Globalization and Its Impact On Economic Growth

How Globalization Impacts International Investors

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“It has been said that arguing against globalization is like arguing against the laws of gravity” – Kofi Annan, Former Secretary General of the United Nations

Globalization has impacted nearly every aspect of modern life. While some U.S. citizens may not be able to locate Beijing, China on a map, they certainly purchase an overwhelming number of goods that were manufactured there. According to a 2010 Federal Reserve Bank of San Francisco report, approximately 35.6% of all clothing and shoes sold in the United States were actually manufactured in China, compared to just 3.4% made domestically.

In this article, we will look beyond the everyday implications of globalization and towards the economic implications that impact international investors.

Globalization Benefits World Economies

Most economists agree that globalization provides a net benefit to individual economies around the world, by making markets more efficient, increasing competition, limiting military conflicts, and spreading wealth more equally around the world. However, the general public tends to assume that the costs associated with globalization outweigh the benefits, especially in the short-term, which has caused problems we’ll explore in the next section on protectionism.

The Milken Institute’s Globalization of the World Economy report highlights many of the benefits associated with globalization, while outlining some of the associated risks that governments and investors should consider. But, in aggregate, there is a consensus among economists that globalization provides a net benefit to nations around the world and therefore should be embraced on the whole by governments and individuals.

Some of the benefits of globalization include:

  • Foreign Direct Investment. Foreign direct investment (“FDI”) tends to increase at a much greater rate that the growth in world trade, helping boost technology transfer, industrial restructuring, and the growth of global companies.
  • Technological Innovation. Increased competition from globalization helps stimulate new technology development, particularly with the growth in FDI, which helps improve economic output by making processes more efficient.
  • Economies of Scale. Globalization enables large companies to realize economies of scale that reduce costs and prices, which in turn supports further economic growth, although this can hurt many small businesses attempting to compete domestically.

Some of the risks of globalization include:

  • Interdependence. Globalization leads to interdependence between nations, which could cause regional or global instabilities, if local economic fluctuations end up impacting a large number of countries relying on them.
  • National Sovereignty. Some see the rise of nation states, multinational or global firms and other international organizations as a threat to sovereignty. Ultimately, this could cause some leaders to become nationalistic or xenophobic.
  • Equity Distribution. The benefits of globalization can be unfairly skewed towards rich nations or individuals, creating greater inequalities and leading to potential conflicts both nationally and internationally as a result.

Tariffs & Other Forms of Protectionism

The 2008 economic crisis led many politicians to question the merits of globalization. Since then, global capital flows fell from $11 trillion in 2007 to a third of that figure in 2012. While some of that may be cyclical in nature, many countries implemented tariffs and other forms of protectionism designed to contain risk in their financial systems and make crises less damaging, although this comes at the cost of forgoing the benefits we’ve seen.

In the U.S. and E.U., new banking regulations were introduced that limited capital flows in order to reduce the risk of contagion. Tariffs have also been put into place to protect domestic industries seen as vital, such as the 127% U.S. tariff on Chinese paper clips or Japan’s 778% tariff on imported rice. In developing countries, these figures are even worse, with Brazil’s tariffs being some four times higher than America’s and three times higher than China’s.

As Kofi Annan said in the quote above, globalization may be inevitable over the long-run, but there are many bumps along the road in the short-run.

These bumps are often spurred by economic crises or some of the negative consequences of globalization, but in the end, the world has always managed to learn that protectionism can make a bad situation worse.

The Bottom Line

Globalization has impacted nearly every aspect of modern life and continues to be a growing force in the global economy. While there are a few drawbacks to globalization, most economists agree that it's a force that's both unstoppable and net beneficial to the world economy.