Economic globalization is the process of increasing the financial integration amongst countries. Consequently, economic globalization leads to the development of a "global marketplace" or "a single world market".
Economic globalization is enhanced by the accession of multinational enterprises, which result into the rise of the profits of that "global marketplace". It is hard to define a multinational enterprise (MNE) as definitions change over time. As Maurice Bye proposed (1958) a company is considered an MNE only depending on the amount of countries it occupies. Specifically he said "...MNE was purely given the name by the amount of countries a company occupied". However, in 1992, J. Dunning defined an multinational enterprise as "... an enterprise that engages in Foreign Direct Investment (FDI) and owns or controls value adding activities in more than one country"
Therefore, we could argue that a multinational company is a firm company that has "headquarters" in one country but with bases, manufacturing or assembly plants in others.
Following the above descriptions, someone would wonder, how companies become multinational. Indeed, the development of a firm into a multinational company is a long-lasting, expensive and difficult procedure, which we will discuss later.
At this point, it would be good to mention that a firm is any business such as a corporation or partnership. A firm differs from a multinational company by means of the firm's market being mainly in the country it sells into and having no FDI (Foreign Direct Investment) in any other apart from the one, which it sells to.
During the last few years, there has been observed, a great expansion/augmentation of MNEs (Multi national enterprises). This phenomenon greatly influences the world's economy.
There are many reasons why firms become multinational enterprises.
To begin with, by becoming multinational, a company can spread risks. More specifically, if the economy in one country is slow, or demand is decreasing, it is highly possible that economy will be prospering in another country. As a result, if a company sells products into a country where the demand is thriving, not only will the profits of the specific company increase, but the country's GDP will also increase.
Also, via expanding globally (i.e. the development of multinational companies) , the size of the market greatly increases. For example, if 1 out of 6 UK citizens are interested in an X product, it is obvious that respectively, more citizens in the world's market will be interested in the same product. Therefore, becoming "multinational" not only contributes in the augment of the firms' profits and gives exposure to more markets but also adds more costumers to the company's potential database. Moreover, expanding a company's market, helps increase the world's GDP, something that constitutes a crucial factor in the outcome of the world's economy.
Furthermore, as the market is becoming more global-especially through internet- it is a case of "multinational to survive". More specifically, various companies use the Internet, the greatest innovation of our times, in order to advertise and sell their products. In that way, competition for small companies/firms increases by a high rate, putting companies that use the Internet in advanced position compared that tend to not use it.
Hence, the amount of companies that use the Internet in order to sell their products rapidly increases, making the market global, interconnecting several countries' market and leading to the boost of multinational corporations.
Moreover, another important factor for firms to develop into multinational companies is cheap labour and cheaper raw materials in several countries abroad. These two factors have a great impact on a company's profits since they reduce unit costs and hence increase the final profit. Therefore, a firm developing into a multinational company, not only by augment of income (since the company's product will be available for a larger population) but also by means of reduction of unit costs. Hence, at the simultaneously a company can reduce its unit costs and increase its incomes by just joining another country's market (i.e. becoming "multinational").
To continue with, by getting into a group of more "technologically developed" countries and companies, firms can benefit in improving their production. More specifically, by integrating with larger companies, firms incorporate better technological equipment. As a result, firms can produce more efficiently and hence, enhance their profits.
At this point it would be useful to mention the phenomenon of "government subsidizing". When a government notices a decrease in the country's GDP (i.e. deficit) due to great import of products, which is expensive and in some cases time consuming, it aims to increase the domestic production. By subsidizing small firms, companies/firms will result in greater production and will therefore commence exporting. In that way, companies will become increase their popularity and eventually become multinational.
However, it is of great importance for firms to obey to specific criteria in order for them to be in fact considered "multinational".
It is true, that the improvement of technological equipment, transportation of products and development of production processes and communications play a great role in the consideration of a company as "multinational".
Neil H. Jacoby proposes that a multinational corporation evolves from six stages. The first stage is exporting its products to foreign countries.
In fact, when a country wants to get involved with another country's market (market share), the government of the first country subsidizes a small company in the second country (country of interest) so as to increase its incomes. This phenomenon is called joint venture exporting and can be more specifically described as the procedure of producing goods in one country and selling them in another one. This procedure is linked to the first stage Jacoby described. Following the procedure of exporting, firms become multinational, increasing their profits and contributing to the outcome of the world's economy and GDP.
The second stage involves establishing sales organizations abroad.
The next stage involves "Licenses use of its patent and know-how to foreign that make and sell its products". This process is called "licensing" and it can be the procedure of "when a company offers the right to trademark patent, trade secretor other similarity calued items of intellectual property in return for a royalty or a fee".
The fourth stage includes "establishing foreign manufacturing facilities".The fifth stage involves "multinationalizes management from top to bottom" and the last one "multinationalizes ownership to corporate stock".
Finally, firms tend to become multinational by establishing an "Internet Encarta". As Quelch and Klein argue: "any company that establishes a site on the Internet, automatically becomes a Multinational corporation:".
To conclude, economic globalization is a thriving phenomenon of the past century and has greatly influenced the world's economy. Indeed, an aspect of economic globalization is the development of firms into multinational companies.
Nowadays, it has been observed that more and more companies aim in exporting their products and augmenting their costumer database. Either by establishing an Internet Encarta or franchising, firms aim to increase their profits while at the same time they contribute in the construction of a global marketplace and the increase of the world's GDP.
Also, firms that become multinational, increase the global sales and the size of the market. As a result, customers around the world have a greater variety of products to chose from and therefore, increase any firms' income.
Furthermore, cheap labour and cheap raw materials attract the owners of firms since they lead to reduce unit costs, which again results into an overall profit of the specific firm.
Moreover, the production increases and becomes more efficient since firms start getting involved with a group of more "technologically developed" companies, when cooperating with multinational companies.
The multinalization of firms may seem superficial by means of cultural or social aspects, but in fact, it is not. As Drucker mentions, we live in a world of "Social Transformation"; making firms multinational directly involves integration of countries, cultures and civilizations. Therefore, the multinationalization of firms, contributes in the coalition of countries, cultures, habits and people to result into a global and unified community. Therefore, economic globalization not only serves social purposes but also economic ones. It is the main and most crucial reason for economy and financial flow amongst countries.
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