Dimensions of globalization

Dimensions of globalization

Globalization is an adjective attached to many things and encompasses more than mere economic globalization. Even however the increasing economic integration of the world’s economies under Globalization has many layers and dimensions to it. In each of these powerful subsets of economic actors whose activities have a global reach, transnational or multinational firms play a central role. Three such important ‘globalizations’ can be said to be contained within contemporary globalization.

Globalization of Financial Markets

The first is the globalization of financial markets, which has become more marked since the early 1990s and is considered by many to be the distinctive feature of contemporary globalization. The capital flows taking place in the world are of two kinds which are distinguished by their purpose and economic significance.

One kind of capital is portfolio capital which seeks profit through investments in financial assets. Financial assets – like loans, equity shares of companies, or government bonds – represent claims on the entities that use them for the purposes of raising funds. Such assets can be acquired from the issuing entity at the time they are issued (primary) or in many cases also through purchase from an existing holder (secondary), both of which involve transactions in financial markets. Profits from holding financial assets can take either the form of receiving from their issuers payments (like interest, dividend) against the temporary transfer of funds, or by their sale at a higher price than that at which they are acquired (capital gains). The era of globalization has been associated with extremely large volumes of portfolio capital, running into billions of dollars, moving freely across the
world in search of profitable investments in the financial markets of different countries.

The conduits for this movement are financial firms – banks and other institutions, with a global reach. Capital account and financial sector liberalization have created the conditions for this globalization which involves primarily the cross-border movement of speculative short-term capital seeking quick and large profits. Increasingly, portfolio investments have taken the forms of holding marketable financial assets which can be quickly bought and sold, thereby enabling such capital to enter and exit from countries very quickly. They are therefore referred to as ‘hot money’ and their flows are characterized by a high degree of
volatility.

Portfolio capital flows are distinct from the other component of international capital flows, namely foreign direct investment (FDI), and are also are not strongly linked to the latter. FDI essentially involves investment in real assets where profits are earned by producing goods and services for sale. Its conduits are nonfinancial transnational or multinational firms. FDI may take the form of companies located in some country holding equity shares in their affiliates in other countries.

The purpose of such holding however is to control and manage the real assets of that affiliate and not to profit from the sale of these shares at a higher price. FDI is therefore typically guided by long-term considerations and therefore does not move in and out of countries as rapidly as portfolio capital. There is however one kind of capital which shares the features of both portfolio capital and FDI, and is generally included in the latter. This is private equity capital where investments are associated with the exercise of control over the real assets of companies but with the relatively short-term objective of increasing the value of their shares before they are sold. Under globalization, the volumes of cross border portfolio capital flows have been considerably greater than FDI flows. In addition, an increasingly larger part of FDI flows consist of private equity flows which are more akin to speculative flows than regular FDI flows.

Globalization of Goods and Services

The second component of Globalization is the globalization of markets for goods and services – the tendency of moving in the direction of a single worldwide market supplied by a common set of firms. Transnational firms of course play a leading role in this, but tradeb and FDI play different roles in different categories of products. In the case of products that cannot be traded across countries (nontradables) which include a large segment of services, FDI drives the process of market integration. Through such FDI, transnational firms have spread themselves across the world as sellers of products. Thus Vodafone is a provider of telecom services in Europe as well as in India.

However, in case of tradables the location of production and sale of a product can be different, and the lowering of trade barriers only makes this more possible. Sony can therefore sell televisions in the Indian market which are produced by its plants say in  China. Cross-border trade flows thus have a much greater role to play in the market integration process of tradables, in which are included most manufactured products. The FDI associated with this integration is somewhat different from that of non-tradables, and
primarily takes place in the quest for the lowest-cost locations of production. A US transnational firm may therefore invest in building plants in China because it finds that relocating from the US to China would lower the cost of the products it can sell in the US itself, and also because it can use the same facility to competitively cater to the Chinese and Indian markets.

Globalization of Production

Complementing and overlapping with the globalization of markets is the third important dimension of globalization, the globalization of production. The entire process through which any product is produced is divisible into a number of stages or parts which are or can be physically separated. These may be vertically or horizontally linked to each other. The production of its engine and the assembly of a car are vertically linked to each other, the former having to necessarily precede the latter.

The cleaning of the factory where these activities are being undertaken is not similarly vertically linked, but nevertheless is an essential but separable activity. Many of these different stages or parts may be undertaken within one firm – thus for instance an automobile company could produce its own engines and also have its own cleaners. Others may be undertaken by other firms thereby involving transactions between firms. Thus the automobile company may purchase the glass used in its automobiles from another firm and it could also hire a cleaning firm to clean the factory. Such transactions between firms may be of an arm’s length variety – where the purchasing and selling firms have no stable relationship with each other and do not coordinate their activities. Such arms length transactions are possible in cases where the products being purchased are of some standard readily available kind of which there are many buyers. Thus, the automobile company may simply purchase the bulbs used in its factory from the market without having to coordinate matters with the bulb-producing firms.

But when it needs engines made to its particular specifications, it cannot hope to similarly purchase them from the market – either it has to produce them itself or has to contract some other specific firm (s) to supply these in the requisite quantity.

In the latter case, no supply will be forthcoming without prior coordination between the transacting firms. Around the automobile firm of our example therefore can emerge a coordinated network of activities and firms involved in one or the other way in the production of automobiles. The automobile firm may not be producing everything, but its position is nevertheless crucial in the entire process of coordination so that it stands at the apex of the network. The globalization of production refers to the emergence of such networks straddling a number of different countries.

Globalization of production can involve the spread of different activities undertaken within the same firm amongst different countries, giving rise to crossborder but intra-firm transactions. A television company therefore could produce picture tubes in one country, other components in another, cabinets in a third, and assemble the final product in a fourth country. Alternatively, it could procure the production of tubes, components, and cabinets from firms producing in three different countries, and assemble the final product in the fourth. These would result in inter-firm cross-border transactions. In either case, because of the different locations of these stages, a certain volume of trade –exports and imports- would occur independent of the export and import of the final product. The tubes,
components, and cabinets would all have to cross borders before the final product can be assembled. In this way, global production networks have contributed to the increase in the ratio of world trade to world production. Not all intra-firm or inter-firm transactions within a network may however necessarily involve crossborder movement.

The twin tendencies of “outsourcing” and “off shoring” by transnational firms associated with globalization have been important mediums through which global

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