What is Globalisation?

Globalisation refers to the process by which businesses, markets, and economies become more interconnected and integrated across national borders. The increase in interconnectedness between economies involves the increasing flow of goods, services, capital, and people. Thus, globalisation has been driven by advancements in technology, transportation, and communication. This makes it easier and faster for economies to conduct business on a global scale.

What are the Drivers of Globalisation?

As previously mentioned, the key drivers of globalisation have been facilitated by advancements in technology, transportation, and communication. The drivers themselves, are mainly; increases in trade of goods and services, increased financial flows, the investment of transnational corporations, and the migration and international division of labour.

Trade of Goods and Services

International trade involves exporting and importing goods and services across borders. Over the past few decades, trade has expanded dramatically due to reduced trade barriers and improved transportation technologies. Countries therefore benefit from engaging in trade, as it provides them with a wider range of goods and services which they are unable to obtain domestically, while also fostering economic growth.

As of 2022, global trade in goods and services was approximately $22 trillion (USD). The graph below displays the growth in global trade since 2000. Looking at the graph, we see that global trade has significantly increased over the last few decades. This indicates the subsequent increase in globalisation as countries are becoming more "interconnected" by trading with one another more frequently.

Financial Flows

Financial flows refer to the movement of money across countries for the purpose of investment, trade, or business operations. This includes foreign direct investment (FDI), portfolio investments, and remittances sent back home by migrants. As such, reduced protectionism and the globalisation of financial markets have enabled the flow of capital between economies. This has allowed investors to diversify their portfolios and access new financial opportunities and investments. For example, emerging markets have seen substantial increases in FDI inflows, with countries like China and India becoming major recipients. This influx of capital has supported their rapid industrial growth and infrastructure development.

Foreign direct investments make up the majority of the world's financial flows. However, the global economy's financial flows are made up of other investment types such as portfolio and land. The following pie chart displays the composition of the global financial flows.

Transnational Corporations

Transnational corporations (TNCs) are companies that are located and operate in multiple countries. These companies play a significant role in driving globalisation by establishing production facilities, supply chains, and networks across multiple countries. In doing this, TNCs are able to reduce labour costs, capitalise on new market opportunities, and offer employment to domestic populations.

For example, the company Apple's biggest product is the iPhone. They are considered a TNC, as they build and design their products in various countries. They design their products in the United States and then use factories and labour in China and Taiwan to manufacture the products. This allows Apple to benefit from the lower labour and production costs offered in China, helping them maximise their profits. As a result, the domestic economies in China and Taiwan are boosted, as jobs are created and additional products are bought. This would be seen as an increase in each country's economic growth.

Technology, Transport, and Communication

Technological advancements, alongside improvements in transport and communication, have been crucial in driving globalisation. The internet and improved mobile technology have enabled instant communication and connectivity. Additionally, advancements in transport, such as container shipping and air freight, have revolutionised the movement of goods. For example, companies such as eBay and Amazon rely heavily on advanced logistics and people's access to the internet. With the introduction of companies such as these, it has become possible for people to order a product from one part of the world and receive it in another within days.

However, with current worldwide economic crisis events such as COVID-19 and the Russia-Ukraine war, costs of transportation methods have increased. For example, post COVID-19, people across the world are battling high levels of inflation as transport of goods and services has decreased, limiting supply. This reduction in the supply of goods and services is demonstrated by the supply-demand graph below, with the supply curve shifting to the left. According to this graph, a shift to the left in the supply curve results in a higher price.

However, moving away from this world catastrophe over the last few years, we have seen technological advancements decrease prices once more. For example, as of April 2023, the average cost for air cargo in tonne-kilometres fell by 6.6% compared to April 2022. This reduction was implemented to make it easier and more accessible to ship products worldwide, encouraging consumption and spending.

What are the Challenges of Globalisation?

While globalisation brings about increased economic growth and access to a wider range of goods and services, there is also a downside to increased globalisation. For example, economic critics argue that globalisation has led to job losses in developed countries, as TNCs shift production of their goods and services to lower cost countries.

Additionally, the COVID-19 pandemic has highlighted the vulnerabilities of global supply chains. As a result, there has been a call for greater resilience in the face of disruptions. As countries seek to recover from the pandemic, there may be a renewed focus on balancing the benefits of globalisation with the need for greater self-sufficiency and risk management.