GlobalisationThe growing interdependence of countries and the

changes associated with it.

• Growing international division of labour

• Growth of trading blocs

• Development of international transport – movement of goods & people (consumers & workers) around the world

• Improvements in IT allowing rapid communication of info & ideas

• Increasing role of multinational companies (MNC’s)

Two Schools of Thought

• Adam Smith (The Wealth of Nations – 1776): wealth depends on the extent of markets, matching higher efficiency with increased customers, and the search for customers drives firms from national to international markets

• Karl Marx (Communist Manifesto – 1848): globalisation involves differentiation of people and countries, as well as rapid change and sweeping away of traditions; “all that is solid melts into air” under the forces of capitalism

Growing Economic Interdependence of Countries

• Rapid Capital Mobility: speculative “hot money” flows very quickly between countries

• Multinational Investment: investors are quick to move “where the action is” – countries have to compete to attract foreign direct investment

• Reductions in Protectionism

• Communication Technology

Key Characteristics of MNC’s

• Networking between companies: ‘hubs’ of network of satellite companies tends to be based in US, EU, or Japan

• Decentralisation of production: many MNC’s produce very close to final market (↓ transport costs & respond to local tastes, etc)

• Concentration: the top 500 MNC’s are responsible for 90% of the world’s foreign direct investments

• ‘wild geese’: MNC’s tend to base their location on subsidies, gov’t investives, etc. – when these run out, they move somewhere else

Impact of MNC’s on Developed Countries

• ↑ investment: may be of particular benefit to previously undeveloped regions

• ↑ tax revenues

• Incentives for countries to make ‘supply-side’ improvements to attract FDI

• ↑ capital acc’t in short-run (longer run ↓ current acc’t)

• MNC may bring management expertise & technology with spill over effects

• May bring instability if economy becomes largely influenced by movement of FDI and MNC’s

Impact of MNC’s on Developing Countries

• To be explored through studies in development economics…