Globalization in Business: History, Advantages, and Challenges

What Is Globalization?

Globalization is the increasing interconnection of national economies, enabling the free movement of products, investment, technology, and jobs across borders and cultures. Economically, it signifies the interdependence of nations facilitated by free trade agreements, which play a crucial role in fostering international commerce. This phenomenon allows corporations to achieve competitive advantages by reducing operating costs, accessing new consumer markets, and benefiting from the removal of trade barriers such as tariffs.

How Globalization Shapes Modern Business

Corporations benefit from globalization through lower manufacturing costs abroad, cheaper raw materials due to reduced tariffs, and access to new consumer markets.

The Impact of Globalization Across Various Sectors

Globalization is a social, cultural, political, and legal phenomenon. 

• Socially, it leads to greater interaction among various populations.
• Culturally, globalization represents the exchange of ideas, values, and artistic expression among cultures.
• Globalization also represents a trend toward the development of a single world culture. 
• Politically, globalization has shifted attention to intergovernmental organizations like the United Nations (UN) and the World Trade Organization (WTO).
• Legally, globalization has altered how international law is created and enforced.

Globalization creates jobs and economic growth through cross-border trade, but this growth is uneven across different industries and countries. On the other hand, this growth and job creation are not distributed evenly across industries or countries.

Some industries, like U.S. textile manufacturing or Mexican corn farming, have collapsed due to international competition.

While globalization can be idealistic and opportunistic, it mainly benefits large Western corporations. Its impact remains mixed for workers, cultures, and small businesses around the globe, in both developed and emerging nations.

Tracing the Evolution of Globalization Through History

Globalization isn’t new. Ancient traders traveled long distances to buy rare commodities to sell at home. The Industrial Revolution brought advances in transportation and communication in the 19th century that eased trade across borders.

According to the Peterson Institute for International Economics, globalization stalled after World War I as nations turned to protectionism with import taxes. This trend lasted through the Great Depression and World War II until the U.S. played a key role in reviving international trade.

A key step in globalization was the 1993 North American Free Trade Agreement (NAFTA). One of NAFTA’s many effects was to give American auto manufacturers the incentive to relocate a portion of their manufacturing to Mexico where they could save on the costs of labor. NAFTA was replaced in 2020 by the United States-Mexico-Canada Agreement (USMC).

Governments worldwide have integrated a free market economic system through fiscal policies and trade agreements in the 20th century. Most trade agreements focus on reducing or removing tariffs.

This evolution of economic systems has increased industrialization and financial opportunities in many nations. Governments now focus on removing barriers to trade and promoting international commerce.

Weighing the Benefits and Challenges of Globalization

Pros

• Proponents of globalization believe it allows developing countries to catch up to industrialized nations through increased manufacturing, diversification, economic expansion, and improvements in standards of living.
• Outsourcing by companies brings jobs and technology to developing countries, which helps them to grow their economies. Trade initiatives increase cross-border trading by removing supply-side and trade-related constraints.
• Globalization has advanced social justice on an international scale as well, and advocates report that it has focused attention on human rights worldwide that might have otherwise been ignored on a large scale.

Cons

• One clear result of globalization is that an economic downturn in one country can have a domino effect on its trade partners. For example, the 2008 financial crisis had a severe impact on Portugal, Ireland, Italy, Greece, and Spain. All of these countries were members of the European Union, which had to bail out debt-laden nations, which were thereafter known by the acronym PIIGS.
• Globalization detractors argue that it has created a concentration of wealth and power in the hands of a small corporate elite that can gobble up smaller competitors around the globe.
• Globalization has become a polarizing issue in the U.S. with the disappearance of entire industries to new locations abroad. It’s seen as a major factor in the economic squeeze on the middle class.
• For better or worse, globalization can reduce the cultural and social aspects unique to people and geographic areas around the world and increase product homogeneity. Starbucks, Nike, and Gap dominate commercial space in many nations. The sheer size and reach of the U.S. have made the cultural exchange among nations largely a one-sided affair.

The Bottom Line

Globalization refers to the ongoing trend of increased interconnectivity of nations across the globe, as enabled by advancements in transportation and information technology, among others.

Globalization is facilitated economically by free trade agreements, which permit barrier-free imports and exports across borders. While globalization brings many advantages—including lower prices and higher standards of living to some—it also has drawbacks, including wealth concentration and cultural homogeneity.