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Globalisation

Ken Edge
Head Teacher, Social Science
Cardiff High School

Introduction

Global business, that is, business activities between individuals, companies, governments and non-government organisations in different countries, has existed for centuries.

Globalisation is a much newer concept. Globalisation implies an integration of world economies. It includes a rapid increase in the movement of goods, services and capital across national borders. Globalisation is related to the increase in the significance of individual businesses that operate in a range of countries. Increasingly these businesses see the world as a single market.

Outcomes
Overview of global business and globalisation
Revision and case studies
More

HSC Topic 5: Global Business is covered in the Board of Studies NSW Syllabus (June 1999) on pages 34-45. The specific outcomes for this section are:

Outcomes

The student:

H 1.1	explains the impact of the global business environment on business role and structure
H 2.1	describes and analyses business functions and operations and their impact on business structure
H 2.2	evaluates processes and operations in global business.

Overview of global business and globalisation

Nature and trends

The globalisation of world economic activities has several major characteristics and trends.
- International trade in products has grown at a faster rate than output (averaging 12% per annum in recent years).
- Trade in services, e.g. banking, tourism, telecommunications and transport has increased at an even faster rate.
- The most rapid increases have been in global financial transactions. For example, the volume of direct foreign investment in 1997 was six-fold that of the 1983 figure. The increase in trade in goods and services over the same period was 50%.
- Most trade is between businesses in developed countries.
- Most investment goes to developed countries in Europe, Asia and Australia.
- Almost 70% of total world trade is conducted by just 500 large companies and this level of concentration is increasing.
- The vast majority of these companies have headquarters in North America, Europe and Japan.
- Many of these organisations have revenues in excess of many countries.

Trends in global business since World War II

Despite the fact that global business has existed for several thousand years, there has been immense growth in the last five decades.

Period	Key features
1945–60 Dominance by the USA	Most of Europe and Asia are devastated by the war. US firms dominate world trade in commodities. Improved transport is making trade easier.
1960–80 Resurgence of Europe and Japan	European and Japanese firms re-enter the world market. There is a growing importance of service industries such as banking and transport. Foreign investment is flowing to areas such as Australia and North Asia. Restrictions to world trade are being reduced in some areas and regional trade groupings are expanding.
1980–2000 The growing world economy	Large transnational corporations (TNCs) spread their international operations. There is an immense growth in services and international financial dealings. Reductions in trade barriers are increasing in many areas.

What is a Transnational Corporation (TNC)?

The UN defines a TNC as an “ association which possesses and controls the means of production of goods and services outside the country in which they were established”. Activities are dispersed worldwide but specialise in locations that are best suited to these particular activities. TNCs usually have their headquarters in one centre but have complex networks servicing their worldwide activities. Examples include General Motors, Shell, Nestles and Sony.

Drivers of globalisation

The rapid growth of international business activities, especially in goods and services and financial transactions; the integration of world economies and the concentration of these activities within TNCs have been made possible by a variety of economic, political, technological and social factors. Some of these include:

Role of TNCs

Large corporations such as BP and Coca-Cola provide the framework and much of the motivation for globalisation. To maximise profits for shareholders such organisations seek world markets, and conduct activities in least costly sites and provide the infrastructure for such activities to take place. Nike for example produces much of its output in low wage countries such as Indonesia using contract labour.

Global consumers

Cultural differences have traditionally created a great variety of distinctive markets. Increased interaction through travel, TV, and the Internet has tended to reduce the preference for local products. McDonalds for example is now able to market a reasonably uniform product in diverse places such as Russia and China.

Impact of technology

Time and distance have long restricted the closer interaction of world economic activities. An improvement in transport and communications, for example, has reduced time and costs and has helped create a worldwide marketplace. Goods, services, capital and ideas can flow freely around the world. The Internet, for example, has created a worldwide marketplace for the products and services of a range of companies.

Role of governments and the deregulation of financial markets

The governments of many countries have seen the benefits flowing from globalisation and have reduced the barriers to such a trend in areas such as tariffs, foreign ownership rules and fixed currency movements. Many countries have also actively encouraged TNCs by offering concessions and making special exceptions to such things as environmental laws. The government of Papua New Guinea for example was very keen for BHP to begin mining at OK Tedi. Such an activity would create needed foreign exchange. Environmental laws were initially relaxed to entice BHP to begin operations at this mining site.

Activities:
1. List the main factors that have lead to the growth in TNCs and on integrated world economy
2. Describe three major technological advances that have enabled world trade to increase.
3. Many third world countries actively seek TNCs to operate within their borders. Outline the advantages and disadvantages TNCs can bring to a developing country such as Papua New Guinea.

Interaction between global business and Australian domestic business

Despite its population size and distant location, Australia has always been an important trading country, relying on the export of food and raw materials and receiving large volumes of foreign investment. Increasingly Australian domestic business has been affected by the expansion of global business activities. Aspects of this include:

Increased competition	Foreign investment
Trade barriers have been reduced, Australian businesses in areas such as textiles, face increased competition from imports.	Overseas investors see Australia as a safe and profitable area for investment. The low $A makes Australian firms quite cheap. As a result many Australian firms have been taken over by foreign corporations. The Australian economy has expanded due to capital inflows.
Part of the global network	Global business cooperation
Australia has become part of the global network. Sydney in particular is the regional headquarters for many TNCs. The Sydney Stock Exchange is a very important world financial body.	To achieve global economies Australian businesses such as Qantas have increasingly sought business partners overseas to coordinate their global activities.
Export and foreign business opportunities	Increased efficiencies
Many Australian businesses have seen the opportunities that globalisation presents. CSR and BHP for example have established operations in foreign countries such as New Zealand, Taiwan and USA.	In order to compete against increased foreign competition and to gain export markets Australian businesses have had to become more efficient. Inefficient businesses have ceased to operate; as a result Australian consumers benefit.

Activities:

List and briefly describe the main impacts of the growth in global business upon businesses in Australia.
In what ways do Australian consumers benefit from this process?
Suggest possible reasons for a law to restrict foreign ownership of Australian based businesses.

Revision and Case Studies

Case study 1
The world passenger aircraft industry

Immediately following World War II there were many companies making large passenger aircraft. Now there are only two manufacturers of such aircraft, Boeing of the USA and the European AirBus consortium.

Research and development costs are huge. It will cost $8 billion to develop the new 747 models and $14 billion to develop the new Airbus super jumbo. Companies need worldwide markets to cover such costs. About 60% of Boeings output is exported.

Both organisations produce component parts in a variety of world locations and both corporations take on investment partners.

Activities 1:

U.S.A. firms dominated the world marketplace before 1960. Suggest why this was so.
Outline possible reasons for the growing importance of European and Japanese firms after 1960.
Only two major aircraft manufacturing companies exist today. Describe the forces bringing about this situation.
Outline reasons why Australia does not produce its own large passenger aircraft.

Case study 2
Campbells and direct foreign investment in Australia

The giant USA based Campbells Food Corporation invested directly in the Australian food company, Arnotts. Campbells gained control over the assets and organisation of the previously Australian owned company. The decision for this investment was aided by the low value of the $A in terms of the $US. The aim of this activity was for Campbells to gain a foothold in the Asian/Pacific region and use this to develop and expand its activities in this region.

Activities 2:

Outline what you understand by the term “Globalisation”.
Identify five major trends in globalisation that have taken place.
List 10 products produced by TNCs that you have used.
Suggest two reasons for Campbells takeover of Arnotts.

Case study 3
Keeping cloth on the move

How Phil Bart worked the system

Phil Bart’s companies imported fabric for 50c–$1 per metre from China.
The fabric was put through a chemical process at National Textiles and National Bartex that allowed it to qualify as Australian-made. Because National Textiles and National Bartex were exporting Australian-made fabric they received credits which effectively reduced the duties they paid on their imported materials.
The fabric was sold for $10-$12 per metre to companies (some associated with Phil Bart) in Fiji to be made into garments and bed linen.
The garments and bed linen were brought back to Australia by Phil Bart’s companies but were not taxed because they were deemed Pacific-made under an Australian-Pacific trade agreement.

Source SMH 15/2/00

Activity 3:

Outline and explain the factors that encouraged this system of global business.

Case study 4
Rag trades $1 billion paradise

On the outskirts of Suva, the main port town on Fiji’s main island of Viti Levu, thousands of workers spend their days sewing clothes destined for the Australian market. Mostly Fijian Indian, it is believed about 18,000 workers toil for between $1 and $1.50 an hour. About 90 percent of their output lands in Australia.

And thanks to a favourable trade treaty operating through the South Pacific, most garments can be shipped back to Australia with no import duties. Companies such as Pacific Dunlop, which owns Bonds, King Gee, Yakka, the Stafford Group and Glo Weave Investments have large operations in Fiji or use sub-contractors to produce their clothing.

A large percentage of the uniforms for the Sydney Olympics were made in Fiji. Pacific Dunlop sourced more than 160,000 pairs of trousers, 7,000 blazers and thousands of skirts from sub-contractors just outside Suva.

The reasons are obvious. Australian workers employed by legitimate operators earn $12 an hour, rendering Australian-based manufacturers uncompetitive.