3.2.6.1 - Globalisation

Integration and its drivers

Globalisation makes decisions in one economy increasingly dependent on markets, production and finance elsewhere.

Globalisation is the increasing integration and interdependence of economies. Its characteristics include cross-border trade in goods and services, investment and financial flows, internationally organised supply chains, and the movement of workers, information and technology. A country can trade more without every form of integration increasing: goods trade, migration and financial openness need not change together.

Distinguish a characteristic from a cause. A growing international supply chain describes integration; cheaper communication helps explain why it became possible. Digital networks let a firm coordinate design, production and customer support across time zones. Containerisation and better transport reduce the cost and uncertainty of moving goods. These changes make it profitable to separate production stages which previously had to be close together.

Lower tariff and regulatory barriers widen accessible markets. Liberalisation of investment and finance makes it easier to fund foreign operations. Rising incomes enlarge demand for products from abroad, while firms seek larger markets and lower costs. Technology and policy reinforce each other: an open border matters more when transport is affordable, and cheap communication matters more when a service can legally be supplied abroad. Integration can slow or reverse when conflict, restrictions or vulnerability encourage firms to shorten supply chains.

Multinational networks

Multinational corporations connect economies through decisions about where to produce, invest and purchase inputs.

A multinational corporation (MNC) owns or controls production or business operations in more than one country. Exporting alone does not make a firm multinational. Establishing a foreign factory or acquiring control of a foreign business is foreign direct investment (FDI). Buying a small holding in a foreign company's shares without management influence is a different financial transaction.

An MNC may place research near skilled workers, assembly near a suitable labour force, and distribution near customers. It can spread large research and marketing costs over worldwide sales, transfer production methods between subsidiaries and draw local suppliers into international networks. Cross-border investment therefore promotes globalisation; larger integrated markets also encourage more investment. The relationship runs both ways.

For an illustrative example, a medical-equipment firm opens a foreign assembly plant and trains local suppliers to meet a quality standard. Capital, technology and supplier contracts cross borders. Local firms may learn useful techniques and enter export markets. However, spillovers are limited if the plant imports almost all inputs, keeps knowledge within the subsidiary and employs few locally skilled workers. Ownership is not enough to establish the size of a benefit.

MNC bargaining power also matters. A government may offer tax relief to attract a mobile firm; its eventual tax receipts depend on the relief, profits and enforceable rules. An MNC's purchasing power may raise efficiency but weaken small suppliers' bargaining positions. Assess the actual contracts and alternatives rather than assume every multinational is either beneficial or exploitative.

Effects on less-developed economies

International integration can relax development constraints, but the gains depend on how it changes domestic capabilities.

Access to export markets gives producers demand beyond a small home market. Investment may supply machinery, managerial knowledge and training that domestic saving cannot yet finance. Higher productivity lowers unit costs, making firms more competitive; increased productive capacity can shift long-run aggregate supply right. Jobs and incomes can rise, creating demand for local goods and improving opportunities for households. This connects firm-level productivity with economic growth.