Importance of Globalization

Question:

Discuss about the Importance of Globalization.

Answer:

Importance of Globalization for Future Growth and the Need for Domestic Businesses to Move Beyond National Borders

The process of expansion and development of domestic and national businesses on an international scale is known as Globalization. It helps in increasing the international trade and the interconnection of different people from different nations of the world. It interconnects the world and enhances the business opportunities to move beyond their domestic zone to the various other areas around and all over the globe (Nederveen Pieterse, 2012). Though the concept of globalization is prevailing from years, but the rapid changes in the technological developments in the past few years have increased the trends of cross-border trade and have taken it to a different level of business which is by far better for the companies as well as for the countries.

Globalization is a term that proves to be beneficial in various aspects. It provides a certain number of chances which helps the companies in increasing its trade and business across the border and provides opportunities for growth in the future. There are following areas in which globalization serves as an opportunity for future growth, which consists of the development of efficient markets. This phenomenon enhances the efficiency of the markets which allows the economies to expand and grow at a faster pace and the growth in an economy leads to growth in various other economies which are closely associated with it. Overall, it becomes a great platform to achieve success in various economies of the world (Aman, Jr., 2011). Another opportunity it creates is of equal distribution of wealth that creates job opportunities which help people in getting employment which in turn assists in enhancing the standard of living. It does not let the wealth to accumulate in several hands, but with the development of businesses the income gets equally distributed among the ones who work for it. It also promotes the growth of the company in its future prospects. It also provides the benefit of advancement and exchange of technology between countries. With the help of globalization, the countries get interconnected and work for the mutual benefits with which it exchanges and adapts to the new and advanced technologies of one another. This process helps a lot in the growth structure of the domestic businesses (Ronconi, 2012).

Companies need to move their business to the global market as it provides access to new customers and markets, a company can sell the same product to different markets which will increase its revenues and profitability. The expansion of businesses by companies with an international market also assists in lowering the labor costs and various other input costs as there are several countries whose labor cost is quite less which itself is a great factor that promotes the companies to move their business beyond national borders. The phenomenon of globalization also aids in reducing the per unit cost of the product as when the product is being manufactured in bulk, the cost of a unit decreases, which also generates and increases the profitability of the company (Baena, 2002). Sometimes, the movement and expansion of business also assist in providing tax and capital markets arbitrage which also proves beneficial for the companies. Companies can also enjoy the benefits of a diversified market, which means that at the time of recession at one place, the business can still earn income as there can be a boom at another place where the other branch of the business is located. This is one of the most important factors as to why the companies should move their business beyond national borders. Globalization of domestic businesses also provides the benefit of brand recognition worldwide. It derives the advantage of making the name of the company known to a large community across different companies which are a good thing for the businesses for generating more revenues and making a reputation on an international level. Expansion of businesses internationally gives the benefits of new and higher sales which is one of the essential and the most common motives of businesses (Dickens, 2005). Therefore, keeping in mind the above explained benefits and advantages of operating businesses worldwide, it is very much clear that globalization provides a great scope for businesses to enhance the revenue and the profitability of the domestic businesses and companies should consider the concept of globalization if it wants to expand its business.

Considering the benefits of globalization and the opportunities it provides, it is concluded that in order to earn maximum revenues and to generate more profits, the companies strictly need to consider the theory of globalization so that the businesses can earn brand recognition and get customer satisfaction globally. On the other hand, it also generates employment opportunities, and the relationship between countries gets better if they are interconnected and work for mutual benefits (Barton, 2014).

Absolute Advantage Theory vs. Comparative Advantage Theory

The theory of Absolute advantage describes the capability of an individual, country, or a company to manufacture a larger amount of a particular kind of goods or products at a cheaper and a faster rate than the other countries or regions using lesser inputs and efficient process. The principle of absolute advantage works great when it comes to international trade. In this process, every country can enjoy and have access to the variety of specialized goods and commodities, though the prices of the products may vary, but it is quite a beneficial process and helps in maintaining relationships between countries (Seretis and Tsaliki, 2015). The theory of comparative advantage trade is somewhat different from that of the absolute advantage theory and, it can also be termed as one of the most important concepts to be followed in international trade. It focuses on the capability of an individual, country, or a company to manufacture products and commodities at a rate which is cost efficient and engages lower opportunity costs in production. It basically relates to the capacity of countries as how much are they efficient and productive in manufacturing a product than the other countries. The principle of comparative advantage is the foundation and the fundamental approach in the cross-border trade (Okubo, 2011).

Comparative advantage theory is different in its nature than the theory of absolute advantage. Basically, the absolute advantage theory focuses on the volume and number of units of production of goods which is a specialized company in producing while in comparative advantage, the focus is mainly on the opportunity cost and the per unit cost of the goods. It does not give importance to the volume of the production. Comparative advantage theory provides the benefit to both the parties who are involved in trading that means it is a mutually beneficial process while in absolute advantage, only one party who is producing the goods gets more benefit than that of the other (Brecher, Chen and Choudhri, 2002). In that case, absolute advantage theory is an advantage for a single party. The theory of absolute advantage trade compares the production capacity of a particular product between countries, while the theory of comparative advantage trade compares the cost efficiency between countries and it generally focuses on the marginal costs and opportunity costs spent in production.

Suppose, there are two countries who are involved in the manufacturing of cars and trucks only. Country A produces 30 units of cars and 6 units of trucks while country B produces 35 units of cars and 21 units of trucks simultaneously. Considering this example, it can be viewed as country B enjoys the absolute advantage in the production of both the products, but it enjoys a comparative advantage in the production of trucks only as the difference in production units is relatively better.

As both the theories have certain advantages and benefits which help in the theory of international trade besides that, both the theories, have some limitations that cannot be avoided to consider.  As it is seen that the comparative advantage theory focuses on the cost factor more than the volume of production. So, in this case the transportation cost of the product has the tendency to outweigh the advantage of marginal cost that has been achieved in comparative theory (Beaudreau, 2016). Companies cannot avoid the transportation cost to be incurred while exporting and importing any kind of products and commodities. Another limitation of both the theories is that there are differences in the factors of production between countries and there also exists different and a variety of rates of productivity which is an important thing to consider in an international trade. The theories of absolute and comparative advantage trade can also lead to the factors which create diseconomies of scale between countries which is not at all good for the countries. It also has the disadvantage of stability as the business can be restricted at any time by the government if it fails to follow any of the important regulations made by the government in the process of international trade. Specialization in the production of goods and commodities also leads to the structural unemployment as it does not provide employment opportunity for the ones who are not good at making the specialized product (Lang, 2011).

Considering all the pros and cons of both the theories, it is assertive to say that the theories of absolute advantage trade and comparative advantage trade play a crucial role in the process of international trade. The cross-border trade is not at all possible if the application of the principles of both theories is not followed and structured properly considering its limitations and advantages both. A company has to keep in mind the repercussions that can arise from both the theories and so it has to make an organized guideline to follow which provides an overall benefit to the company as well as to the country (Deardorff, 2014). Therefore, both the theories are of equal importance and enjoys various advantages and disadvantages which are noteworthy. 

References

Aman, Jr., A. (2011). The Domestic Face of Globalization. OMNES, 2(2).

Baena, C. (2002). Growth Beyond National Borders. Latin American Business Review, 3(1), pp.31-55.

Barton, R. (2014). Power to the People: Revolutionizing Businesses with Transformative Ideas.Innovations: Technology, Governance, Globalization, 9(1-2), pp.47-53.

Beaudreau, B. (2016). Competitive and Comparative Advantage: Towards a Unified Theory of International Trade. International Economic Journal, 30(1), pp.1-18.

Brecher, R., Chen, Z. and Choudhri, E. (2002). Absolute and Comparative Advantage, Reconsidered: The Pattern of International Trade with Optimal Saving. Rev International Economics, 10(4), pp.645-656.

Deardorff, A. (2014). Local comparative advantage: Trade costs and the pattern of trade. International Journal of Economic Theory, 10(1), pp.9-35.

Dickens, B. (2005). International bioethics: reaching beyond national borders. The Lancet, 366(9481), pp.195-196.

Lang, N. (2011). The Latent Absolute Advantage Of The Comparative Advantage In Theories Of International Trade. International Business & Economics Research Journal (IBER), 5(1).

Nederveen Pieterse, J. (2012). Periodizing Globalization: Histories of Globalization. New Global Studies, 6(2).

Okubo, T. (2011). Ricardian Comparative Advantage and Geographical Concentration. Review of Development Economics, 15(4), pp.620-637.

Ronconi, L. (2012). Globalization, Domestic Institutions, and Enforcement of Labor Law: Evidence from Latin America. Industrial Relations: A Journal of Economy and Society, 51(1), pp.89-105.

Seretis, S. and Tsaliki, P. (2015). Absolute Advantage and International Trade: Evidence from Four Euro-zone Economies. Review of Radical Political Economics.

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