Globalisation has opened up opportunities for businesses to trade, invest and operate across national boundaries. At the same time, it presents challenges, such as intense competition and exposure to global risks.
Globalisation and free trade
Globalisation is the increasing integration of economies through trade, investment, technology and cultural exchange. It has been driven by reductions in trade barriers, advances in transport and communications, and liberalisation of markets.
Free trade allows goods and services to move between countries without tariffs or other restrictions. International institutions like the World Trade Organization (WTO) promote free trade. Regional trading blocs (e.g. the European Union, North American Free Trade Agreement) create free trade areas where member countries reduce or eliminate tariffs.
Benefits and challenges of globalisation
Globalisation offers businesses:
- Larger markets and potential for increased sales and profits.
- Economies of scale through higher production volumes.
- Access to cheaper or more specialised labour and resources.
- Opportunities to spread risk across countries.
However, globalisation also brings challenges:
- Increased competition from overseas firms.
- Exposure to exchange rate fluctuations and economic instability in other countries.
- Cultural and language barriers.
- Ethical issues relating to labour standards and environmental impact.
Multinational companies (MNCs)
MNCs are businesses with operations in more than one country. They invest abroad to access new markets, reduce production costs and avoid trade barriers. MNCs can bring benefits to host countries, such as employment, training, technology transfer and tax revenue. However, they may also be criticised for exploiting cheap labour, repatriating profits and harming local businesses.
Trade protection
Governments sometimes protect domestic industries from overseas competition. While protectionism can support infant industries, secure strategic sectors and safeguard jobs, it may also provoke retaliation and deprive consumers of choice. Common tools include:
- Tariffs – taxes on imported goods to make them more expensive.
- Quotas – limits on the quantity of imports allowed.
- Subsidies – financial support for local producers to reduce their costs.
- Administrative barriers – complex regulations and standards that make it difficult for imports to compete.
| Measure | Description | How it protects domestic industries | Potential drawbacks |
|---|---|---|---|
| Tariffs | Taxes on imported products. | Raises import prices, making domestic goods more competitive. | Higher prices for consumers; may trigger retaliation by trading partners. |
| Quotas | Limits on the quantity of a good that can be imported. | Restricts supply of foreign goods, protecting market share of domestic firms. | Can create shortages; encourages smuggling; distorts markets. |
| Subsidies | Payments to domestic producers. | Lowers production costs, enabling domestic firms to compete on price. | Cost to taxpayers; may encourage inefficiency if firms rely on support. |
| Administrative barriers | Complex rules, standards or licensing requirements for imports. | Raises compliance costs for foreign firms, deterring imports. | Can be perceived as unfair; may provoke disputes in trade bodies such as the WTO. |
Globalisation: benefits and drawbacks
Globalisation has far‑reaching effects on different groups. The following table summarises some of the key advantages and disadvantages for businesses, consumers and economies. Keep in mind that the impact of globalisation varies by country, industry and individual firm.
| Stakeholder | Potential benefits | Potential drawbacks |
|---|---|---|
| Businesses | Access to larger markets; economies of scale; ability to source cheaper inputs; diversification of risk. | Increased competition from abroad; vulnerability to global economic shocks; cultural and legal differences in foreign markets. |
| Consumers | Greater variety of goods and services; lower prices due to competition; access to products not produced locally. | Domestic job losses in some industries; quality concerns with imported goods; cultural homogenisation. |
| Economies/Governments | Foreign direct investment (FDI) brings capital, technology and jobs; export revenue; tax income from multinational firms. | Dependence on global markets can lead to instability; potential exploitation of natural resources; challenges in regulating multinational companies. |
Exchange rates and economic policies
The value of a country’s currency against others affects trade flows and competitiveness. An appreciating currency makes exports more expensive abroad and imports cheaper at home. This can reduce export revenue but lower the cost of imported components and consumer goods【141601244980680†L343-L360】. A depreciating currency has the opposite effect: exports become cheaper and more attractive to foreign buyers while imports become more expensive, which can lead to higher production costs and inflation【718435290749720†L170-L204】.
Businesses engaged in international trade monitor exchange rate movements and may hedge using financial instruments, invoice in stable currencies or diversify their markets to manage risk.
Governments and central banks influence economic activity through three main policy tools:
- Fiscal policy – adjusting taxation and public spending. For example, cutting taxes or increasing infrastructure investment can stimulate demand and employment, while raising taxes or reducing spending can cool an overheating economy.
- Monetary policy – controlling the money supply and interest rates. Central banks can lower interest rates to encourage borrowing and investment or raise them to control inflation. They also use open‑market operations and, in some cases, quantitative easing to influence liquidity.
- Supply‑side policy – implementing structural reforms to enhance productive capacity. Measures include deregulation, privatisation, investment in education and training, reducing business taxes and improving infrastructure.
These policies shape the business environment by influencing consumer spending, investment costs, exchange rates and the overall level of economic activity. Firms must stay alert to policy changes and adjust their strategies accordingly.
Examples and applications
To see how globalisation operates in practice, consider the smartphone industry. A single handset may be designed in the United States, use rare‑earth minerals mined in Africa, be assembled in China and sold to consumers worldwide via online platforms. This complex supply chain illustrates how businesses source inputs and sell outputs across national borders. It also shows how disruptions – for example, a pandemic or geopolitical tensions – can ripple through the entire chain.
Bangladesh’s ready‑made garment sector provides another example. Global clothing brands outsource production to Bangladeshi factories because wages are lower there. While this has created millions of jobs and lifted many families out of poverty, it has also raised concerns about worker safety and low pay. Governments, consumers and campaigners are pressuring multinational companies to improve labour conditions.
Trade protection policies can be seen in the recent tariff disputes between the United States and China. Both countries imposed tariffs on hundreds of billions of dollars’ worth of goods, raising costs for businesses and consumers and illustrating how protectionism can lead to retaliatory measures and uncertainty for global supply chains.
