Welcome to the World of Globalisation!

Hello future economist! This chapter, Globalisation, is all about understanding how the world's economies have become super interconnected. It’s one of the most vital topics you'll study because it explains almost every trend in modern trade, production, and policy.
Don't worry if it seems large—we’ll break down the main characteristics, the causes, and the huge consequences this process has for everyone, from high-income countries to emerging economies.

Key Takeaway: Why Study Globalisation?

Globalisation defines the modern business world. To understand why your phone was made in China using American design and materials from Africa, you need to understand these fundamental economic connections!

1. What is Globalisation? (Characteristics)

Globalisation is essentially the process by which the world's economies, cultures, and populations are becoming increasingly integrated due to cross-border trade of goods and services, technology, and flows of investment, people, and information.

Main Characteristics of Globalisation

Globalisation is defined by several key movements or "flows":

  • Increased Trade in Goods and Services: Countries are buying and selling far more products and services internationally. Think of everything you buy—much of it has crossed at least one border.
  • Financial Liberalisation (Capital Flows): Money moves freely and instantly across borders for investment (like buying stocks) or lending. This leads to massive flows of Foreign Direct Investment (FDI).
  • Increased Labour Mobility: People are more able (and willing) to move between countries seeking work. Although often restricted politically, the movement of labour is higher than decades ago.
  • Technological Transfer: Knowledge, ideas, and technology spread rapidly across the globe (e.g., sharing medical research or manufacturing techniques).
  • Cultural and Political Interdependence: Countries rely on each other. Economic shocks in one major economy (like the US or China) quickly affect others.

Quick Review: Globalisation means Economic Interdependence—we all rely on each other, often across huge distances.

2. The Causes of Globalisation

Globalisation isn't a random event; it’s driven by specific political, technological, and economic decisions.

Driving Forces: Why did the World get so Interconnected?

You can categorize the causes into groups, making them easier to remember:

  1. Trade Liberalisation (Policy Changes)
    • Governments have actively lowered barriers to trade (like tariffs and quotas).
    • The influence of international organizations like the World Trade Organisation (WTO) encourages countries to sign trade deals and remove protectionist policies.
  2. Technological Advancements
    • Communication Technology: The internet, email, and mobile phones allow firms to manage complex global supply chains instantly.
    • Production Technology: Automation and modular production mean different parts of a product can be made in different countries before final assembly.
  3. Decreased Transportation Costs
    • The invention of containerisation (standardized shipping containers) drastically cut the cost and time of moving goods globally.
    • Analogy: Imagine sending 1,000 separate boxes versus loading one standard container onto a massive ship—it’s much more efficient!
  4. The Rise of Transnational Corporations (TNCs)
    • TNCs actively seek out the lowest cost countries for production, driving investment and integration across borders. Their global strategies are a major catalyst.

Don't Forget: Globalisation is both a *result* of technology and a *result* of governments choosing to open their borders (political will).

3. Key Players: The Role of Transnational Corporations (TNCs)

Transnational Corporations (TNCs) are the engine of globalisation. They are firms that own or control production or service facilities in more than one country (e.g., Apple, Toyota, Samsung).

How TNCs Influence the Global Economy
  • Foreign Direct Investment (FDI): TNCs are the primary drivers of FDI, building factories, offices, and infrastructure in host countries.
  • Knowledge and Technology Transfer: When a TNC sets up shop in an LEDC, it often brings modern technology, management expertise, and skills that benefit the local workforce.
  • Creation of Global Supply Chains: TNCs break up the production process (known as fragmentation of production) to minimise costs, increasing trade between the firm’s various branches worldwide.
Costs and Benefits of TNC Growth (Assessment focus!)

To score highly, you must assess both sides of the TNC impact:

Benefits of TNCs Costs of TNCs
• Creates employment and boosts income in host countries.
• Introduces new technology and skills.
• Increases competition and consumer choice.
 • May exploit labour (low wages, poor conditions).
• Repatriation of profits (money flows out of the host country).
• Political Influence: TNCs may lobby governments for favourable regulations or tax breaks.
A Key TNC Issue: Transfer Pricing

Transfer Pricing is a method TNCs use to reduce their global tax burden.

The process (simplified):

  1. A TNC branch in a high-tax country (Country A) sells a component cheaply to its subsidiary branch in a low-tax country (Country B).
  2. This artificially lowers the recorded profit in Country A (less tax is paid there).
  3. The high profit is recorded in Country B, where the corporate tax rate is much lower.

Impact: This costs governments (especially LEDCs) billions in lost tax revenue, which could otherwise be spent on public services.

4. Consequences of Globalisation

Globalisation has dramatically altered the economic landscape, creating winners and losers. We must analyse its effects on MEDCs (More Economically Developed Countries) and LEDCs (Less Economically Developed Countries).

Consequences for More Economically Developed Countries (MEDCs)
  • Benefits:
    • Lower Consumer Prices: Importing cheaper goods from countries with low production costs reduces inflation and increases consumers’ real income.
    • Increased Competition: Domestic firms must become more efficient or innovate to compete with foreign rivals, benefiting consumers.
    • Larger Export Markets: Firms gain access to billions of new consumers, boosting output and profits.
  • Costs:
    • Structural Unemployment: Industries that cannot compete (e.g., manufacturing in high-wage economies) shrink or close down, leading to long-term job losses.
    • Wage Inequality: Low-skilled wages may stagnate due to competition from cheaper foreign labour, increasing the gap between high- and low-income earners.
Consequences for Less Economically Developed Countries (LEDCs)
  • Benefits:
    • FDI and Job Creation: Inflows of investment by TNCs create jobs and help industrialise the economy.
    • Technology Spillover: New production techniques and best practices are learned locally.
    • Faster Economic Growth: Access to global markets allows these countries to benefit from specialisation and comparative advantage.
  • Costs:
    • Exploitation and Dependency: LEDCs may become overly dependent on a few TNCs or a narrow range of exported goods (e.g., primary commodities).
    • Brain Drain: Highly skilled workers may leave the LEDC to seek better pay and opportunities in MEDCs.
    • "Race to the Bottom": Countries may lower environmental or labour standards just to attract TNCs.

Did you know? Vietnam is often cited as a success story of globalisation, transitioning from a low-income to a lower-middle-income economy largely through integrating into global supply chains for electronics and textiles.

5. Globalisation and the Natural Environment

The syllabus specifically requires an understanding of how globalisation interacts with environmental sustainability.

Negative Impacts on the Environment
  • Increased Carbon Emissions: Global supply chains rely heavily on air and sea freight, significantly increasing greenhouse gas emissions.
  • Resource Depletion: Increased global production and consumption lead to faster depletion of non-renewable resources (oil, minerals).
  • Pollution Havens: TNCs may relocate polluting production facilities to LEDCs that have lax environmental regulations, exploiting the "race to the bottom" phenomenon.
Potential Positive Impacts
  • Diffusion of Green Technology: Global TNCs can rapidly introduce and scale up environmentally friendly technologies and processes in developing countries.
  • Global Collaboration: Globalisation facilitates international agreements (like the Paris Accord) and cooperation to address cross-border environmental problems (like marine pollution).

Quick Review Box

Key Terms to Master (3.4.1.1)
  • Globalisation: Increasing integration of world economies.
  • FDI: Investment made by a firm or individual into business interests located in another country.
  • TNC: A firm operating production/services in multiple countries.
  • Transfer Pricing: An accounting strategy used by TNCs to shift profits to low-tax countries.
  • Trade Liberalisation: The removal or reduction of barriers to trade.
Final Thought

Globalisation is not inherently good or bad—it’s a powerful force. Your job as an economics student is to use these concepts to weigh the benefits (efficiency, growth, lower prices) against the costs (inequality, environmental damage, political risk). Keep practising your assessment skills!