2.2.1 Globalisation
- Syllabus
- 2026
- Topic
- 2.2.1
- Level
- —
Learning objectives
2.2.1a Globalisation: increased integration and interdependenceDefinition of globalisation: increased integration and interdependence of economies.2.2.1b Reasons for globalisationReasons for globalisation:• fewer tariffs and quotas• reduced cost of transport• reduced cost of communication• increased significance of multinational corporations (MNCs).2.2.1c Impacts of globalisation on stakeholders and the environmentImpacts of globalisation and global companies on individual countries, governments, producers and consumers, workers and the environment:• rising living standards• greater choice• lower prices• reduced costs of communication• closing of traditional industries• environmental impact.2.2.1d Multinational corporations (MNCs)Definition of multinational corporations (MNCs):• definition of foreign direct investment (FDI)• reasons for emergence of MNCs/FDI:- to benefit from economies of scale- to access natural resources/cheap materials- lower transport and communication costs- to access customers in different regions.• advantages and disadvantages of MNCs/ FDI:- creating jobs- investing in infrastructure- developing skills- developing capital- contributing to taxes- avoiding paying taxes- environmental damage- moving profits abroad.
Recognise globalisation as integration and interdependence
Globalisation is the increasing integration and interdependence of economies.
Integration means national economies become more connected through cross-border production, trade and investment. Interdependence means decisions or shocks in one economy increasingly affect firms, workers, consumers and governments elsewhere.
Selling one exported product is international trade; globalisation is the wider process in which many economies, supply chains and companies become more closely connected and mutually dependent.
Trace four forces that deepen globalisation
| Change | Mechanism increasing integration |
|---|---|
| fewer tariffs and quotas | imported goods face lower charges or fewer quantity limits → cross-border trade becomes cheaper and easier |
| lower transport costs | firms can move inputs and finished products farther at lower unit cost → international supply chains and markets become viable |
| lower communication costs | firms coordinate suppliers, workers, finance and customers across countries quickly and cheaply |
| greater significance of MNCs | firms locate production, investment and sales in several economies → trade, capital and business decisions link those economies |
The forces reinforce one another: cheaper transport and communication make multinational production practical, while fewer trade barriers give those firms wider access to inputs and customers.
A lower cost enables globalisation but does not guarantee it. Political barriers, infrastructure, skills and market demand still affect whether cross-border activity expands.
Evaluate globalisation across six stakeholder effects
| Stakeholder | Possible benefit | Possible cost |
|---|---|---|
| consumers | greater choice and lower prices from wider sourcing and competition | dependence on distant supply chains; traditional local options may disappear |
| producers | wider markets, cheaper inputs and lower communication costs | stronger foreign competition can close traditional industries |
| workers | export growth and foreign investment can create jobs, income and skills | displaced workers may face unemployment, lower bargaining power or a skills mismatch |
| individual countries | trade, investment and productivity can raise output and living standards | gains may be uneven and reliance on a narrow export or foreign firms increases risk |
| governments | more activity can raise tax revenue and access to technology | pressure to support displaced sectors; mobile firms may shift activity or tax base |
| environment | international diffusion of cleaner methods is possible | more production, extraction and transport can increase emissions, waste and resource damage |
Judge the outcome by identifying the stakeholder, time period and distribution of gains. Lower consumer prices can coexist with job losses in a traditional industry, so an economy-wide benefit does not mean every group benefits.
Globalisation does not automatically raise living standards or lower prices. Competition, worker adjustment, environmental rules and how income is distributed determine the result.
Explain why MNCs use FDI and judge host-country effects
A multinational corporation (MNC) operates in more than one country. Foreign direct investment (FDI) is investment that establishes or acquires a lasting business operation in another country, such as building or buying a factory.
| Reason for MNC/FDI expansion | Business mechanism |
|---|---|
| economies of scale | producing for several markets spreads fixed costs and supports larger-scale purchasing or production |
| natural resources or cheaper materials | locating near inputs can secure supply and lower production cost |
| lower transport and communication costs | coordinating and moving output between countries becomes more affordable |
| customers in different regions | local operations improve market access and adaptation and may avoid some trade costs |
| Host-country advantage | Host-country disadvantage |
|---|---|
| creates direct jobs and demand for local suppliers | local firms or workers may be displaced |
| invests in infrastructure and productive capital | profits may be moved abroad rather than reinvested locally |
| trains workers and transfers skills or technology | key roles may be filled from abroad and promised skill transfer may be limited |
| contributes business, wage and spending taxes | complex structures may avoid taxes or shift profits to lower-tax countries |
| can raise output, exports and living standards | extraction and production may cause environmental damage |
Net benefit depends on the MNC's conduct, local linkages, wages and training, tax enforcement, environmental regulation, how long it remains and how much profit is retained in the host economy.
Exporting to a country does not by itself make a firm an MNC or constitute FDI. The firm must operate abroad, and FDI involves a lasting productive or controlling investment rather than a routine sale.