There are many factors which have driven globalisation to where it stands today. The drivers can be divided into economic, political and intellectual.
While recent writings on globalisation have focused more narrowly on the proactive role of international organisations such as the IMF or the WTO in the liberalisation of markets, many other factors are impelling or impeding this process of globalisation, including:
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i. Liberalisation of Capital Markets:
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With the digitization of capital, investments have flowed more freely across international borders. Liberalisation of capital markets has clearly created many opportunities, though risks have also increased due to currency fluctuations and ‘interlinked financial markets.
ii. Advances in Technology and Accelerating Information Flows:
Rapid technological progress has had direct impacts on globalisation. Shift to manufacturing from agriculture, especially for the developing countries, has been the direct impact. Communication and information technologies have facilitated exchanging information and conducting transactions quickly and cheaply, diminishing the barriers of distance and international borders.
These changes have spawned new industries and created new opportunities. The flow of information accelerated the diffusion of innovation between countries to manage cross border innovation, develop new products and services for a global market, and protect intellectual property. The cost of moving too slowly can be enormous.
iii. Mobility of People:
The mobility of people has increased a lot. This is because of several factors. The populations of industrialised countries are getting older. The cheaper workers in emerging economies have received the best education, which makes them competitive in world labor market. Migration is increasing. Some of the people opine that an increase in the freedom of labor movement will be indispensable in the future.
iv. Mobility of Products:
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Barriers to trade are falling, largely due to the efforts of GATT and the WTO. In general, the possibility of selling any product anywhere in the world is becoming a reality. This creates more opportunities for businesses to enter diverse markets more easily. Competition has given it a further fillip.
v. Falling International Trade Costs:
A broad definition of trade costs includes policy barriers (tariffs and non-tariff barriers), transportation costs (freight and time costs) as well as communication costs and other information costs, enforcement costs, exchange rate costs, legal and regulatory costs and local distribution costs. In terms of an ad valorem tax equivalent, international trade costs have been estimated to represent 74% and local distributional costs 55%.
Here we shall not talk of tariffs (already down to minimum post-WTO), and non-tariff berriers, which have been dealt with in greater detail elsewhere.
With regard to transport by road, the trucking costs have been falling by 2% per year; railroads show a decline from over 28 cents per ton-mile in 1890 to 2.3 cents in 2000. Air transport costs (measured in terms of revenue per ton-kilometre) dropped by 92% between 1955 and 2004. Containerization has made shipping comfortable and convenient.
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Modern shipping charges have been lowered significantly. Cost of communication has fallen considerably. Technological developments and regulatory reforms have contributed to a substantial reduction in the cost of telecommunication services. Internet access has increased over time. Also the movement of people across countries has increased due to decline in cost of transportation.
vi. Decline in Transportation Costs:
The mobility of people and cargo is partly because of the decline in transportation costs. Increased capacities and new technologies have reduced costs to the point that materials that were too bulky to transport long distances are now manufactured in a single location and shipped to the rest of the world.
vii. Global Regulatory Harmonisation:
This harmonisation is because of two reasons. First, as firms transact more across country boundaries and compete on a global basis, the need for homogeneous regulations increases, as seen in the standardisation of international accounting rules. Second, greater diffusion of concerns about environmental issues, such as global warming. Businesses often feel the greatest impacts of these regulations, both positively and negatively. Clear and uniform rules can help in reducing uncertainty and level the playing field across the globe.
viii. Cultural Convergence:
Similarities among cultures can be expected to increase in future because of sharing of products, experiences, travel, and communications. There are many factors which explain cultural convergence – such as economic development, urbanisation, and mass media coverage – that have nothing to do with globalisation. Increasing uniformity can facilitate the development of mass markets, while awareness of cultural differences can help companies to identify niche opportunities.
ix. Emerging Market and Economic Development:
During the last two decades, a number of countries have reached the development levels that put them well within the set of industrialised countries. Take the case of South Korea, which has advanced from “backward developing country” to an “export and foreign investment power”.
The end of communist regimes in Russia and Eastern Europe as well as opening up of China to a market economy have created new set of opportunities within them and in collaboration with the rest of the world. Economic development in these emerging economies can open significant new markets and also create new players in global markets, as has been seen in electronics, automobiles, and other industries.
x. Increased Interdependencies:
The utility derived from a particular product may depend on network effects across countries. To illustrate, the utility of the telephone increases with the number of users in all countries. As mobility and communication increases, these global externalities become greater at the international level. The production and marketing of products like telecommunications depend upon these network effects, and these effects also serve to increase the interdependency of different parts of the world.
xi. Global Consolidation:
Through mergers and acquisitions, rapid consolidation of business across borders can be observed. As firms compete more in multiple geographical markets and face the same competitors, size has become a critical factor. Consolidation is also important to send relevant information about markets to managers in different countries. To achieve this coordination, now firms do cooperate with local companies, with which earlier they had arms length relationships.
xii. Corporate Social Responsibility:
The agenda of corporate social responsibility has been raised to a new height in global markets. This is due to a large failure of the international organisations to provide balanced economic development to poorer countries. Companies, while addressing them individually, there is need to work with governments and other firms to tackle the broader concerns.
Apart from these forces propelling the world toward greater globalisation, there are other reasons too, which are – (i) the governments’ realisation to reduce its interference as much as possible so that it conforms to the ideal of a ‘minimal state’, (ii) the market is a better substitute for the state as it performs better, (iii) resource allocation and resource utilisation must be based on market prices which should conform as closely as possible to international prices, (iv) national political objectives, domestic economic concerns or even national boundaries should not act as constraints, and (v)’most global products and markets exist because marketing phenomenon create them – for example, society and individuals do not need soft drinks, but the industry, with its marketing suaveness, created the need by making individual’s “wants” become his or her “needs’”. Regionalisation and demographic change (like NAFTA and EU), and rising effect of non-governmental organisations in addressing and regulating a wide range of international issues have also paved way for globalisation.