4.3.1 - Causes and effects of globalisation
- Syllabus
- 2018
- Topic
- 4.3.1
- Level
- A2
Learning objectives
4.3.11a - Increase in trade as a proportion of GDP. globalisationIncrease in trade as a proportion of GDP. globalisation4.3.11b - Increase in importance of transnational companies (TNCs) and foreign direct investmentIncrease in importance of transnational companies (TNCs) and foreign direct investment (FDI).4.3.11c - Increase in migrationIncrease in migration.4.3.12a - Factors contributing to increased globalisation in the last globalisation 50 years: •Factors contributing to increased globalisation in the last globalisation 50 years:; trade liberalisation; increased number and size of trading blocs; political change (breakdown of the Soviet system and opening up of China); reduced cost of transport and communications; increased significance of TNCs.4.3.12b - FDI by TNCs: • reasons for FDI • the impact of FDI on recipient countriesFDI by TNCs:; reasons for FDI; the impact of FDI on recipient countries.4.3.13a - Possible benefits of globalisation: globalisation • increased economic growth •Possible benefits of globalisation: globalisation; increased economic growth; increased tax revenue; economies of scale; lower prices and higher consumer surplus; more choice; higher living standards.4.3.13b - Possible costs of globalisation: • displaced workers • exploitation of workers •Possible costs of globalisation:; displaced workers; exploitation of workers; environmental impact of increased trade; loss of tax revenue from transfer pricing; increased income inequality within countries; the influence of TNCs on domestic economic policy.
Trade as a proportion of GDP
A rising trade-to-GDP ratio means cross-border trade is growing relative to domestic production, so the economy or world economy is becoming more integrated through goods and services.
$Trade\ as\ a\ percentage\ of\ GDP=\dfrac{value\ of\ trade}{nominal\ GDP}\times100$
If the stated trade measure is 30 billion and nominal GDP is 120 billion in the same currency and period, the ratio is 30/120×100=25%. If the ratio and trade value are known, GDP equals trade divided by the ratio written as a decimal.
Check the dataset's numerator: some series use exports alone, while an openness ratio often uses exports plus imports. Use nominal values in the same currency and period; a higher ratio can reflect trade rising, GDP falling, or both.
TNCs and foreign direct investment
A transnational company (TNC) owns or controls productive activity in more than one country. Foreign direct investment (FDI) is cross-border investment that establishes or expands a lasting business interest and influence, such as building a facility or acquiring a business.
| Growing importance appears as... | Integration mechanism |
|---|---|
| more production controlled across countries | stages of a supply chain are located where the TNC expects advantage |
| larger cross-border FDI flows/stocks | finance and productive capacity connect home and recipient economies |
| wider international sourcing and sales | inputs, technology, management and output cross borders |
| more influence over employment, tax and policy | large TNC decisions affect several national economies |
Buying foreign shares only for a financial return is portfolio investment, not automatically FDI. A domestic exporter is not a TNC unless it owns or controls operations abroad.
Migration as a feature of globalisation
Migration is the movement of people to live or work in another country. Greater international migration connects labour markets and is a characteristic of globalisation alongside rising trade and FDI.
| Measure | Meaning |
|---|---|
| immigration | people enter a country to live/work |
| emigration | people leave a country to live/work elsewhere |
| net migration | immigration minus emigration |
For a recipient country, migrants can fill vacancies, add skills and entrepreneurship, raise productive capacity and pay taxes. Effects depend on employment, skills, duration and public-service capacity; origin countries may receive remittances but can lose scarce workers.
A large immigration flow does not prove high net migration if emigration is also large. Migration includes skilled, unskilled, employed, inactive, temporary and permanent people, so its effects are not uniform.
Why globalisation increased
| Factor in the last 50 years | Causal route to greater globalisation |
|---|---|
| trade liberalisation | lower tariffs, quotas and other barriers make cross-border exchange cheaper/easier |
| more and larger trading blocs | preferential access integrates member markets and supply chains |
| political change | the breakdown of the Soviet system and opening of China connected previously restricted economies to world markets |
| lower transport cost | containerisation, scale and infrastructure reduce the cost of moving goods |
| lower communication cost | digital communication, information and payments coordinate distant production and sales |
| increased significance of TNCs | FDI, offshoring and international sourcing link production across countries |
These causes reinforce one another: lower trade barriers matter more when transport is affordable, while cheap communication makes TNC coordination and cross-border supply chains practical.
No single factor affects every country equally. Geography, infrastructure, digital access, policy and shocks can slow or reverse integration even when global average costs fall.
Why TNCs undertake FDI - and what follows
| Reason for FDI | TNC objective |
|---|---|
| access a market or avoid a trade barrier | sell closer to customers and protect market access |
| lower production/transport cost | use advantageous labour, land, inputs or location |
| secure resources, skills, technology or suppliers | strengthen capacity and the supply chain |
| exploit scale, brand or managerial advantage | expand sales and spread fixed costs |
| respond to tax, grants, infrastructure or regulation | improve expected post-tax return and operating conditions |
| Possible recipient-country gain | Possible recipient-country cost |
|---|---|
| investment, AD and productive capacity raise growth | profit/dividend repatriation creates outward income flows |
| jobs, training, technology and productivity spillovers | low pay, weak linkages or protected technology limit spillovers |
| tax revenue, exports and infrastructure | transfer pricing/tax avoidance can reduce revenue |
| greater competition and choice | domestic firms may be displaced by a large TNC |
| cleaner or more efficient methods | pollution/resource use can create external costs |
Assess net FDI and its size relative to the recipient economy, not the gross cash value alone. Ownership change without new capacity may have different effects from greenfield investment.
Possible benefits of globalisation
| Possible benefit | Mechanism |
|---|---|
| increased economic growth | trade, FDI, specialisation and technology raise AD and/or productive capacity |
| increased tax revenue | higher incomes, output and profitable activity expand tax bases when compliance is effective |
| economies of scale | access to larger markets lets firms spread fixed cost over more output |
| lower prices/higher consumer surplus | import rivalry, scale and lower input costs can reduce price |
| more choice | consumers and firms access a wider range of products and suppliers |
| higher living standards | higher real income, jobs, productivity, lower prices and choice can improve material welfare |
The gains form a chain rather than separate promises: larger markets may create scale economies, which lower unit cost; if rivalry passes savings into price, real purchasing power and consumer surplus rise.
Benefits are possible, not automatic or evenly shared. Market power, tax avoidance, weak institutions, adjustment costs and unequal ownership can prevent national growth from raising every household's living standard.
Possible costs of globalisation
| Possible cost | Mechanism |
|---|---|
| displaced workers | import competition/offshoring contracts some industries faster than labour can move or retrain |
| exploitation of workers | weak bargaining power or labour standards allow low pay and unsafe conditions |
| environmental impact of increased trade | more production/transport and relocated pollution create external costs |
| tax revenue lost through transfer pricing | related companies can set internal prices that shift reported profit to lower-tax jurisdictions |
| greater within-country income inequality | gains accrue to scarce skills, mobile capital and owners while exposed workers lose wages/jobs |
| TNC influence on domestic policy | governments may weaken tax, labour or environmental rules to attract/retain investment |
Average income can rise while inequality also rises: expanding high-productivity sectors reward skilled/mobile factors, while displaced workers face structural unemployment or lower relative wages.
These are risks, not universal outcomes. Labour mobility, training, enforcement, tax cooperation, environmental rules and how gains are redistributed determine their scale.