Globalization refers to the open exchange of goods, services, information, and culture between different countries. While nations have been engaging in trade agreements for centuries, the Industrial Revolution ushered in an unprecedented shift toward a global economy.
Mankind’s rapid technological advances have since resulted in global partnerships on a previously unimaginable scale. As international markets continue to expand, it’s important to understand the benefits of globalization, as well as the unique challenges it presents.
Let’s take a closer look at what you need to know to survive in an increasingly global marketplace.
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Examples of Globalization in Action
The odds are that you’re probably sitting within a few feet of a product that was made in another country. From cell phones and computers to clothing and consumer staples, most of us use products every day that are manufactured in foreign markets.
A thorough inventory of all the items in the average home or business would likely reveal an astounding number of products from all over the world. On the economic front, globalization is all about the expansion of fair trade across national borders.
But the benefits of globalization don’t begin and end with economic growth. As the world becomes more interconnected, more people are enjoying easier access to the cultures of other countries.
These days, most Americans don’t have to look far for an Indian restaurant, just as a trip to KFC has become a quirky Christmas tradition in Japan. People all over the world use Chinese apps like TikTok or power products with semiconductors manufactured in Taiwan.
Phones now allow us to speak to someone on the other side of the planet or to learn new languages on free apps like Duolingo. The benefits of globalization can also be seen through international organizations such as the United Nations, the World Trade Organization (WTO), and the World Bank.
Many businesses are becoming multinational corporations with various headquarters in different countries. There’s no argument that global expansion is playing an increasingly fundamental role in national economies and cultures.
Many business leaders find that understanding these ever-evolving changes is a vital part of forming a thoughtful and responsive strategy for staying relevant in the modern world.
The Benefits of Globalization
Much like every other major movement in history, globalization comes with its own unique set of pros and cons. Before we get into the potential drawbacks and challenges of globalization, let’s take a moment to focus on some of the benefits its producing on a global scale.
1. Access to a Wider Customer Base
From a business standpoint, one of the most obvious benefits of globalization is access to customers all over the world. Long gone are the days when businesses were limited to selling goods or services to people from their own local or national geographic areas.
Whether through eCommerce or multinational corporations, sellers now have a 1 in 8 billion chance of developing a product that someone in the world is interested in buying. Customers can also benefit from the arrangement by enjoying a wider range of product offerings.
A global business also enjoys the opportunity to take advantage of specific market niches. Even if a product doesn’t take off in one country, it might prove to be a huge success in another.
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2. Economies of Scale
Global businesses often enjoy the economies of scale that come with a larger customer base. Simply put, economies of scale are factors that can allow a business to grow more efficiently.
The more customers a business has, the more products it’s like to manufacture at a time. As production numbers increase, manufacturing costs often decrease.
For example; you know how you can save money at stores like Costco by buying in bulk, right? It turns out businesses enjoy similar savings through bulk manufacturing.
In the end, this can be a win-win situation for everyone. When a company is able to cut its own costs, it can pass these economic benefits to customers in the form of lower prices.
3. Cost Savings Through Outsourcing
Admittedly, outsourcing can be a double-edged sword, but it does have its upsides. The ability to produce products overseas can often save companies a great deal of money.
By outsourcing production to developing nations, the company is able to cut costs and pass savings along to customers. This can result in lower prices that allow people who live in developing markets to enjoy products that contribute to a higher standard of living.
Outsourcing also brings jobs to developing economies, which helps narrow the international income gap. These benefits also often translate to developed countries by lowering the cost of living, as well as inflation rates. According to a study by Grand View Research, the global outsourcing market could be worth over 405 billion by 2027.
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4. Increased Capital Flow and Risk Sharing
Joining the global marketplace has led to increased capital flow for many developing nations. This has been particularly evident in developing countries that have only recently joined the global marketplace.
“China and India benefited enormously, leading to the largest reductions in poverty the world has ever seen,” says Project Syndicate. As the IMF puts it; “Capital flows are a boon to the region in a variety of ways. They can serve as a source of financing for countries and contribute to job creation for a fast-growing population.”
But in addition to the economic benefits of globalization in developing countries, increased cross-border capital flow can increase international risk sharing. This can help lead to the stabilization of international exchange rates.
5. Encourages Global Competition
Back in the old days, many people’s options for buying certain products were fairly slim. Imagine, for instance, that you lived in a village where only one merchant sold shoes.
Unless you were a really great DIY cobbler, you probably wouldn’t have been in a position to complain about the merchant’s prices or workmanship. But if a new merchant moved into town that sold better shoes at a cheaper price, things would drastically change overnight.
Today, the global markets offer a huge range of choices for every product under the sun. Global companies now operate with the understanding that unique product benefits are essential for gaining a competitive advantage.
6. Access to a Global Workforce
While the COVID-19 pandemic was a health disaster of epic proportions, it also had far-reaching effects on the workforce. Data researchers at Ladders say that not only is remote work here to stay but that “25% of all professional jobs in North America will be remote” by 2023. In fact, 100% of the team at The Impact Investor are remote workers, and that’s not going to change!
Ladders CEO Marc Cenedella points to this surge in remote work opportunities as the biggest American societal shift since World War II. As a result, global employers are discovering access to a much wider talent pool.
Many positions are no longer bound by geographic location, leaving employers free to build a globally diversified workforce. Consequently, many employees now enjoy remote opportunities in multiple countries or states.
The rise of remote work may also help address another recent issue among Western economies. Despite decades of increased labor mobility in the early 20th century, Americans have become increasingly resistant to relocation since the 1980s.
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7. Information Sharing
The ability to share ideas, innovations, and advancements at lightning speed is arguably one of the most notable benefits of globalization. Throughout most of history, there was no guarantee that news of a major medical breakthrough or technological advance would ever reach all the countries in the world.
Many countries that did get word of new discoveries had to wait years, or even decades, depending on their proximity. Now, scientists and medical researchers can share entire studies with foreign countries all over the world by simply uploading them to the internet.
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8. Cultural Sharing
Global trade has also led to the ability to enjoy the benefits of different cultures, no matter where you happen to live. It’s now common in many countries to ask what someone would like to eat based on the country the food originated in.
From Italian and Mexican food to Thai and Chinese cuisine, much of the world now enjoys a wealth of different options. The same can be said for celebrations and holidays.
Día de Los Muertos, Kwanzaa, and Hanukkah are often celebrated right alongside European traditions such as Christmas and Easter. International expansion has created an opportunity to learn more about the cultures and philosophies of other countries firsthand.
And how are we all sharing these examples of culture? We’re all speaking English, and with that language, comes centuries worth of culture, history and experiences.
9. Encourages International Cooperation
One of the other potential benefits of globalization is simply that no one wants to go to war with a strong trade partner. “Countries cooperate if they perceive it to be in their best interests, both economically and politically,” explains the IMF.
As the world becomes more interdependent, nations are naturally beginning to depend on other countries as both import and export partners. The world saw the other side of this coin in early 2022 with the Russian invasion of Ukraine.
Given that Ukraine was not a member of NATO, many sympathetic countries were hesitant to send military troops to join the armed conflict. Instead, they were able to lend support by imposing harsh trade bans and sanctions on Russia without risking more lives, as well as sending humanitarian and military aid.
Consequently, Ukraine currently enjoys greater international relations, even with nations it historically has beef with (e.g. Poland). Conversely, Russia is seeing itself further isolated on the global stage, even finding it difficult to garner support from its regular allies in the BRICS nations.
The Challenges of Globalization
Unfortunately, not all globalization benefits come without obstacles. International expansion can be difficult for global businesses at best and harmful for developing countries at worst.
Let’s take a closer look at some of the most common challenges of globalization. Simple awareness of the risks of moving into new markets can go a long way toward avoiding common mistakes.
10. Worker Exploitation
One of the most common challenges of globalization that businesses face is ensuring that outsourcing production doesn’t come at the cost of workers’ rights. One of the reasons that overseas production can be so cheap is that some developing countries have yet to create legislation to protect employees.
The Bureau of International Labor Affairs (ILAB) maintains a list of products that are commonly produced using child or forced labor. Many American brands have fallen into the trap of outsourcing manufacturing to sweatshops and other unethical companies in foreign markets.
It’s essential for businesses that plan to outsource to a developing country to remain up to date on ever-changing labor laws and working conditions. Fashion Revolution has several great resources for retailers who are considering hiring global employees.
11. Effects of Outsourcing on the Local Economy
Another common global expansion obstacle is that outsourcing labor may cost local workers their jobs. A study from the Economic Policy Institute found that outsourcing labor-intensive jobs contributed to the widening of the wealth gap in industrialized countries like the United States.
While non-college-educated workers are now having a harder time finding work, college-educated professionals are finding their skills even more in demand. The increase in cheaper imports from new markets is also producing more foreign competition for US manufacturing companies.
One of the most famous studies on the topic is called “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” The report was able to link an increase in Chinese imports between 1999-2007 to a 25% decline in US manufacturing jobs.
Additionally, some multinational companies have found ways to avoid paying taxes in the United States by exploiting tax loopholes in new markets. While this may be great for business, it ultimately has a negative effect on the US economy, all while increasing the national trade deficit.
12. Expanding Globally Can Be Expensive
According to Velocity Global, substantial upfront capital is often required to expand into a new market overseas. The company advises that setting up a foreign entity can cost anywhere from $15,000- $20,000 and can require $200,000 each year to maintain.
International recruiting can also be a major challenge when it comes to expanding into multiple markets. Companies that wish to send members of their own teams to oversee operations in other countries may also have to contend with immigration issues.
Recruitment experts can be incredibly helpful when it comes to overcoming language and cultural barriers.
13. Compliance Challenges
Legal compliance is among the most common challenges of globalization that many businesses face when moving into new countries. Establishing a legal presence often involves setting up a Global PEO and understanding how to maintain a compliant overseas presence.
Navigating new legal systems, registering with the appropriate tax authorities, and complying with local regulations can be a mammoth administrative task. To make matters worse, there can be severe financial or legal consequences for failing to comply with employment law in new countries.
For this reason, it’s always advised to seek legal counsel when establishing a local presence abroad.
14. Environmental Impact
Globalization has major advantages when it comes to promoting free trade and raising the gross domestic product of developing countries. But it has also come at an unfortunate cost to the environment.
According to the World Wide Fund for Nature (WWF), since 1970, the world has seen a 69% decline in the wildlife population. Additionally, the increased transport of goods is burning fossil fuels at an alarming rate.
The ITF estimates that “CO2 emissions from transport will increase by 16% to 2050 even if today’s commitments to decarbonize transport are fully implemented.” Fortunately, more major companies are beginning to make more significant commitments to sustainability.
15. Monopolization of Foreign Markets
Monopolization is not a new phenomenon, especially in developed countries. Plenty of towns have witnessed the devastating effects that even one large chain store can have on small local businesses.
One of the challenges of globalization is ensuring that this doesn’t happen on an international scale. While industrialized nations may be able to help improve conditions in developing countries, it’s vital to ensure that each business operates in a way that doesn’t end up making a foreign economy worse.
16. International Dependence
The Russian invasion of Ukraine has proven to be a prime example of one of the challenges of globalization. Obviously, the most tragic effects of Russia’s unprovoked attack are the loss of lives and property in Ukraine.
But the citizens of many countries have been surprised by the massive ripple effects that the conflict has created throughout the global economy. While enhanced international relations are one of the goals of globalization, Russia’s barbaric actions have shown how quickly the system can unravel when even one country doesn’t cooperate.
Unfortunately, Russia is one of the largest oil and gas producers in the world and many nations are reliant on this oil and gas. Gas prices were already on the rise as the world attempted to recover from the economic fallout of COVID-19.
But news of Russia’s invasion sent the price of a barrel of crude oil skyrocketing from $76 in January 2022 to over $110 in early March 2022. The global disruption in oil supply has resulted in everything from massively inflated gas prices to shipping problems all over the world.
Additionally, Russia and Ukraine are collectively responsible for roughly a third of all wheat production in the world. For many countries, the sudden disruption in this supply has become evident in the form of rising food prices.
17. The Drawbacks of Sanctions and Tariffs
Over 30 countries imposed sanctions on Russian goods in response to the country’s unprovoked attack on Ukraine in 2022. But when an individual country attempts to use sanctions or tariffs to force another country into compliance, the results can be much harder to predict.
When Donald Trump ran for president in 2016, he vowed to reform America’s roughly $346 billion trade deficit with China. In simple terms, the idea was that America imports far more Chinese goods than it exports to the Chinese market.
In 2017, Trump and Chinese President Xi Jinping agreed on a deal that was intended to help fix the problem, but it quickly fizzled out. Trump responded by imposing a series of tariffs (import taxes) on Chinese goods between 2018 and 2019.
The idea was to either force the Chinese government back to the table or convince manufacturers to bring jobs back to America. But, for the most part, Trump’s tactics backfired, even as the deficit continued to widen. Shocker, I know.
As the Washington Post reported, “U.S. economic growth slowed, business investment froze, and companies didn’t hire as many people. Across the nation, a lot of farmers went bankrupt, and the manufacturing and freight transportation sectors have hit lows not seen since the last recession. Trump’s actions amounted to one of the largest tax increases in years.”
18. Loss of Cultural Identity
On some levels, the spread of different cultures throughout the world is one of the benefits of globalization. On the flip side of the coin is the danger of cultural homogenization.
The concept refers to the idea that the more interconnected the world becomes, the harder it will be to preserve cultural diversity. Sociologists worry that the spread of Western capitalist culture through social media and popular entertainment will begin to replace the unique ideas and viewpoints of other cultures throughout the world.
History features plenty of tragic examples of cultural imperialism, such as the effects of European colonization on African, Far East Asian, and Native American cultures. While the spread of Western media may not be quite so blatant, some fear it will come to a similar end.
Only time will tell if the world has learned the importance of cultural preservation from the lessons of the past.