What is Globalization?
Globalization is a worldwide phenomenon that has resulted in the international exchange of information, culture, products, services, and labor without any barriers across the world due to advancements in communication and transport technology.
Before diving into the benefits and challenges of globalization, let us trace it back to its roots.
Evolution of Globalization
Trade and commerce have existed since man tasked his muscles and brains to invent the wheel. However, the pace at which spread did not accelerate until corporations emerged in the 1500s.
The advent of the Industrial Revolution led us to mass-produce goods. However, the early drivers of the industrial revolution in Europe had one problem, though.
The size of their domestic markets was limited.
Domestic consumption did not satisfy the Victorian era’s growth managers, hackers, and markets. Thus, globalization kicked off – and all the benefits and challenges along with it.
Almost all kingdoms that had colonies worldwide sourced raw materials from their territories and used these colonies to sell their manufactured goods. This eased border and trade restrictions, which eased selling to these markets. With the invention of the steam engine, every mode of transportation – ships, animals, and human-pulled carts became more advanced.
Simply put, anything that had wheels found a way to evolve.
Coupled with the means to produce, control, and discover electricity, labor mobility, trade, and supply chain started progressing at an incredible pace.
Why is Globalization Important for Businesses?
There are several benefits of globalization. For businesses, in particular, globalization has removed barriers to their most important goal – global expansion.
Businesses expand to escape market saturation. A positive effect of globalization for businesses is that it erases all borders to:
- Buy and sell on international markets,
- Capitalize on free trade
- Avoid market saturation
- Find better product-market fit
- Save more by reducing tax
- Find new talent
- Find specific talent
- Tap new economies to scale
Factors That Have Led to the Enormous Benefits of Globalization
Whether globalization is good or bad for business is debatable. There have always been four factors that have accelerated the effects of globalization.
Technology
As articulated above, transport and supply chain technology have always been the primary drivers of globalization. The commodification of the internet in the 1980s broke several barriers to global communication. From a business perspective, a technological boom in semiconductors, energy, storage, containerization broke many barriers to expanding into other countries with ease. Every business can set up a virtual global presence and sell to customers worldwide with social media. Such is the effect of technology on globalization.
Market-based factors
Globalization merged many distinct markets into a single global market. Thus factors such as product-market fit, market saturation, domestic market potential, developing markets made companies choose internationalization as a strategy.
Cost factors
The colonization of several countries made companies look at developing markets to source labor and raw materials at affordable rates. As supply chain technology integrated these markets, companies began to outsource manufacturing and service.
Political drivers
Globalization is primarily identified with economics and trade. However, politics and other entities have largely influenced globalization.
For example, governments loosen immigration laws to allow the emigration of skilled labor into the country. Governments with knowledge economies market themselves as education destinations. This allows the immigration of international students, which enriches the local economy and supports their workforce.
In several countries, politics is inseparable from business. Governments frame business-friendly policies to source labor from foreign countries, loosen tariffs for imports. These policies solve labor and cost-related problems for businesses.
How Important is Globalization for the Economy?
There is no nation in the world that hasn’t reaped the benefits of globalization. Granted that there are cons to globalization, but the liberty to exchange goods and services without barriers is crucial to all economies.
Economies of all countries have become closely linked and have begun to influence each other. Globalization has successfully merged historically and culturally-distinct national economies into one global marketplace.
Benefits of Globalization
Globalization is one of the most influential phenomena to occur in the history of humanity. Below we discuss the benefits of globalization for businesses and employees in detail.
Benefits of globalization for business
The benefits of globalization for businesses are numerous. Besides providing more markets to sell, globalization also benefited companies with several competitive advantages.
Cheaper raw materials, talent availability, better product-market fit saw small domestic players grow into large global businesses, thanks to the effects of globalization.
Here are the benefits of globalization for businesses:
- Easier escape from market saturation
- Find better product/market fit
- Outsource services and manufacturing to lower costs
- Reduce HR costs for individual businesses
- Collaboration in knowledge and technology
- Find new and specific talent
- Competitive advantage
Now, let’s look at them in detail.
Evade market saturation
Market saturation occurs when businesses begin to run out of customers in a particular market.
Businesses have several strategies to deal with market saturation. Of course, there exist strategies such as price reduction, value-based strategy, diversification,
However, these strategies are unsustainable. They lead you to:
- Sacrifice profits for market space
- Cannibalize your earnings when you diversify
- Spend more on innovation to maximize customer value
- Develop new products that may not have a good product-market fit
Thus, businesses go global. Globalization has proven advantageous for companies that have existed long enough in the domestic market and longed to expand into new ones.
By expanding into other countries, companies find new customers and sales opportunities. They also find local partners who help them penetrate further into the market. Moreover, globalization benefits businesses by assisting them to find a better product/market fit.
Find better product/market fit
Bad product/market fit is one issue that continuously plagues businesses. As a matter of fact, 42% of startups fail due to product-market misfit.
Many business leaders imagine themselves as the second Steve Jobs. They believe in the renowned CEO’s adage, “Customers don’t know what they want until you show it to them.”
Although they do not follow the quote to the word, many businesses are lethargic in researching their market’s wants, needs, and desires.
Sometimes, products may not meet market requirements. Occasionally there may be too many competitors to penetrate the market.
In these times, businesses see the benefits of globalization as a boon.
With increasing ease of expansion, companies can test new markets and identify potential customers without much difficulty. With global employment solutions like Multiplier, businesses can employ sales and tech teams to find expansion opportunities without even establishing a base in the country.
Outsource services and manufacturing to lower costs
Until the first world war, countries that benefited from the industrial revolution had a monopoly on manufacturing. These businesses sourced raw materials from colonies at cheaper rates and manufactured them domestically. In the end, colonizers sold the products in the territories.
However, post the second world war, countries in the developing world – China, India, Brazil – saw manufacturing as a bright prospect to base their economies.
In 2018 China accounted for 28% of the manufactured goods worldwide. In parallel, India grew to be the fastest-growing services sector globally. By 2027, the global outsourcing market is predicted to pass over $400 billion.
In tandem, the countries that once were manufacturing hubs became knowledge economies. Here, businesses began outsourcing manufacturing and services to countries where labor and raw materials were cheap.
With a rapidly globalizing world, supply chains became more elaborate. Technologies such as cloud computing, AI, storage, and containerization favored businesses sourcing raw materials and services overseas at cheaper costs.
Reduce HR costs for individual businesses
Services like payroll and HR come at a cost to businesses. When handled in-house and with local talent, these functions, although vital, are expensive to manage. Moreover, payroll and HR aren’t revenue-generating functions like sales, marketing, product development.
Globalization has enabled businesses to outsource payroll and HR overseas. According to the latest HR trends, HR consulting, benefits administrations, insurance services are the most outsourced globally.
You could partner with Multiplier’s EOR platform to manage your insurance for your global employees.
Collaboration in knowledge and technology
One of the positive effects of internationalization is that knowledge and technology began flowing across the globe.
Since the start of 2000, this flow hasn’t been equal. According to the IMF, the G5 countries produced 3/4th of the knowledge.
However, countries like China and Korea have started to generate knowledge in recent years. The number of patents these countries generate is one testimony.
QS University Rankings for 2021 featured more than 650 Asian universities. Over 3,300 Indian scientists made it to Stanford University’s Global List of Top 2% Universities.
This transition happened due to the positive effects of globalization. You see, one of the benefits of globalization is that it allows developing countries to participate in global supply chains. Moreover, as more multinational companies established their bases in these markets, their employees participated in the knowledge creation process.
A study supported by the World Bank, this is how globalization benefits knowledge creation in developing economies:
- Firms with market power tend to be the innovators in terms of developing new products and acquiring new technologies, but less so in obtaining formal accreditations,
- Greater pressure from foreign competition stimulates innovation
- Supplying multinationals as well as exporting and importing (vertical relationships) induce innovation by domestic firms
- Firms with market power tend to innovate more, but pressure from foreign competition also stimulates innovation.
Find new and specific talent
Worldwide, there is a shortage of 40 million skilled labor. In 2019, 920,000 software engineer roles went unfilled in the USA. Although this has transformed the role into one of the best-compensated job roles in the USA, for the superpower nation, it spells trouble.
The global talent shortage is real. Several developed economies such as Singapore, the UK, and Japan face a colossal lack of talent.
Thus, 42% of HR managers have started to seek higher-quality talent in global markets.
One of the advantages of globalization is that it increases labor mobility. Businesses can now easily avail of work visas for employees. They can find talent nurtured in specialist markets. For instance, Thailand allows several farmers from India to migrate to partake in their agriculture.
Competitive advantage
All the above benefits of globalization make businesses more competitive. Any company with a globalized outlook in talent acquisition, sales strategy, and market penetration will have an advantage over its competitors.
Benefits for employees
More jobs in developing countries
Globalization broke the back of countries that earlier monopolized manufacturing and services. With models such as just-in-time manufacturing, the manufacturing process became more distributed worldwide.
Resultantly, manufacturing jobs too became distributed.
This increased jobs for employees in developing countries. China has witnessed growth at over 7% in its labor market since the 1980s. India saw a huge economic boom once the economy opened up to global companies.
Africa was largely left out of globalization. However, growth rates have been over 6% in the last five years. Private capital has flowed into Africa, not just in oil and mining. We started to see more private equity and some of the more flexible asset classes you would expect in dynamic economies.
Increased labor mobility
An underappreciated benefit of globalization for businesses and employees is increased labor mobility. Thanks to globalization’s technological and political drivers, individuals can easily migrate to other countries.
Countries that cannot source talent domestically can pander to the global job market to fill these positions. Many governments that can impart world-class knowledge have positioned themselves as educational destinations.
Countries like the USA, UK, Ireland, New Zealand have started opening their institutions to international students. These countries have reaped some of the best benefits of globalization, such as increased capital flow, strengthening local markets, the influx of skilled workers, and more.
More salaries for employees
A higher salary translates to workplace motivation and better trust between organizations and employees. Better wages also improve the living standards of the population. Although debatable, increased living standards are one tangible benefit of globalization.
By moving manufacturing-related jobs, and other skilled labor to affordable developing countries, locals in these nations could increase their standard of living. You should note that governments of developing nations provided the necessary infrastructure to take advantage of globalization.
To conclude, globalization benefited millions of workers in developing nations – lifting them out of poverty, providing dignified labor, and access to quality products.
More household income & Improved standards of living
The effects of globalization impacted household income vastly.
- The global phenomenon reduced inflation rates in Western economies.
- In developing countries, many goods and services have become more affordable. As businesses could penetrate maturing economies, they competed with domestic players. For instance, in India, Amazon is warring with Indian e-commerce companies, thus slashing the prices of its products to make inroads into the market. This competition has made products more affordable to the Indian populace.
- This development also has the effect of increasing real wages by lowering the cost of living.
- Globalization has helped reduce gender wage discrimination and give new opportunities to women.
Challenges with Globalization for International Business
Undoubtedly, globalization has endowed several benefits to the world. Hate or debate, the phenomenon leveled the globe. It transferred monopolies to the other side of the world. For instance, China recently became the world’s wealthiest country – the USA trailed the dragon nation by several points.
However, we would be biased if we leave out the challenges of globalization. Although many nations which were formerly colonies to European masters rose to be manufacturing, financial and democratic powerhouses, they still face stiff challenges of globalization.
Businesses, too, face many strategic challenges of globalization. Do the benefits of globalization outweigh the costs is one hotly debated topic.
Below is a list of challenges of globalization:
- International recruiting
- Managing employee immigration
- Payroll & Compliance challenges
- Foreign worker exploitation
- Legal compliance for employee
- Incurring tariffs & export fees
Now, let’s look at them in detail.
International recruiting
One of the attractive benefits of globalization is international employee mobility. However, is your business able to hire foreign talent seamlessly?
Take the growth of companies that provide global employment solutions like Multiplier. The demand for the services we offer has grown despite the pandemic bringing businesses to a halt.
This indicates that employee mobility services are highly sought after since businesses cannot independently deal with migration complexities and compliance issues. This is a challenge presented by globalization for companies.
Exploitation of workers
Although globalization proved advantageous for businesses in developing countries, labor rights took a huge hit.
Globalization is often seen as neo-colonization by detractors of the phenomenon. They consider this shift of monopoly in manufacturing to developing countries as profit-seeking efforts on businesses.
For instance, countries like China, India, Bangladesh, Congo offer cheap labor for manufacturing. Businesses exploit workers with unfair wages. Women and children, the labor segment with little voice to demand their rights, automatically suffer the most.
Such demands, in turn, affect the environment too.
Environmental degradation
Globalization did crush geographical barriers and led to more seamlessness and liberalization in trade. Consequently, supply chains became more integrated and interdependent.
However, this takes a toll on the environment. Firstly, lesser distribution barriers worldwide, airlines, ships, and trains reached places unlike any time in the history of the world. This led to increased supply and accessibility to products.
Increased access leads to more demand. As economies opened up and per capita income increased, the need for raw materials, products, and fuel followed suit.
Dependence on local products and broader acceptance of remote work cut carbon emissions by 5.4% during the pandemic. However, the effects of globalization on the environment are far-reaching.
Besides, moving manufacturing to poorer countries means that companies can lobby and capitalize on lax local regulations. Thus, these countries act as dump yards for developed nations. European Environment Agency estimates that between 250,000 tonnes and 1.3 million tonnes of used electrical products are shipped out of the EU every year, primarily to West Africa and Asia.
Laws to protect these nations do exist. However, we must point out environmental degradation as one of the disadvantages of globalization.
Setting up local entities
For businesses that want to go global and discover the benefits of globalization, setting up a compliant overseas presence is problematic.
Suppose companies take the traditional route of setting up an entity. In that case, they need substantial upfront capital, sometimes up to $20,000, and costs of $200,000 annually to maintain the business.
Additionally, global businesses must keep up with different and ever-changing labor laws in new countries. When expanding into new countries, companies must navigate new legal systems. Otherwise, missteps lead to impediments and severe financial and legal consequences.
Compliance Issues
Global employers also need to consider how to employ people legally in all the countries where they are based. One of the disadvantages of globalization is that all countries have their labor law.
This covers working hours, types and amounts of paid leave, termination rights, intellectual property rights, salaries, benefits, and social security. You must be aware of the labor code of each jurisdiction where your employees are based so you can employ them compliantly. This is a mammoth administrative task and requires a thoughtful and responsive strategy.
Payroll and Compliance Challenges
Another common global expansion obstacle is managing overseas payroll and complying with changing employment and tax laws. This management task gets even more difficult if you’re trying to manage operations in multiple markets.
How Multiplier Helps Reap Benefits and Evade the Challenges of Globalization
Businesses have been the biggest drivers of globalization. Thus fate too did justice and endowed the several benefits of globalization. Counterintuitively, the challenges of globalization are equal in number.
As the world’s leading global employment solution, Multiplier can help your business gain a local presence anywhere in the world.
Our 150+ local entities and 100+ legal experts can help you employ talent with the zero hassles globalization offers.
Contact us to grow your business across the globe.
