1.9 Globalisation

What do you know bout globalisation?

Globalisation

• Multinational companies are companies that have factories in more than one country; an organisation that only has sales offices abroad would not be considered a multinational business.

• Walmart Inc (US); Tata Group (India); Volkswagon AG (Germany)

Why did multinationals develop?

• Saturation of domestic markets• Wanting to move closer to their global customers• Wanting to benefit from lower labour costs• Greater retained profits with lower tax rates• Incentives from governments – monetary and non-

monetary• Exploiting colonial power to grab markets abroad• Opportunity to be closer to raw materials and

energy sources.

Problems• In Bhopal, India, in 1985 Union Carbide operated a chemical plant that

leaked toxic gases and killed thousands of local residents. It seemed that safety standards were not rigorous enough as the business had minimised costs.

• ‘MacDonalisation’ is the term given to the impact of fast food outlets in countries where obesity was previously almost unheard of. This has an effect on health costs and also cultural values.

• Some people also think multinationals are ‘footloose’ – that they have no long term loyalty to a country and will pull out if there are negative changes in the external environment, for example if the government increases tax rates, or if better locations emerge.

Problems continued

• There are arguments that while multinationals create employment, the type of work they provide is low level and the wages are low. In most cases though, the wages are at least equal if not better than local rates and there is some local management created.

• Multinationals are the key mover of foreign direct investment in countries around the world – an important driver for globalisation.

• If multinationals are so bad why are they warmly welcomed by so many countries?

Regional Trading Blocks• A trading bloc is a collection of countries that agree to certain rules

regarding trade. Types of trading bloc:– Free trade areas; Countries can trade with no tax imposed or restrictions.

They are independent when deciding tax for countries outside of the bloc.– Custom unions; A custom union has a common external barrier for

imports. Might impose a quota on the number of units of a product allowed in or they can agree on a standardised tax rate.

– Common markets; They have similar features to custom unions but they not only allow free movement of goods and services but also of labour and capital. The countries involved can also introduce agreements to standardise products, such as a list of ingredients that justify a chocolate bar.

– Economic and monetary unions; In addition to features of a common market, an economic and monetary union requires a single currency for its members. It will also require a single interest rate across the zone.

– Find examples all types of trading blocs.