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Contextual Meaning Impact And Effect Of Globalization Economics Essay

The assignment outlines the contextual meaning of the term “Globalization” by summarizing explanations in the economical literature and the different contemporary perceptions of the term Globalization over the years and its evolution in to a concept which has been tailored to better define its current perspective in the modern era.

The second part of the assignment is broken down in two sections. The first section introduces in brief the Impact of Globalization over the years on the globe, organizations, businesses and also its unprecedented affect on people who in true essence are the source and focus of any global event.

The second section gives a deeper insight on the effect of Globalization in the way organizations adapted to new strategies and modified their corporate structures to best suit the demands of the new globalized world. These changes are huge and difficult to implement which need to be in conjunction with the law and regulations that are designed to monitor the smooth functioning of the regions involved.

Towards the end of this assignment there is a brief discussion about the emergence of many international organizations which work towards the harmony of its members by promoting economic growth and financial stability [2] .The assignment concludes shedding some light on the effects of tax reforms which were instigated as a integral part of this phenomenon called Globalization.

Introduction

“A German businessman may wear an Armani suit to meet an English friend at a Japanese restaurant, who later returns home to drink Russian vodka and watch an American soap on TV.” [3] 

This statement 30 years back would have been a perfect conversation starter between some old timers sitting at a bar side on a Friday evening, probably even satisfy the occasional funny bone tickle. That said the trend has changed drastically, even though this has been a topic of debate from the late 20th century, the discussion has led to an introduction of a term ‘Globalization’.

According to the Stanford Encyclopaedia of Philosophy the term has only come into light in the last two decades, and academic commentators who employed the term in the late 1970s recognized the novelty of doing so [4] . Covering a wide range of distinct political, economic, and cultural trends, the term “Globalization” has quickly become one of the most fashionable word of contemporary political and academic debate.

In popular discourse, Globalization often functions as little more than a synonym for one or more of the following phenomena: the pursuit of classical liberal (or “free market”) policies in the world economy (“economic liberalization”), the growing dominance of western (or even American) forms of political, economic, and cultural life (“westernization” or “Americanization”), the proliferation of new information technologies (the “Internet Revolution”), as well as the notion that humanity stands at the threshold of realizing one single unified community in which major sources of social conflict have vanished (“global integration”). This concept has been more precisely been reiterated by the more recent social theorists as compared to the so called Pundits.

Globalization

One can be sure that virtually every one of the many thousands of articles, journals, academic papers, commentaries, books, legal writings written by scholars, learned men, professionals, experts and a reliable enthusiast on the concept of Globalization included its own definition. Many see it as a social and economic phenomenon that encompassed increased interaction, integration of “Westernization or Americanization” [5] , or integration of international economic systems routed through the growth of international trade.

However, Roland Robertson defines ‘the concept of Globalization as a topic often discussed but less understood. The term catapulted from obscurity to the subject of headlines towards the end of the 20th century. Though, the first great expansion of European capitalism took place in the 16th century, following the first circumnavigation of the earth in 1519 to 1521.

Expansion in the world trade took a big upturn in the late 19th century, it took a tumble because of the First World War and the emergence of the anti-free trade protectionism that led to the Great Depression in 1930.This however was just an interruption to the process of Globalization which commenced in the late 19th century.

A sense that the world was united was generated by the establishment of International Date Line and World Time Zones, along with the near global adoption of the Gregorian calendar between 1875 and 1925’. During that period, international standards were also agreed for telegraphy and signalling.

With the end of Second World War came another great expansion of capitalism with the development of multinational companies interested in producing and selling in the domestic markets of nations around the world, which in turn fuelled the generation of jobs in these regions which were supported by air travel and the development of international communication enhancing the process of international business. [6] 

‘In the 21st century, several new professional groups have appeared, including Global Studies Association in Great Britain and the United States and the Globalization Studies Network, which has a worldwide membership.

The older kinds of global links have expanded to far higher levels than ever before: the telephone, radio broadcasts, trans world refugee flows, global social movements, multilateral treaties, intercontinental direct investment, global marketing strategies, global currencies and foreign exchange markets, global pandemics and global symbols like Coca-Cola insignia and Che-Guevara portraits.

All these things that were in rarities in the 1950’s have become everyday face for hundreds of millions of people across the planet.’ [7] Kotler and Keller suggest that with faster communication, transportation, financial flows, the world is rapidly shrinking.

Products developed in one country are finding enthusiastic acceptance in other countries [8] . Likewise, territorial governments and territorial identities persist as major features of the more global world of the 21st century. Furthermore, contemporary Globalization has unfolded together with a historically unprecedented regionalization, as seen in the emergence of dozens of formal arrangements among groups of nations, such as the African Union (AU), North American Free Trade agreement (NAFTA),World Trade Organization (WTO),UN Commission on International Trade Law (UNCITRAL), Organization for Economic Co-operation and Development (OECD) and so on. [9] 

‘Globalization has played a key role in the unprecedented increase in prosperity in the last 50 years, which is now spreading from the United States and Europe to include many formerly poor countries in Asia, including China and India.’ [10] Globalization has had intense effect on every facet of life.

The impact of Globalization on the whole has been widespread especially on strategies that govern the future of any organization that plans to stay in competition and also move ahead with the right opportunity. It also can be summarised that business and companies are affected at three levels in particular.

The first being Corporate strategy and Behaviour, secondly Corporate structures and relationships and lastly government regulations and policies towards companies. The focus on these levels is immense and should be looked at in depth. These features should be understood with caution.

As José Luiz Fiori points out,

“The process of Globalization is all but global, insofar as it is highly selective, dualism-conducive, and dependent of Nation States' political strategies that remain in full force”. [11] 

‘Globalization is, in the end, a contradictory and selective process, that gives each country a different perspective. In this sense, it is a mistake to believe that Globalization is the exclusive result of market forces, thus neglecting the extremely relevant role played by the State to incentivize and regulate production and the consumer market itself.

For this very reason, the belief that Globalization promotes a peaceful and inevitable decrease in the sovereignty of the States is highly questionable. Finally, it is equally wrong to believe that Globalization is a universal phenomenon, inclusive and homogenizing, and ignore the strong economic dualism and socio-economic exclusion to which it is related.’ [12] 

Keeping these factors in mind the effects of Globalization have to be discussed over three main factors.

Corporate Strategy

“Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces, the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and noneconomic contribution it intends to make to its share holders, employees, customers, and communities... Corporate strategy defines the business in which a company will compete, preferably in a way that focuses resources to convert distinctive competence into competitive advantage.” [13] 

‘There are implications of Globalization on the way organizations have to work or rather have been applying to counter or absorb some of these effects in the most effective manner. Domestic markets have been exposed to new foreign-owned companies which have definitely bought new job prospects, better knowledge, international exposure and a bigger market to grow. In contrast, it also has increased the competition within their home markets as a result of market liberalism.

This means that every sizable business has to have some basic knowledge about the international markets, even if they do not deal within them as the global markets may set the cost base.

Survival is possible only if companies have to develop markets abroad and/or outsource abroad, this is definitely a step to minimize on the investments made in their home ground where it is vital to collect information, Research and Development, implement, expand and produce which may be an expensive proposition and risk involved is high, hence in order to get the best out of the business, investments made abroad on the available resources of expertise in the region, also to bank on the available exposure to the international market is not a bad idea at all.

A lot of theorists may argue otherwise and say that larger companies may have to seek debt and capital funding; this is only possible through the financial markets and the stock markets including markets outside their own countries. All of this is only possible if the idea of “Free- trade” is allowed to flourish.’ [14] 

It can be noted that Multinational Enterprises (MNEs) are increasingly developing global strategies and their links with any one country are becoming more tenuous. In addition, technological innovation has affected the way in which MNEs are managed and made the physical location of management and other service activities much less important to the MNE.

International financial markets continue to expand, a development that facilitates global welfare-enhancing cross-border capital flows. This process has improved welfare and living standards around the world by creating a more efficient allocation and utilization of resources. For the smooth induction of these ideas these MNEs have to take into consideration the tax reforms in the countries they are in business with.

Globalization has had certain positive effects as well as negatives effects on the development of the tax systems which have led to the emergence of certain governing bodies like Organization for Economic Co-operation and Development (OECD), who seek to safe guard and promote an open, multilateral trading system and to encourage adjustments to that system to take into account the changing nature of international trade, including the interface between trade, investment and taxation.

These developments have become an important part of the corporate strategies which are in tune with the new globalized world, which is going to evolve superficially as time comes. It is inevitable for organizations to make changes to all of their organizational blue prints of thought to benefit from this global phenomenon called Globalization. [15] 

Corporate structure

According to Malcolm Tatum, a corporate structure is essentially the layout of the various departments, divisions, and job positions that interact to conduct the business of the company. Generally, a corporate structure is necessary in order to ensure that all-important tasks are conducted according to the guidelines of the corporation, as well as providing lines of communication and authority for the overall function of the company.

Even the smallest of businesses have a corporate structure, although the exact format for the structure may be extremely simplistic.

A corporate structure usually helps to accomplish three things. First, the corporate layout helps to define all the areas of responsibility within the company. The accounting department is understood to handle all financial matters, such as paying the bills of the company and also issuing invoices for services rendered.

The sales department works to ensure there are efforts to market the goods and services produced to the consumer market. Provisions for executive, managerial, and administrative matters are also normally accounted for in a corporate structure, so that everyone in the organization knows where a given issue should be addressed.

Along with providing reference points for the handling of various functions, a corporate structure also helps to establish a line of communication for employees to utilize. This makes it possible for comments, questions, and ideas to flow easily from anywhere in the organization to someone with authority to act on the information effectively.

By establishing this line of communication, the corporate structure helps to ensure effective interaction and also minimize time wasted by information moving through the company in a disorganized manner.

Lastly, Malcolm Tatum also insists that the corporate structure helps to establish a working chain or line of authority. Corporations often require responsible persons placed at various points in the structure to ensure tasks are handled properly and in accordance with company bylaws.

By granting specific levels of authority to persons all along the corporate structure, including making persons accountable to other persons for their competency in exercising authority, it provides a checks and balance system to keep the company on an even keel. Employees who are disgruntled with immediate supervisors have someone who can hear their grievances, while overseers may step in and conduct the tasks assigned to an employee when needed. [16] 

As Globalization is getting a wider grip on the markets, the trend underlying a company’s competitive behaviour towards the other companies in the market is changing to a system that incorporates building alliances, joint ventures, mergers and acquisitions and partnering with other companies under the various banners like Limited Liability Partnerships (LLP).

Kotler and Keller suggest that foreign investors may join with local investors to create a joint venture company in which they share ownership and control for instance:

“Coca-Cola and nestle joint forces to develop the international market for “Ready to drink” tea and coffee which currently they sell in insignificant amounts in Japan.” [17] 

A joint venture may be necessary or desirable for economic or political reasons. A foreign firm might lack the financial, physical, managerial resources to undertake the venture alone; or the foreign government might require joint ownership between the participating companies as a condition for entry for the foreign firm. Even corporate giants need joint ventures to crack the toughest markets.

When Unilever wanted to enter China’s ice-cream market, Unilever joint forces with Sumstar, a state owned Chinese Investment Company. The venture’s general manager says Sumstar’s help with the formidable Chinese bureaucracy was crucial in getting a high-tech ice-cream plant up and running in just 12 months [18] 

Globalization of Laws and Regulations

There are various connotations to the term 'Globalization of law'. Parikshit Dasgupta- ALMT Legal, Indo-European Consultants- An expert in this field suggests

“The term 'Globalization of law' refers to the degree to which the whole world lives under a single set of legal rules. Such a single set of rules might be imposed by an international body, adopted by global consensus, or arrived at by parallel development in all parts of the globe.

In today's world of increasing international trade and inter-dependence the need for transnational law has increased many folds. Since more and more countries, open their economy, either partially or completely, there is a growing need to recognize and work towards a uniform system of law. This process of Globalization is evident in all facets of law.” [19] 

It may be viewed as a concomitant of the Globalization of markets and the business practices of the multinational corporations that operate in those markets. There has been some movement toward a relatively uniform global contract and commercial law. It is well established that contracts are a kind of private lawmaking system. By that we mean that a contract may be defined as a law between the parties to the contract.

The two or more contracting parties create a set of rules to govern their relationships, as laid down under the terms of their agreement. In international trade too, the parties enter in contracts and the contracting parties invariably agree to submit to a nongovernmental arbitration mechanism or the courts of some particular nation state, or both, to resolve contract disputes.

They may also choose the governing law of the contract under which any contract dispute between them shall be resolved.

In today's world of inter-dependence and international commerce, there is increasing importance of growth of harmonization of international commercial law. Most of the countries have now recognized the need for a uniform, predictable and transparent system of law for encouraging foreign investment and international trade with other countries.

As a result of this, the courts and law of most of the countries recognize and enforce the judgments of the others. Hence there is a tentative movement towards the formulation of transnational commercial law through contracts. [20] 

Establishment of New courts and Tribunals

‘The processes of Globalization have a reverberating effect on the legal regulation giving rise to the new international law that includes previous rules governing sectors of international activities like international trade, global mergers, corporate expansions and even sectors of world health, which were established by unitary law-makers recently.

In a multicultural society, the rules to be followed are usually a result of a consensus between multiple opinions where conflicts become ever more frequent. Therefore, a need for a international community becomes essential to implement a system of rules and sanctions with far greater binding force than the system that previously existed and which is empowered by its setup of new international tribunals endowed with personal, subject matter and territorial jurisdiction.

It is the evolution of these courts and tribunals that has given a channel for the individual cases to be looked upon for the general interest of the international community and provide a ruling that confides to the smooth functioning of this community under the effect of Globalization.

Over the period of fifty years not only has the European court of Human Rights been operational, other courts like the Inter-American Court of Human Rights and the African Court on Human and People’s Rights have been established’ [21] .

These courts were limited to a temporal and territorial jurisdiction which ensured the interest of persons in peacetime giving rise to International Criminal Court (ICC) who were entitled to a very broad Jurisdiction and a detailed structure.’

With the advancement of Globalization, there has been substantial increase in international organizations which have come at a price of erosion from the regulatory bracket of a single States.

To manage the smooth functioning of these international organizations governing the many Multinational Companies which are affected, new rules have been issued and applied, which is where the international Courts and Tribunals with multiple jurisdiction come into action. Few of the well established organizations following this principle format fall under concepts of ‘Regional Free Trade Zones’ [22] .

THE EUROPEAN UNION

The European Union was formed in 1957 to create a single European market by reducing the number of barriers to allow smooth functioning of trade among member countries, and by developing trade policies with non-member countries. At present, the European Union is one of the world's largest single markets with a list of 15 member countries.

The EU now contains more than 454 million consumers and accounts for 23 percent of the world's exports. It has a common currency, the euro monetary system. Unification of these member countries under one banner creates tremendous opportunities for trade within the EU, but this may also cause a increase in differences with the companies outside it.

NAFTA

In January 1994, the North American Free Trade Agreement (NAFTA) established a free trade zone among the United States, Mexico, and Canada creating a single market of 360 million people who produce and consume $6.7 trillion worth of goods and services annually.

As NAFTA is implemented over a fifteen year period, NAFTA will eliminate all trade barriers and investment restrictions among the three countries. Before NAFTA came into picture, tariffs on American products entering Mexico averaged thirteen percent, whereas U.S. tariffs on Mexican goods averaged six percent. The difference can clearly be seen.

MERCOSUL

MERCOSUL now links Brazil, Argentina, Paraguay, and Uruguay. While Chile and Mexico have formed a successful free trade zone, NAFTA is likely to merge with this and other arrangements to form an all-Americas free trade zone.

For instance, in Brazil, seven of the ten largest private companies are owned by European establishments; in contrast, two are controlled by Americans. Among the notable European companies operating in Latin America are automotive giants Volkswagen and Fiat.

Some may argue that this clearly portrays the effect of international organization on bringing companies closer through Mergers and Acquisitions, Joint Ventures, business expansions and so on.

APEC

The Asian Pacific Economic Cooperation forum (APEC) along with NAFTA member states-contributing to the Twenty-one Pacific Rim countries, China and Japan are working together to create a pan-Pacific free trade area. There are also active attempts at regional economic integration in the Caribbean, Southeast Asia, and parts of Africa.’ [23] 

OECD

‘Organization for Economic Co-operation and Development (OECD), has played an important role in pacing up the process of Globalization. OECD strongly promotes the idea of progressive “liberalization [24] ” of cross border trade and investment being the key reason for economic growth and rising living standards. OECD seeks to safeguard and encourage multilateral trading system and motivating adjustments to the system considering the factors like international trade, investment and taxation.

It is empirical to take into account the positive and the negative facets involved in the field of taxation as the impact of Globalization has changed the laws and regulation that surround it. Tax reforms have been instigated by Globalization to a great degree focusing on base broadening and rate reductions, in turn minimizing tax induced distortions.

In order to attain the ideal condition of a fiscal climate for investment, companies have to continually asses their tax systems and public expenditures; Globalization has instigated this and has set the right platform for transforming the world into a single market. The most important effect of Globalization on the tax reforms is that it has promoted the development of capital and financial markets which has encouraged countries to reduce tax barrier to capital flows and to modernize the system of taxes which show these developments.’ [25] 

Tax reforms – A boon or a ban?

‘The process of Globalization has multiplied competition to increased magnitudes in global market place especially in regard to Multinational Enterprises (MNEs) which are constantly developing global strategies and their links to one country are turning tenuous. In addition, technological innovations has affected the way in which MNEs are managed and made the physical location of management and other service activities much less important to the MNE.

International Financial markets continue to expand, a development that facilitates global welfare-enhancing cross-border capital flows. This has improved living standards globally by creating efficient allocation and utilization of resources. This shows that Globalization has had a huge positive impact on the tax system globally.

Some may also argue that Globalization also has the negative effects, by opening up new ways through which companies and individuals can minimize and avoid taxes exploiting which countries can develop tax policies aimed primarily at diverting financial and other geographically mobile capital, which induce potential distortion in the pattern of trade and investment and reduce global welfare.

These schemes can then hamper national tax bases of other countries, and also alter the structure of taxation and erode the application of progressive tax rates and the achievement of redistributive goals. This can result in changes in tax structures in which all countries may be forced by spill over effects to modify their tax bases which can be very risky, even though a more desirable result could have been achieved through intensifying co-operation.

Investors in tax havens, imposing zero or nominal taxation, who are residents of non-haven countries may be able to utilize in various ways those tax haven jurisdictions to reduce their domestic tax liability.

Such tax payers are in effect free riders who benefit from public spending in their home country and yet avoid contributing to its financing though Globalization has many positive effects on the world economy yet as seen above governments of every country must take measures, including intensifying their international co-operation , to protect their tax bases and to avoid the world –wide reduction in welfare caused by tax-induced distortions in capital and financial flows in order to make this world a better place to live in .’ [26] 

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