Key Drivers of Globalization
Globalization refers to the increased interdependence among countries; this interdependence has resulted in the international mobility of goods and services, capital and technology (Johnson and Tuner, 2009, p. 21). The development of globalization, like any other occurrence, has been driven by several factors as discussed below.
A change in pattern regarding trade regulations is an element of globalization. The move to deregulate trade by changing terms of customs duties facilitated trade across countries’ borders thus encouraging international trade as a result of the reduced cost of transactions. Former economic patterns were characterized by domestic regulations within countries to protect domestic industries from foreign competition. One of the steps that were used to achieve this protection was high custom duties and strict regulatory measures by countries about importation of commodities. A shift from this trend was initiated by the General Agreement on Tariff and Trade (GATT).
The GATT agreement reduced cross border restrictions that posed financial restrictions to investors. The high tariffs previously exercised made international trade more expensive as compared to domestic transactions hence promoting local development. The establishment of GATT saw the reduction of tariffs from their previous high rates to moderated rates. Led by developed countries like the United States and Britain, the tariffs were lowered from the then average of more than twenty per cent to an average of less than five per cent.
The concept of liberalized international trade through tariff reduction then spread to other countries including China and Russia. The adoption of the lowered customs agreement initiated by GATT, later to be known as the World Trade Organization, reduced barriers to international transactions and eventually increased the volume of global trade across countries. The tariffs reduction was, therefore, an important driver to economic globalization (Johnson and Tuner, 2009, p. 21).
Another driver of globalization is the witnessed transition of government policies over time. The generally changed and changing government policies include policies on local trade and foreign affairs (Jatuliaviciene and Kucinskiene, 2006, p. 35). Improved governance of individual countries as a factor to global governance and cooperation is another factor to trade globalization. Country governance as a basic unit forms forces of political alliances and bodies upon which economic agreements are made.
Established governments have played an important role in the formation of economic agreements through bodies such as the North American Free Trade Agreement and the European Union and even the West African ECOWAS. Though governments, either directly or through its agencies, have played a central role in the globalization process, globalization has been characterized by governments relinquishing their control over their domestic markets to the international forces of demand and supply.
Government policies are a driving force to globalization and have ensured the reduction or elimination of barriers to international trade through such tools as embargoes and quotas. Moves by governments to liberalize foreign investment policies as a means to attract foreign investors have also been players in the direct foreign investment into different countries. Policies that set standards for domestic productions by governments have also supplemented competition as a means to ensure productions that are of internationally acceptable standards. This has fostered interdependence of countries over products as quality standards are upheld (Jatuliaviciene and Kucinskiene, 2006, p. 37).
Production costs of varieties of products are other factors that have influenced the development of trade globalization. The difference in the costs of raw materials, labour and energy are determinants of the final costs of goods and services produced. Choices and efficiencies of different economies determine the production costs and the final product costs. This has influenced a level of specialization and interdependence to enable the sourcing of commodities from countries where they are cheaply produced.
The uniformity of markets from one country to another has also been a factor in the exploration of markets in different countries by producers with a lot of ease. The liberalized markets depend on their forces of demand and supply which operate uniformly across the world. This has offered a level ground for participants in economic markets to fit and operate in any country. The uniformity in markets is experienced in terms of similarities of trends and patterns of customer needs, similarities in market forces as well as that of production and delivery channels in different countries.
The uniformity has played a role in making the mobility of businesses and products easier. Competition has also been a factor in the rise and development of globalization. By initiating strategies of coping up with the increasing competition, market players are forced to expand in terms of geographical markets to keep ground for sustainability and profitability. The competition has in this respect promoted explorations of international markets by both producers and distribution agents who have gone global as they attempt to secure larger market and profit capacities (Jatuliaviciene and Kucinskiene, 2006, p. 38).
Another driver of globalization has been the developments in technology. Technological advancements have greatly influenced globalization in terms of communication and transport systems. The improved communication system has provided an efficient source of information for all participants in the global market enabling the market players to move to where they can meet their needs.
Improved transport systems have also realized faster and cheaper movement of goods and services hence encouraging movements across the globe. Technological improvements have also made it possible for the production of goods in large quantities and high qualities for the mass markets. Technology developments have made it possible for the specialization of firms and regions making it possible for production to take place cheaply. Technology has, therefore, had a significant impact in promoting globalization (Cooper and Hall, 2007, p. 275).
Globalization of Markets and Globalization of Production
Globalization of Market
Globalization of the market refers to the change from the defragmented domestic market into the international market. In a globalized market, there are reduced restrictions to trade activities across countries and increased competition. The market globalization, therefore, calls for the critical study into the determination of potential locations for selling products at maximized profits (Johnson and Tuner, 2009, p. 45).
Globalization of production
Globalization of production opens up opportunities to a variety of choices on where production best maximizes resources at minimal expenses (Johnson and Tuner, 2009, p. 45). It offers a variety of choices concerning resources used in production. The difference between globalization of the market and globalization of production lies in their scope of application. Globalization of market is oriented to the end product of a business entity giving it an advantage over its revenue while the globalization of production is oriented to an entity’s resources giving the advantage to minimize its costs of production (Johnson and Tuner, 2009, p. 45).
Foreign Direct Investment
Foreign direct investment is a mode of participation in international trade through “ownership and active control of the productive assets of ongoing business concerns by an investor in a foreign country” (Schaffer, Agusti and Earl, 2008, p. 19). Due to the direct control involved in foreign direct investment, this form of business is the most exhaustive as it provides an investor with every available aspect of opportunities provided in the market (Schaffer, Agusti and Earl, 2008, p. 19).
Under the foreign direct investment, a foreign investor builds a long term engagement, together with control of the business entity in which the subject has invested in the other country. The foreign investor to a business in this respect can obtain significant ownership value through business amalgamation techniques (Jansen and Stockman, 2004, p. 19). The foreign direct investments exist in two aspects to a particular country. A country to which foreign direct investment is made is referred to as the host country. The country from which the investment originates faces some potential risks and advantages as regards to the outcomes of the investment (Jansen and Stockman, 2004, p. 19).
Other methods used to engage in international trade
Other methods employed by companies in international business include: “international trade, licensing, franchising, joint ventures, acquisitions of existing operations and establishing new foreign subsidiaries” (Madura, 2008, p. 7). Under international trade, a business entity imports its resources or exports its product to another country without the mobility of capital to foreign countries. This method reduces risks that capital could be exposed to in other countries. Under licensing, a business entity is entitled to the provision of technology in a country for agreed-upon benefits. Franchising involves an agreement for the provision of specified “sales or service strategy, support assistance and initial investments” (Madura, 2008, p. 9).
Like licensing, there is no mobility of resources from one country to another as the facilities are provided for and managed by local mechanisms. Franchise agreements are entered into for periodic payments. Under joint ventures, a foreign firm enters into a partnership with a local firm in another country to reach the foreign market for its product. Acquisition of existing operations involves foreign firms taking over another firm in a foreign country to help it capture the foreign market while the establishment of new foreign subsidiaries involves the initial development of a particular operation in a foreign country to help in capturing the foreign market (Madura, 2008, p. 8).
Measurements Taken to Restrict Imports
Regardless of the globalization wave of reduced international trade restrictions, governments under some circumstances enforce measures to restrict the importation of particular products into its territory. One of the methods used by governments for this particular purpose is the imposition of tariffs. Tariffs are imposed by governments at different rates depending on the degree of the importation of a given product required into a country. The imposition of tariff increases the cost of the products and the rise in product cost also depends on the percentage of tariff imposed.
Relatively higher tariffs will lead to corresponding high costs which can make imports more expensive as compared to domestic products. This will, as a result, reduce the importation of goods on the grounds of economic infeasibility. Restrictions on imports can also be achieved through the establishment of a quota. Under quota policy, the government directly dictates the limit of the quantity of import allowed into a country over a specified period (Madura, 2008, p. 35). The steps by governments to restrict imports by using either tariffs or quotas are to protect specific interests in a particular country. The imposition of tariffs, which are discriminatory against imports, are at times meant to protect domestic industries under particular cases like during an establishment of the industry to give the industry a stable economic foundation.
Special interests such as health and security also call for complete bans when it is established that particular goods will cause harm if imported into a country. Another method used by governments to restrict imports is by use of embargoes. This, however, is more of a political device. An embargo is the imposition of a total ban on imports from a particular country. Within political considerations, a country can restrict its imports from another in event of adversity or conflicts between the two countries. This move is always considered to be a punitive measure over a country. The punishment is always in the form of lost revenues due to the country that would be exporting. The lost market would lead to wastage due to perishable goods or opportunity cost in terms of unit time revenues (Globalization, n.d., p. 1).
Impacts of Import Restrictions on Consumers
An import restriction, either through tariffs or quantitative restriction has the effect of cutting off the source of supply of a commodity to the consumers of the restricting country. Several consequences may arise from such restrictions. One of the consequences is that the consumers could lose the supply a commodity which offers them the best satisfaction. A restriction enforced to protect a domestic industry restricts consumers to the industry’s products which could be of low quality compared to imported products.
The control will, therefore, reduce the utility that consumers derive from the particular type of imported products which are restricted. Another impact of imports control to consumers is the reduced competition from international suppliers. This has the effects of reducing consumer power by limiting the number of suppliers and hence the variety of goods. As a result, domestic suppliers can intimidate consumers by increasing the prices of commodities due to the consumers’ reduced bargaining power. There is also a possibility of reduced supply as a result of the restriction.
The domestic industry may lack the capacity to meet the consumers’ demand. As a result of high demand and relatively lower supply, the market forces will push commodity prices upwards (Czinkota, Ronkainen and Moffett, 2008, p. 62). Other restrictions such as quotas and embargos imposed due to health and security reasons could on the other hand yield positive effects to consumers in the restricting country. The elimination of harmful goods from a country’s domestic market has the effect of protecting the health and lives of consumers.
This could by extension yield economic benefits to the consumers if the restricted goods had negative side effects that either causes impairments leading to economic disabilities or medical costs. Bans of commodities that are a threat to security also have the benefit of protecting citizens of the subject country restricting such imports. By restricting imports into a country, the products will be shifted to other markets such as that of the exporting country and other international markets (Globalization, n.d., p. 1).
Trade regulations in a country have the effect of shifting trade to the exporting country or other international markets. The effects to the consumers in the other markets will be the exact inverse of the effects encountered in the restricting country. In the case of domestic protection, where the restricted goods had no defaults, the consumers in the exporting country or any other international market get the opportunity to increased supply hence increased utility and lower prices (Czinkota, Ronkainen and Moffett, 2008, p. 62).
Results of German Car Exportation
1 dollar = 1 Euro
Therefore, 15 000 dollars = 15000 Euros
Profit per vehicle = selling price – cost price = 15000-14000 = 1000
Profit = 1000 Euros per vehicle
Question Two (when 1 euro = 0.8 dollars):
Therefore, 15000 dollars = 15000/0.8 = 18750 Euros
Profit per vehicle = selling price – cost price = 18750-14000= 4750
Profit = 4750 Euros per vehicle
Question three (when 1 euro = 1.25 dollars)
Therefore, 15000 dollars = 15000/1.25 = 12000 Euros
Hence profit = 12000-14000 = -2000
Loss = 2000 Euros per vehicle
Possible Actions to Protect a Manufacturer from Currency Variation
The manufacturer can protect his/her from the effects of currency fluctuation by choosing to transact in terms of the domestic currency. This will transfer the effects of the currency variation to the buyers in foreign countries. The choice of currency to be used is normally a negotiation between the buyer and the seller (Hinkelman, 2005, p. 50).
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