Factors that have contributed to globalization

1. Introduction

The world has turned into a global village with worlds coming closer to each other. The borders are fading at unprecedented speed. As geography tends to set us apart, our desire to share and trade brings us together. Nowadays, if you visit a mall you will discover many brands from other countries having stalls in that mall or their products being sold at the supermarket. For instance, you are shopping for ingredients required to prepare a burger from home, you will get local bread, and the mayonnaise will probably be from the Middle East, the mustered from the USA and so on and so on.

The high level of trade that occurs within and outside our borders is rapidly changing the state of our borders. At this rate we see an economy not restricted by geography and propelled by the desire to increase the level of trade worldwide. When it comes to the understanding of the word Globalization, its definition is still debatable with so many proposals brought forward trying to give a simple understanding of the word. Different disciplines pick a different aspect of globalization and coin them to produce a definition that fits into their core of the teaching e.g for those studying subjects like anthropology tends to pick the integration of different cultures to advance a definition of the term.

In brief, globalization is the integration of world economies. Globalization is the integration of people, the government they form and the businesses they run in the world (Rothenberg, 2003)

The core business of the assignment is to distinguish the role globalization play in economic development of the world in general. We will try to analysis the reason for globalization, its impact on the lives of people and the challenges that come with it

Globalization has changed how people trade and also affected the level of production through the expansive nature of the global market available. People can now easily trade with other countries and engage a wider set of possibilities available at the global market. With these possibilities, the preferred market has shifted from the local arena to the world platform (Intrligator.2003)

2. Globalization

This can broadly be defined as the geographical spread of trade activities all the world, where there is vast sourcing of factors of production from different countries and increased networking among many companies in the world through global partnership and collective share of resources.

Globalization can be attributed to the slow disappearing of borders and integration of states for economic, social and political gains.

2.1 Aspects of globalization

The following aspects indicate the nature of globalization

• Globalization is a process through which nationals have opted to come together and share resources.

• Globalization is dynamic, in that it’s a means not an end. It means that it has the ability to grow or die.

• Globalization is not certain, which means that sometimes it can move and other times stagnant

2.2 Factors that have contributed to globalization

2.2.1. Economies of scale

Many studies have proven that there is a significant increase in the Minimum Efficient Scale related to certain industries hence invoking the need to seek more markets. It has been considered that the local markets are not sufficient enough to cater for the growth and expansive desires in these industries due to the rising Minimum Efficient Scale. This has provided the avenue for growth of multinationals which operate in almost all the part of the world trying to satisfy the progressive and expansive nature triggered by the increase in the perceived Minimum Efficient Scale.

2.2.2 Technology

There has been a rapid transformation of the world due to technological advancement which has tried to bring the world together. Technology has made it easy to communicate with different countries and access different information about available markets. With globalization, the website is now easy to access information about any places and be able to derive useful research about potential avenues of trade.

2.2.3 Containerization

Over a period of time, the cost of shipping of products has significantly dropped and hence reduced the cost of buy products from outside markets. With the new bulk shipping and other practices is has made it possible to move products easily and has significantly reduced the burden of trading from outside sources

2.2.4 Favorable tax policies

Motivated by the desire to benefit from least unit manual labor cost and other factors of production, many countries especially the developing economies have started setting complimentary tax policies and incentives to attract foreign Direct Investments which are done through multinationals. Countries have tried to level up or even in extreme measures lowered their tax practices to be competitive and offer attractive deals to entice investors through incentives, tax waivers on certain goods or companies. All these have motivated the desire to trade across borders and made it possible to import and export goods.

2.2.5 Intensification of strategies of Multinationals

The desire by these companies has proven that boundaries are not handles but rather doors that need to be open to explore and discover. In pursuit of new markets for their products and desire to increase their revenue margins, these companies have intensified their activities in other countries which in turn has opened new opportunities and avenues of trade. These companies have proven to have potential and financial muscles to invest especially in areas of business where there are potential buyers of their products. These have promoted globalization by opening up these new markets.

2.2.6. Reduced level of protectionism

In the past, there were strict laws protecting the local market from interference from foreigners which had its advantages and but also it had its fair shares of challenges. These protection approaches were in form of traffics import licenses which in a way hindered or controlled the level of goods from other countries.

With the change in foreign policies and the need to attract investors, the borders have been opened in the name of integration and many of the existing tariffs dropped and replaced with incentives to attract new and more goods from outside countries. This has opened door to more trade and facilitated globalization (Weiss, 2003).

2.3 Characteristics of globalization

Globalization is characterized by increased integration among countries and sharing resources which can be viewed through the following:

2.3.1. Increased level of trade among states

Through globalization inter-border trade of good and service increase, opening up new and emerging markets which create opportunities

2.3.2. Growth and emergence of multinationals

The opening up of borders and creation of a global platform of trade has invoked the growth of companies with greater capabilities to take advantage of these existing opportunities available. An example of such a company is Coca-Cola which has gained the opportunity to sell its product all over the world (Weiss, 2003).

2.3.3. Increased transfers of funds and resources

There has been an increase in the transfer of funds from one state to another which is termed as Foreign Direct Investments, done through transnational companies or multinational institutions. These institutions have grown with the sole purpose of transferring funds and resource from a group of developed countries to least developed ones with aim of rejuvenating the economies of these states (Weiss, 2003).

2.3.4 Increased of labor migration

There has been unprecedented economic growth of certain countries , which necessitates the need of a workforce that such states cannot offer and hence the need for cheap and affordable labor force from other sources in the world. A good example of such countries are the Middle East countries like Qatar which has been sourcing cheap and affordable labor force from Africa and other least developed states for construction and development of the mega projects being constructed in these countries.

2.3.5 Emerging new economies

For a very long time, the share of world economic output has been dominated by few countries like the United States of America, but the story is shifting with the growth of new emerging countries which are growing at a rapid speed offering new opportunities to the world.

These new and emerging developing economies now account for approximately more than 56% of the world Goss Domestic Product according to information published by the International Monetary Fund (IMF), 2015.

2.4 Impact of globalization on World Economic Development

As stated earlier the effects of globalization have a far-reaching ripple effect in the daily lives of the participating states and it has been proving that globalization has a positive impact on economic development. Effects of globalization on economic development can be discussed in the following clusters (Chossudovsky, 1999).

2.4 0 Positive cluster

2.4.1. Global markets

Global market can be defined as merging of past distinct and different state Markets into one vast global markets avenue (Hill C.W, 2009). With these growths and expansions of markets from local standards to global settings, there is freedom to trade between countries which has injected a new level of production which in turn has influenced the economic development of certain regions (Chossudovsky, 1999).

2.4.2 International institutions

Some of the developed countries and developing one are in congruence on the importance of forming a government that runs and regulates the world economy (Chossudovsky, 1999). Most economists believe that there should be a governing body that will be mandated to set rules and control the level of international interactions and transactions. Such institutions that embody such ambitions are the very well known World Trade Organisation, the International Monetary Fund, and the World Bank.

2.4.3 Change in world trade overview

Globalization has given certain countries which were dominant the opportunity to grow and gain competitive advantages over the existing developed economic giants. Before the onset of globalization, countries like the U.S.A was the dominant key player in world trade forum and it accounted for the largest percentage in global GDP. After the dawn of globalization, the focus has shifted to China which now leads the world economy by pulling the largest percentage of the global GDP. The shift has also shifted rapidly to the Asia-Pacific countries who now dominate in the world markets. The figure below paints a clear picture of the shift the year 1980 to 2015.

2.4.4. Increased level of foreign trade

Globalization has expanded the level of trade among countries in the world. People can now, easily buy goods and receive services that were only available in developed countries. The improved technology and new shipping approaches as containerization people can now afford to import goods from abroad at considerably less cost as compared to earlier days (Brown et al, 2008).

2.4.5. Exchange of crucial Resources

Due to factors such as population growth and the level of technology possessed by developing countries it has led to depletion of natural resources and raw materials, hence it necessitates the trade exchange with developing countries who have natural resources in plenty and lack technology, capital and technical know-how which is also readily available from developed countries(Brown et al, 2008).

The availability and lack thereof of these two sets of countries has led to the growth of interdependency between the two propelled by such factors as overpopulation and natural causes (Brown et al, 2008).

2.4.6. Foreign investments

One of the most significant indicators of the effect of globalization is the increased level of foreign direct investments from developing countries to least developed countries. The effect of these investments is felt through Multinational Enterprises (MNEs) which invest directly in these least developed countries by opening up productions units. These units create employment for the local people hence boosting the level of production in that country (Brown et al, 2008).

2.4.7. Improved quality of products

With the advent of globalization, the quality of products produced in both local and foreign markets has significantly increased due to stiff competition prevailing in these markets. The competition has led to the employment of marketing strategies which strive to attain the highest level of customer satisfaction in the business environment and has led to improved service delivery and product quality(Brown et al, 2008).

2.5.0. Negative cluster: Drawbacks of globalization

2.5.1 Dominance in the market

Foreign companies with advanced technology can stifle competition and create a sort of monopoly in certain sectors like telecommunication.

2.5.2. Unemployment

As much as globalization can be praised for creating a tone of jobs especially in the least developed countries it can also be blamed for the loss of other significantly higher numbers of jobs. With the increased level of competition caused by globalization, firms strive to increase output and cut on cost by employing technologies which require a certain level of technical know-how and also can be operated by a small number of people, this causes structural unemployment (Brown et al, 2008).

2.5.3. Trade imbalances

As much as global trade has grown there grow certain imbalances which are generated by the growing demand of the global market (Blanton et al, 2018). Some states are producing excess trade products and these provoke the need to dispose of such and the available avenue is, dumping of such products at cheaper prices in developing countries markets (IMF,2008). This affects greatly the local markets and in some instance, the local governments tend to crawl back to protectionism to cushion the local traders (Blanton et al, 2018).

Conclusion

Globalization has significantly affected the level of trade among nations which in turn has led to improved living standards of people. Globalization has been and is going to be the propelling force that drives economies of the world and helps alleviate the everyday struggles of certain sections of the world.

Globalization offers new methods of production, offers a global solution to pertinent issues of certain sections of the continent, it offers new and improved technologies and above all, it offers a pool of unmatched expertise which is crucial for growth and development

There have always been periods of protectionism and nationalism which was justified back then but as things stand globalization is the quickest way out of the prolonged drag in development.

Though there has been a good number of drawbacks brought about by globalization many studies still believe and support globalization and agree that it’s the portal to new opportunities and grow.

QUESTION 2A

This problem will tackled using the NPV Analysis

NVP = (investments) +( CF1 /(1 + K)1) +(CF2/(1+K)2)…+ (∑CFt/(1+K)t

NVPCHINA= 21/(1.08)1 + 3/(1.08)2 +6/(1.08)3 + 6/(1.08)3 + 6/(1.08)3 +6/(1.08)3

=21/1.08 + 3/1.1664 +6/1.259712 + 6/1.3605 +6/1.4693 +1.5869

= €31.10 MILLIONS

NVPINDIA= 15/(1.08)1 + 1/(1.08)2 +2/(1.08)3 + 4/(1.08)3 + 8/(1.08)3 +8/(1.08)3

= 15/1.08 + 1/1.1664 +2/1.259712 + 4/1.3605 +8/1.4693 +8/1.5869

=€ 29.80 MILLIONS

They will invest in the china project

Q2 B) Part 1

1.0 How to anticipate changes in exchange rates;

When you are a business person or you are simply a trader, the knowledge on forecasting on fluctuations of exchange rates comes as an added advantage in minimizing risk and safeguarding profits

There is a myriad of approaches when it comes to forecasting and in this paper, we will tackle the four approaches below:

1.0.1Exchange rate forecast by Purchasing Power Parity (PPP)

The purchasing power parity approach is one the vastly applied method which is founded on the hypothetical law of one price (same price principle). This theoretical law simply states that the price of a certain commodity should be uniform in all countries or markets (Sassen, 2018).

The law simply implies that for example the price of mobile in the US should the same in the UK, this is possible after considering the change in exchange rates exclusive of transactional and shipping expenses. This law is put to avoid the possibility of one person buying the mobile where it’s cheap and selling it in another country where the prices are steep (Sassen, 2018).

The PPP approach then projects that the exchange rates have to adjust to mitigate the price shifts due to inflation as per the guidelines of this law. For example if the price of mobile phones in the US are projected to rise by 5% over the period of time while that of UK are expected to rise by 3%, then the inflation difference will be 2%.what this scenario simply means is that the prices of mobile phones in the US are set to rise quicker relative to those in the UK. The PPP approach would predict that the U.S dollar will have to depreciate by an estimated 2% to balance the prices in both countries (Blanton et al, 2018).

QUESTION 2B Part II

2.0. Exchange rate forecast by use of Relative Economic Strength :

This approach investigates the capacity of economic growth in different parts of the world to forecast the course of exchange rates. This whole approach is inclined on the importance of getting the right information to investors on when to invest in a certain country and also when not to. This approach believes that countries with high economic growth rate have a tendency of enticing investors to invest their cash. In order for an investor to invest in that country, then he/she has to buy that country’s currency (Blanton et al, 2018).

This purchase increases the demand for that country’s currency which in turn results to an appreciation of that country’s currency.Another possible inducement to investors is interest rates. High-interest rates will entice investors where the opposite will make investors avoid investing in such a country

This approach unlike the PPP which gives a direct forecast of the developing and pending changes in exchange rates, this approach simply gives the investor an overview of where there is a possibility of appreciation and depreciation of currency of certain countries (Blanton et al, 2018).

2.1. Exchange Forecast by Time Series Approach

This is a mathematical approach which involves data collected on a certain phenomenon then analyzed over a given period of time. Time series analysis use the method called autoregressive moving average where this method use information on past behavior and price changes of a certain phenomenon the data is then used to predict future patterns and fluctuations.

This data is keyed into a computer program then the results displayed with forecasted pattern and possible fluctuations indicated in summary form.

2.2. Exchange forecast using Econometric models

The time series analysis which is purely mathematical in approach, this method operates on economic theories. This approach involves a system that gathers all the variables that affect currency movements and bring them together to observe changes in the currency as the factors are keyed in (Michie, 2011).

How to mitigate the impact of possible exchange rate fluctuations:

If you are a business person and your daily activities deals in foreign currencies or you make transactions on foreign currency then it’s important for you to make adjustments that might help mitigate any losses due to changes in exchange rates (Michie, 2011).

As an exporter, for example, it is paramount to understand that exchange rates fluctuate very fast and there is a need to strategize on how to mitigate these changes once before they cause any harm. Take for an example if you are an exporter and you invoice your client in their local currency, then such fluctuations in currency exchange rate occur which are not to your favor, this will significantly affect your profit margins. Then it’s only prudent to come up with ways to avert such mistakes by drafting policies that will cushion you against such changes.

The following are ways to mitigate the effect of the change in the exchange rate

3.0. Operating a Foreign Currency Account

It’s wise to set up multiple accounts for different foreign currencies so that clients can pay for goods and service in their local currencies. This helps mitigate the effect of exchanging this currency to your currency hence cut the possible effect of exchange rate fluctuation.

Operating on a market order basis. (Parker, 1998)

This approach allows a trader to ask for a foreign exchange conversion for a specific amount of cash and exchange rates. The trader in this incidence does not undergo the stress on monitoring the money market.

Operating the currency preference /option

This allows you to protect a certain currency exchange rate but also gives you the opportunity to participate in the exchange if the rates are favorable to you (Parker, 1998).

Applying the forward exchange contract

Using this approach allows you to purchase one currency amount and be able to sell another currency at a fixed exchange for a specified duration of time.

Reference List

Weiss, L. ed., 2003. States in the global economy: Bringing domestic institutions back in (Vol. 86). Cambridge University Press.

Chossudovsky, M., 1999. Globalisation of poverty: impacts of IMF and World Bank reforms. Humanist in Canada, (129), pp.34-5.

Parker, B., 1998. Globalization and business practice: Managing across boundaries. London: Sage.

Michie, J. ed., 2011. The handbook of globalisation. Edward Elgar Publishing.

Brown, P., Lauder, H., Ashton, D., Yingje, W. and Vincent-Lancrin, S., 2008. Education, globalisation and the future of the knowledge economy. European Educational Research Journal, 7(2), pp.131-156.

Sassen, S., 2018. The global city: strategic site, new frontier. In Moving Cities–Contested Views on Urban Life (pp. 11-28). Springer VS, Wiesbaden.

Blanton, R.G., Early, B. and Peksen, D., 2018. Out of the shadows or into the dark? Economic openness, IMF programs, and the growth of shadow economies. The Review of International Organizations, 13(2), pp.309-333.