UNIT II THE

STRUCTURES OF
GLOBALIZATION
UNIT II
Objectives 01 define economic
globalization

explain the two major

02 driving forces of
global economy

differentiate economic
03 globalization from
internationalization
trace the origin of

04 economic
globalization
01
The
Global
Economy
 The Global
Economy
Economic globalization refers to the increasing
interdependence of world economies as a result
of the growing scale of cross-border trade of
commodities and services, flow of international
capital and wide and rapid spread of
technologies.

Economic globalization is a historical process, the

result of human innovation and technological
progress.

In economic terms, globalization is nothing but a

process making the world economy an organic
system by extending transnational economic
processes and economic relations to more and
more countries and by deepening the economic
Two Major Driving
Forces of Economic
Globalization

The rapid
growing of
information in all . Marketization
types of
productive act
Dimensions of Economic
Globalization
The The
. The
globalization of globalization of
globalization of
financial and technology and
trade of goods
capital markets communication
and services

The
globalization of
production
Difference between Economic
Globalization from Internationalization
Economic globalization is a functional integration between internationally
dispersed activities which means that it is a qualitative transformation rather than a
quantitative change while internationalization is an extension of economic activities
between internationally dispersed activities

Transnational corporation otherwise known as multi -national corporation is a

corporation that has a home base, but is registered, operates and has assets or
other facilities in at least one other country at one time (24). Examples are the US-
based General Electric (GE), the Coca-Cola Company of Atlanta, Georgia, US Nike
and others.
 Origin of Economic
Globalization
. Global economy in the 19th and 20th
centuries grew by an average of
In the 16th century world system nearly 4 percent per annum, which is
analysts identify the origin of roughly twice as high as growth in the
modernity and globalization through national incomes of the developed
long distance trade in the 16th economies since the late 19th century.
century.
19th &
16 th
17 th
18 th
20th

In the 17th and 18th century

global economy exists only in
trade and exchange rather than
production as the world export to
World GDP did not reached 1 to 2
percent.
International
Monetary Systems
and Gold Standard
International monetary system
(IMS) refers to a system that forms
rules and standards for facilitating
international trade among the
nations. It helps in reallocating the
capital and investment from one
nation to another.

 IMS as rules, customs, instruments,

facilities, and organizations for
effecting international payments
with the main task of facilitating
cross-border transactions,
especially trade and investment.
Evolution of the International
Monetary System
● In 1870 to 1914, with the help of gold and
silver, trade was carried without any
institutional support. Monetary system
during that time was decentralized while
market based and money played a minor
role in international trade in contrast to
gold.
● After World War I, the use of gold declined
due to increased expenditure and
inflation which were caused by war. Major
economic powers were on gold standards
but could not maintain it and failed
because of the Great depression in 1931.
● In 1944, 730 representatives of 44
nations met at Bretton Woods, New
Hampshire, United States to create a new
international monetary system called as
the Bretton Woods system, the aim of
which is to create a stabilized
international currency system and ensure
a monetary stability for all the nations.
Evolution of the International
Monetary System
● The Bretton Woods system ended in 1971
as the trade deficit and growing inflation
undermined the value of dollar in the
whole world. In 1973, the floating
exchange rate system, also known as
flexible exchange rate system was
developed that was market based.

● The following roles of a properly designed

IMS must be considered: to lend order
and stability to foreign exchange markets,
to encourage the elimination of balance-
of-payments problems, and to provide
access to international credits in the
event of disruptive shocks.
European Monetary
Integration
European monetary integration refers to a 30-year long
process that began at the end of the 1960s as a form of
monetary cooperation intended to reduce the excessive
influence of the US dollar on domestic exchange rates,
and led, through various attempts, to the creation of a
Monetary Union and a common currency. This Union
brings many benefits to Member State

The European Monetary System (EMS) on the other

hand is a 1979 arrangement between several
European countries which links their currencies in an
attempt to stabilize the exchange rate. This system
was succeeded by the European Economic and
Monetary Union (EMU), an institution of the European
Union (EU), which established a common currency
European Monetary
Integration
The European Financial Stability Mechanism (EFSM) is a
permanent fund created by the European Union (EU) to
provide emergency assistance to member states within
the Union. It raises money through the financial markets,
and is guaranteed by the European Commission. Fund
raised through the market, use the budget of the
European Union as collateral.
 International Trade
and Trade Policies
International trade is the exchange of goods,
services and capital across national borders.

It is a multi-million dollar activity, central to the

Gross Domestic Product (GDP) of many countries,
and it is the only way for many people in many
countries to acquire resources.

In acquiring products where demand is inelastic

and domestic supply is inadequate absent
traders, consumers and suppliers are forced to
either develop substitute goods or devote a large
percentage of their income.
 International Trade
and Trade Policies
Two Key Concept of Economic International Trade:

1. Comparative Advantage comes in; so long

as the two countries have different relative
efficiencies, the two countries can benefit from
trade.

2. Specialization refers to this process;

countries as well as individual businesses can
maximize their welfare by specializing in the
production of those goods where they are most
efficient and enjoy the largest advantages over
rivals.
International Trade
and Trade Policies
Trade policies refer to the regulations
and agreement of foreign countries. It
defines standards, goals, rules, and
regulations that pertain to trade
relation between countries.
Focuses of Trade Policy in
International Trade
Tariffs
These are taxes or duties paid for a particular
class of imports or exports. Imposing taxes on
imported and exported goods is a right of
every country.
Trade barriers
Theses are measures that governments or
public authorities introduce to make imported
goods or services less competitive than locally
produced goods and services.

safety
This ensures that imported products in the
country are of high quality.
Types of Trade Policies
National Trade Policies
 This safeguards the best interest of its
trade and citizen.

Bilateral Trade Policy

 To regulate the trade and business
relations between two nations, this
policy is formed.

International Trade Policy

 This defines the international trade
policy under their charter like the
International economic organizations,
such as Organization for Economic Co-
operation and Development (OECD),
World Trade Organization (WTO) and
International Monetary Fund (IMF).
Trade Policy and International Policies
In most developed countries where open market economy prevails, the
international economic organizations support free trade policies.

The World Trade Organization (WTO)

The World Trade Organization (WTO) deals with the global rules of trade between
nations with the main function of ensuring that trade flows smoothly, predictably
and freely.

Global Economy Outsourcing

Outsourcing is an activity that requires search for a partner and relation-specific
investments that are governed by incomplete contracts and the extent of
international outsourcing depends on the thickness of the domestic and foreign
market for input suppliers, the relative cost of searching in each market, the
relative cost of customizing inputs and the nature of the contracting environment
in each country.
There are three essential
features of a modern
outsourcing strategy

Firms must search They must convince They must induce

for partners with the the potential the necessary
expertise that suppliers to relationship-specific
allows them to customize products investments in an
perform the for their own environment with
particular activities specific needs. incomplete
that are required.
contracting.
Possible Determinants of the
Location of Outsourcing
 Size of the country can affect the “thickness”
of its markets.
 The technology for search affects the cost and
likelihood of finding a suitable partner.
 The technology for specializing components
determines the willingness of a partner to
undertake the needed investment in a
prototype.
 The contracting environments can impinge on
a firm’s ability to induce a partner to invest in
the relationship.
End of Unit II:
Section 1
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02
Market
Integratio
n
 Market Integration
Market integration refers to how
easily two or more markets can trade
with each other. It occurs when prices
among different locations or related
goods follow similar patterns over a long
period of time. Groups of prices often
move proportionally to each other and
when this relation is very clear among
different markets it is said that the
markets are integrated.
 Market Integration
Example:

China produces toys at a cheaper price than

the US. If foreign trade increased between the
two countries, toys could be sold to the US
more easily, making them more available,
thus reducing price. If the demand for baby
dolls within a given geographical market were
to suddenly be reduced by 50%, there is a
good chance that the demand for baby doll
clothing would also decrease in proportion
within that same geographical market. Should
the baby market increase, this would usually
mean that the market for doll clothing would
also increase. Both markets would have the
chance to adjust pricing in order to deal with
the new circumstances surrounding the
demand, as well as adjust other factors, such
 Type of Related
Markets where Market
Integration Occurs

Stock Market Integration

 This is a condition in which stock
markets in different countries trend
together and depict same expected
risk adjusted returns.

Financial Market Integration

 It is an open market economy between
countries facilitated by a common
currency and the elimination of
technical, regulatory and tax
differences to encourage free flow of
capital and investment across borders.
Global Corporation
A global corporation is a business that
operates in two or more countries. It also goes
by the name "multinational company". Several
advantages are offered by global expansion of
business over running a strictly domestic
company.

Example:

One can find more customers in a country

whose economy is vibrant and expanding in
lieu of stagnant local and domestic economy
or market share that has hit a plateau
Historical Periods of
Globalization
 In early historical periods as both cities and
countries extended their reach beyond their own
borders, a form of globalization was initiated which
then followed complex patterns of interactive
engagements organized through trade and
industry directly influenced by the emergent and
subsequently dominant technologies especially in
shipping and navigation.

 American Corporations led the economic recovery

and expansion after the World War II destruction.
This period up to the reentry of Japanese and
European corporation to the global scene is viewed
as multinational corporations (MNCs).
The Finance Function
in Global Corporation
These three functions can be created by CFOs
through exploiting their internal capital markets:

Financing
A group’s tax bill can be reduced by the CFO like
borrowing in countries with high tax rates and lending to
operations in countries with lower rates.

Risk Management
Global firms can offset natural currency exposures
through worldwide operations instead of managing
currency exposures through financial markets.

Capital budgeting
Getting smarter on valuing investment opportunities
CFOs can add value.
Foreign Direct
 Foreign Direct Investment Foreign Direct Investment (FDI) was of corporate origin. It
is a major driver of extended global corporate development. It is an investment
made by a company or individual in one country in business interests in another
country, in the form of either establishing business operations or acquiring business
assets in the other country, such as ownership or controlling interest in a foreign
company and the key feature of foreign direct investment is that it is an investment
made that establishes either effective control of, or at least substantial influence
over, the decision making of a foreign business.

BRICS Economies
 Brazil, Russia, India, China and South Africa (BRICS) is an acronym for the
combined economies of Brazil, Russia, India, China and South Africa. BRIC, without
South Africa, was originally coined in 2003 by Goldman Sachs, which speculates
that by 2050 these four economies will be the most dominant. South Africa was
added to the list on April 13, 2011 creating "BRICS". These five countries were
among the fastest growing emerging markets as of 2011.
General Agreement on Trade in
Services (GATS)
 The General Agreement on Trade in Services (GATS) is the first multilateral
agreement covering trade in services which was negotiated during the last round of
multilateral trade negotiations, called the Uruguay Round, and came into force in
1995. The GATS provides a framework of rules governing services trade,
establishes a mechanism for countries to make commitments to liberalize trade in
services and provides a mechanism for resolving disputes between countries.
End of Unit II:
Section 2
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