign firm have to their consumers (Vaswani, 2018). These restrictions are mainly on direct investment, from financial firms to cars, making it difficult for foreign businesses to invest in China and for these companies to do business with Chinese citizens without the involvement of a joint venture.

The next logical step would be for China to drop joint venture restrictions and directives to please the United States, still allowing Beijing to have what it wants most- control. If foreign companies were given the option to set the terms in Beijing, it would fundamentally

change China’s system. This is a very unlikely situation, however, because President Xi has had, and would like to keep, a lot of control over China’s economy. The way the US now plays into this is that President Trump will place more tariffs on Beijing if they do not cooperate. This is, and already has somewhat raised the prices on goods here in the US, but in the long run it will help us out.

Modern Day Causes and Indicators

We are beginning to see the importance of two major factors that play into the world’s economy: international trade and direct investment. The role of international trade in the global economy

has become more apparent in recent years because of globalization. As shown in appendix b, when compared to economic activity, international trade has increased drastically. In the 1950’s, the merchandise trade (trade between Hong Kong and its trading associates) only claimed close to one percent of the world’s GDP, by 2011 this ratio had risen to around twenty-six percent (Griffin and Pustay, 2015). Another six percent could be accounted for through trade of services  (Griffin and Pustay, 2015). Some of this evolution can be considered a product of the invention of the Internet and other technological advances. Another major benefit of this advancement is making trade in more complex areas, such as: banking, retailing, and education, easier to come by. Overall, as long as trade can be conducted in the form of Internet transaction, the location of the people trading becomes obsolete.

One good indicator of modern globalization is commodity price convergence. In a completely integrated global market, prices would be consistent for every country. We all know this is never going to occur because of the different cost in transaction (ie. Transportation, Tariffs, Monopolies, etc.) causes a larger difference in prices in both export and import markets. In an ideal situation, increases in factors such as: communication, bank activities, and globalization, would point towards commodity prices in sporadically dispersed markets and theoretically should develop similarities over a period of time. These spatial price associations are subject to the international trade theory. According to the Hechscher-Ohlin principle, the factor price equalization theorem states that unless the beginning factors of endowment are not equal enough, commodity mobility will never fail to stand-in for factor mobility. Said in another way, a higher level of market integration for simple commodities is an important condition for reaching free mobility of production factors. Another factor of trade theory deals with the law of one price.

This was at first meant to analyze the closeness in prices of traded goods and has been utilized in more recent times for integration among primary commodity markets and prices.

Another indicator of globalization is based upon technology. Traditional indicators are somewhat limited because they are primarily based upon innovation inputs and outputs. While trying to understand the globalization situation, one must pay close attention to events occurring in the

innovation process itself.  Major indicators of technological collaboration such as: strategic alliances, joint ventures, etc., are attempting to fill the gap (Rycroft, 2003). Keeping these arrangements in mind helps us to focus on firms, universities, and government agencies in the scope of globalization. If we were to view globalization through the idea of emergence and evolution of social capital, this allows us to see that even with the most technological revolution, success not only depends on trust and shared values but on engineering, economic and scientific factors as well.  Something that comes across as striking is how only a small amount of businesses and corporation can successfully innovate on their own, especially in more complicated areas such as bioengineering. The majority of innovation we see today takes an abundance of organizations working together, most of which come from foreign nations.

Emerging Markets

When it comes to emerging markets in globalization, research suggests there are two greatly diverse ways it could end up. One way is that these new markets could gain investment and be able to diversify their risks. The second option is not so pleasing; these new markets could end up having increased chances of a complete financial crash after receiving more capital.

Some evidence shows opening a market financially in emerging markets often allows for a drop in the price of equity capital and might even promote domestic investment. However, other research by Joshua Aizenman (2004) shows the risk possibility of liberalization (the removal or limitation of restriction for free trade of goods) and the defenselessness of the new markets financial framework in regards to capital mobility. These risk are still a possibility for developed economies; however, they are considerably more destabilizing to developing nations. In most cases, it has been found that stock markets tend to become more vulnerable shortly after liberalization; but settle down and stabilize in the overall picture. Something fascinating is that we have seen that openness of trade in commodities can actually have an influence on the amount of crashes that emerging markets experience, but in direct opposite correlation to financial openness. The effects of globalization in finance and trade are noted in appendix c and suggest that there is a strong correlation between the frequency of crashes and the expansion of capital. Trade openness corresponds with huge drops in the amount of crashes for new markets. Appendix C is an example of this with the emerging market accepting financial flows and not accepting the goods flows, which leads to potential for more crashes.

Another way globalization has affected emerging markets is through international capital flows, which were on the rise in the 1990s and are believed to have led to the Asian Financial Crisis of 1997. From 1998 to 2007, we witnessed global capital flows rising from around 7% of the worlds GDP to around 20%, however this took a drop in 2008, which is when we saw a large increase of bank credit flows (Fuertes, Phylaktis, and Yan, 2016). The question is: was this drop associated with “hot money” (money that is moved typically fast between financial markets on a regular basis in an attempt to get the highest short term interest rates possible according to

Investopedia)? This type of capital has the potential to make the market unstable. In recent years, we have devoted the equity premium as a possible instigator of hot money. A jump in hot money, for emerging markets, can mean destabilization and a need for regulation. This has make hot money a key topic for policy design.

 

Environmental Causes

Businesses would not have been able to grow and mature their international enterprises to what we saw during the post World War II era without making substantial changes in two areas: the political and technological environments.

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In the early twentieth century, there were so many barriers on foreign trade and trade created by the national governments that made it hard and often infuriating for companies to enter the new markets. Following World War I, countries such as: the United States, Germany, France, and more, wanted to promote local firms for governmental supply contracts that they started putting tariffs and quotas on imports (Griffin, & Pustay, 2015). Because of this action, we saw a significant drop in international investment and trade across the 1930s. Following World War II, however, these policies became flipped and the leading trading powers started renegotiating the tariffs and quotas. This allowed them to do away with the barriers to FDI.  We saw the General Agreement on Tariffs and Trade (GATT) come into play when negotiating reductions along with GATTs successor, the World Trade Organization (WTO).

International business was promoted with these changes in governmental policies. Advancement in technology, especially in information processing, communications, and transportation allowed

international business to be more accessible and lucrative. When it comes down to it, at one time our primary way of transportation was a ship, the only form of data processing and management was a pencil and paper practically, and the way we got information around was a letter and postman with a horse. These factors made international business extremely difficult, time consuming, and very inefficient. These technological advancements in transportation alone has promoted international travel and tourism, which today is a huge part in international trade especially in services. Now that computers are becoming advanced enough to compute large

amounts of information, businesses can manage their factories or offices for anywhere in the world. Exxon Mobil is a good example of this because they are dependent upon computers to monitor and control the output of its refineries and the transportation of its tankers to meet the fluctuations of global demand of oil and gas.

Immigration and Education

Globalization pretty much defined the post-Cold war era in many ways. Globalization led to the reallocation of cities and even entire countries and regions. Globalization can be broken down into three key areas: new information and ways of communicating, new global markets and post- national economics, and unknown levels of immigration (Suarez-Orozco, 2001). Globalization is the reason we have so many immigrant children coming into out school systems in large numbers and eventually their futures will be molded by it. Education is very important and it has become a high-risks process that convey the skills we need as adults to participate in a quickly emerging, knowledge dependent part of the global economy that we have built. Children, immigrant or not, who are schooled in the era of globalization will have their well being shaped

as well as their opportunities. These children will be more prepared to integrate into a global society. For immigrant children, the education they receive in their new location serves as the point of contact they have with the society their parent decided to become part of.

Focusing on immigration in globalization, it is impossible to have globalization without migration. Typically, people cross borders to offer their skills, investments, and ideas to a market that gives them the opportunities that their native country cannot necessarily offer them. Often when discussing globalization, concerns about migration arise. The recent “Brexit” vote, which

was to tidy things up/ create a slight separation between Britain and the European Union, was mainly concerned with policies that are granting free movement of migrants between European Union nations (Smith, 2018). The majority of the concerns about immigration came from either real or imagined fears about the amount of people who would be coming to British territory and how they were going to handle employment, the economy, and really the life Britain’s know. Migrants and commodities have traveled along trade routes like the Silk Road for thousands of years. Traders stormed the Indian Ocean and other waters over centuries before what we define as the age of discovery started an era of new trade and migration between the old and new world during the 15th century. Some say that a worldwide open border policy for immigration could get labor to allocate by itself productively, which would led to a rise in global GDP. Then there are some that are more skeptical; arguing that no country will actually commit to completely free trade; making migration laws a necessity in order to protect the economy of each country involved.

Moving back towards education and globalization, education has played a considerable role in the process of globalization. As we all know, knowledge and skills become more primitive as the

economy grows and develops. Education and skills are also used as a way to gain foreign direct investment, which is a primary driver of development for numerous countries. In a way, education and skills are a determining factor in how knowledge and technologies are transformed and utilized; thus the degree to which a nation can build its industries and the level of competition it brings to the global market (with goods and services). Education also can play an important role in moderating the public’s response to stress created by globalization and ensuring social and economic benefits through development and interaction with the global economy.

Conclusion

In conclusion, there are many factors that contribute to the cost of globalization. The few that I choose to analyze and get a better point of view on are: the benefits and constraints of globalization, modern day causes and indications of globalization, emerging markets and what it takes to be successful in a globalized atmosphere, the environmental causes it take for globalization to occur, and overall how immigration and education are affected by globalization. Before giving detail of any of these factors, I first gave an over view of what globalization really is. Just to recap, globalization has a wide variety of definitions, which leads to uncertainty when discussing it. However, in a broad sense of the term, globalization is an integration of markets, ideas, technologies, and innovations. Globalization has helped broaden the horizons for many businesses and economies; allowing them to reach every corner of the globe with ease and efficiency within a few seconds. Globalization has its ups and downs, like most things in this world. For example, one constraint of globalization is that, for democracies, it becomes harder to control the economic factors involved. However, one benefit is that it tends to move capital

faster (though not always equally). Globalization can be caused by many factors such as trade, investment, and political and technological environments. Globalization can cause polar extremes when it come to the success, or lack there of, of newly emerging markets. Finally, globalization plays a huge part in immigration and education. An example of this was in the post-war era with the relocation of many cities to even regions. Overall, globalization is a very complex topic that I believe everyone should study at some point in his or her life to understand where our future is likely headed in one way or another.

References

  • Aizenman, J. (2004). Financial Opening: Evidence and Policy Options. In Challenges to Globalization: Analyzing the Economics. ed. Robert E. Baldwin and L. Alan Winters. 479-94. Chicago: University of Chicago Press.
  • Fuertes, A., Phylaktis, K., & Yan, C. (2016). Hot money in bank credit flows to emerging markets during the banking globalization era. Journal of International Money and Finance, 60, 29-52. doi:10.1016/j.jimonfin.2014.10.002
  • Griffin, R. W., & Pustay, M. W. (2015). International business: A managerial perspective (8th ed.). Harlow: Pearson Education Limited.
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  • Marshall, J., & Fisher, S. D. (2015). Compensation or constraint? how different dimensions of economic globalization affect government spending and electoral turnout. British Journal of Political Science, 45(2), 353-389. doi:http://dx.doi.org.proxy.tamuc.edu/10.1017/S0007123413000422
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  • Sacra, M.M. & Nichols, L.M. Int J Adv Counselling (2018) 40: 443. https://doi.org/10.1007/s10447-018-9336-0
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Appendices

Appendix A

This table shows precise number of each economies growth in each stage of growth. Liang, 2010.

Appendix B

This graph shows world exports as a percentage of world GDP from 1950 to 2004. International Business: A Managerial Perspective, Fifth Edition, by Ricky W. Griffin and Michael W. Pustay. Published by Prentice Hall. Copyright © 2007 by Pearson Education, Inc.

Appendix C

This table shows the effects of globalization in finance and trade. Martin & Rey, 2006.

 

 

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