During the last decades of the 20th century many barriers to international trade fell and a wave of firms began pursing global strategies to gain competitive advantage.
Rather than thinking in terms of national markets and national economies, leaders of business thought in terms of global markets.
Let us first consider why there has been such a rapid expansion of overseas trade in recent decades.
Causes of rapid expansion of trade
- Rising real living standards
- Trade liberalisation (World Trade Organisation, expansion and deepening of the European Union)
- Transition to market systems in Eastern Europe
- Rapid growth in the Asian Tigers and more recently in China and India
- Privatisation in and liberalisation of domestic markets
- Deregulation of international capital markets
- Fall in transport costs
- Improvement in global communications
What is globalisation?
Globalisation is a business philosophy based on the belief that the world is becoming more homogeneous - national distinctions are fading and will eventually disappear.
Globalisation is an increase in interconnectedness and interdependence of economic activity and social relations.
If the world is homogeneous then companies need to think globally and standardise their strategy across national boundaries.
Globalisation concerns:
- Trade in goods and services
- Investment
- Labour force movement
- Products
- Production
- Technology
- Research and development
- Exchange of ideas and knowledge
- Intellectual property
Key features of globalisation
- Rapid expansion of international trade
- Internationalisation of products and services by large firms
- Growing importance of multinational corporations
- Increase in capital transfers across national borders
- Globalisation of technology
- Shifts in production from country to country
- Increased freedom and capacity and firms to undertake economic transactions across national
- boundaries
- Fusing of national markets
- Economic integration
- Global economic interdependence
Growth of multinational enterprise:
There are various forces driving the growth of MNCs:
- The search for growth markets
- Globalisation of markets
- Desire to reduce production costs
- Desire to shift production to countries with lower unit labour costs
- Desire to avoid transportation costs
- Desire to avoid tariff and non tariff barriers
- Forward vertical integration
- Extension of product life cycles
- Deregulation of capital markets
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