How Globalization Affects Developed Countries

The phenomenon of globalization began in a primitive form when humans first settled into different areas of the world; however, it has shown a rather steady and rapid progress in recent times and has become an international dynamic which, due to technological advancements, has increased in speed and scale, so that countries in all five continents have been affected and engaged.

What Is Globalization?

Globalization is defined as a process that, based on international strategies, aims to expand business operations on a worldwide level, and was precipitated by the facilitation of global communications due to technological advancements, and socioeconomic, political and environmental developments.

The goal of globalization is to provide organizations a superior competitive position with lower operating costs, to gain greater numbers of products, services and consumers. This approach to competition is gained via diversification of resources, the creation and development of new investment opportunities by opening up additional markets, and accessing new raw materials and resources. Diversification of resources is a business strategy that increases the variety of business products and services within various organizations. Diversification strengthens institutions by lowering organizational risk factors, spreading interests in different areas, taking advantage of market opportunities, and acquiring companies both horizontal and vertical in nature.

Industrialized or developed nations are specific countries with a high level of economic development and meet certain socioeconomic criteria based on economic theory, such as gross domestic product (GDP), industrialization and human development index (HDI) as defined by the International Monetary Fund (IMF), the United Nations (UN) and the World Trade Organization (WTO). Using these definitions, some industrialized countries are: United Kingdom, Belgium, Denmark, Finland, France, Germany, Japan, Luxembourg, Norway, Sweden, Switzerland and the United States.

Components of Globalization

The components of globalization include GDP, industrialization and the Human Development Index (HDI). The GDP is the market value of all finished goods and services produced within a country's borders in a year, and serves as a measure of a country's overall economic output. Industrialization is a process which, driven by technological innovation, effectuates social change and economic development by transforming a country into a modernized industrial, or developed nation. The Human Development Index comprises three components: a country's population's life expectancy, knowledge and education measured by the adult literacy, and income.

The degree to which an organization is globalized and diversified has bearing on the strategies that it uses to pursue greater development and investment opportunities.

The Economic Impact on Developed Nations

Globalization compels businesses to adapt to different strategies based on new ideological trends that try to balance rights and interests of both the individual and the community as a whole. This change enables businesses to compete worldwide and also signifies a dramatic change for business leaders, labor and management by legitimately accepting the participation of workers and government in developing and implementing company policies and strategies. Risk reduction via diversification can be accomplished through company involvement with international financial institutions and partnering with both local and multinational businesses.

SEE: Evaluating Country Risk For International Investing

Globalization brings reorganization at the international, national and sub-national levels. Specifically, it brings the reorganization of production, international trade and the integration of financial markets. This affects capitalist economic and social relations, via multilateralism and microeconomic phenomena, such as business competitiveness, at the global level. The transformation of production systems affects the class structure, the labor process, the application of technology and the structure and organization of capital. Globalization is now seen as marginalizing the less educated and low-skilled workers. Business expansion will no longer automatically imply increased employment. Additionally, it can cause high remuneration of capital, due to its higher mobility compared to labor.

The phenomenon seems to be driven by three major forces: globalization of all product and financial markets, technology and deregulation. Globalization of product and financial markets refers to an increased economic integration in specialization and economies of scale, which will result in greater trade in financial services through both capital flows and cross-border entry activity. The technology factor, specifically telecommunication and information availability, has facilitated remote delivery and provided new access and distribution channels, while revamping industrial structures for financial services by allowing entry of non-bank entities, such as telecoms and utilities.
Deregulation pertains to the liberalization of capital account and financial services in products, markets and geographic locations. It integrates banks by offering a broad array of services, allows entry of new providers, and increases multinational presence in many markets and more cross-border activities.

In a global economy, power is the ability of a company to command both tangible and intangible assets that create customer loyalty, regardless of location. Independent of size or geographic location, a company can meet global standards and tap into global networks, thrive and act as a world class thinker, maker and trader, by using its greatest assets: its concepts, competence and connections.

Beneficial Effects

Some economists have a positive outlook regarding the net effects of globalization on economic growth. These effects have been analyzed over the years by several studies attempting to measure the impact of globalization on various nations' economies using variables such as trade, capital flows and their openness, GDP per capita, foreign direct investment (FDI) and more. These studies examined the effects of several components of globalization on growth using time series cross sectional data on trade, FDI and portfolio investment. Although they provide an analysis of individual components of globalization on economic growth, some of the results are inconclusive or even contradictory. However, overall, the findings of those studies seem to be supportive of the economists' positive position, instead of the one held by the public and non-economist view.

Trade among nations via the use of comparative advantage promotes growth, which is attributed to a strong correlation between the openness to trade flows and the affect on economic growth and economic performance. Additionally there is a strong positive relation between capital flows and their impact on economic growth.

Foreign Direct Investment's impact on economic growth has had a positive growth effect in wealthy countries and an increase in trade and FDI, resulting in higher growth rates. Empirical research examining the effects of several components of globalization on growth, using time series and cross sectional data on trade, FDI and portfolio investment, found that a country tends to have a lower degree of globalization if it generates higher revenues from trade taxes. Further evidence indicates that there is a positive growth-effect in countries that are sufficiently rich, as are most of the developed nations.

The World Bank reports that integration with global capital markets can lead to disastrous effects, without sound domestic financial systems in place. Furthermore, globalized countries have lower increases in government outlays and taxes, and lower levels of corruption in their governments.

One of the potential benefits of globalization is to provide opportunities for reducing macroeconomic volatility on output and consumption via diversification of risk

Harmful Effects

Non-economists and the wide public expect the costs associated with globalization to outweigh the benefits, especially in the short-run. Less wealthy countries from those among the industrialized nations may not have the same highly-accentuated beneficial effect from globalization as more wealthy countries, measured by GDP per capita etc. Although free trade increases opportunities for international trade, it also increases the risk of failure for smaller companies that cannot compete globally. Additionally, free trade may drive up production and labor costs, including higher wages for more skilled workforce, which again can lead to outsourcing of jobs from countries with higher wages.
Domestic industries in some countries may be endangered due to comparative or absolute advantage of other countries in specific industries. Another possible danger and harmful effect is the overuse and abuse of natural resources to meet new higher demands in the production of goods.

The Bottom Line

One of the major potential benefits of globalization is to provide opportunities for reducing macroeconomic volatility on output and consumption via diversification of risk. The overall evidence of the globalization effect on macroeconomic volatility of output indicates that although direct effects are ambiguous in theoretical models, financial integration helps in a nation's production base diversification, and leads to an increase in specialization of production. However, the specialization of production, based on the concept of comparative advantage, can also lead to higher volatility in specific industries within an economy and society of a nation. As time passes, successful companies, independent of size, will be the ones that are part of the global economy.

SEE: What Is The World Trade Organization?

By Nicolas Pologeorgis

Source:http://www.investopedia.com/articles/economics/10/globalization-developed-countries.asp

Deutsche Bank's 2017 Outlook Weighs Trump's Upside Against Brexit Downside

A stimulus package from U.S. President-elect Donald Trump will boost growth in the U.S. and beyond, Deustche Bank economists say, with Brexit paring some of the benefits for Europe.

For politicos, 2016 was a tale of two populist shocks: Republican real estate mogul Donald Trump's victory in the U.S. presidential race and Great Britain's decision to leave the European Union.

In 2017, the fallout from those two votes will play a pivotal role in determining economic growth in much of the western world, according to assessments from Deutsche Bank (DB) economists. A stimulus from President-elect Trump and the Republican-controlled Congress should drive expansion by U.S. businesses and consumers, which will, in turn, benefit U.S. trading partners. 

In Europe, however, the benefits of that growth will be pared somewhat by confusion about how and when Great Britain's departure from the 28-member bloc will take place.

"The key thing for Europe, as you all know too well, unfortunately, is political uncertainty," Torsten Slok, Deutsche's chief international economist, said in a conference with reporters Thursday in New York. Still, he said, "sentiment is coming back with Trump, and sentiment is very important for the outlook because we're hoping it will unleash the animal spirits."

Indeed, markets in the U.S. have already surged since the Nov. 8 election, with the Dow Jones Industrial Average and the Standard & Poor's 500 each reaching record highs.

"The Trump election was a game-changer," said Joseph Lavorgna, chief U.S. economist for Deustche. "It brought fiscal policy back into focus. Consensus had determined, and I think rightly so, that that was significantly paralyzed."

In government circles, fiscal policy refers to attempts to boost the economy through government stimulus, typically via tax cuts or spending on infrastructure such as highways and bridges. Such measures were virtually sidelined due to Congressional wrangling with Democratic President Barack Obama for six of his eight years in office.

Republicans took control of the House of Representatives in 2010, two years after Obama was elected, and regained the Senate four years later.

While it's still difficult to say what contours a stimulus might take, "you have to assume it will be something of some scale, simply because Republicans have both houses," Lavorgna said. "That's something Reagan didn't have when he was inaugurated in 1981 and Bush 43 didn't have when he was inaugurated in 2001."

Ronald Reagan, the 40th U.S. president, and George W. Bush, the 43rd, both pushed economic stimulus programs early in their terms. Reagan's was intended to end the economic malaise of the 1970s and Bush's to curb the effects of the dot-com bubble bursting.

READ MORE: Trump's Election, Like Brexit, Drives Wall Street Trading Surge

"There's a lot of room for compromise and for there to be a lot less gridlock," Lavorgna said. "If you overlay that, at least tonally, with what will probably be a somewhat more friendly regulatory backdrop, you can see how the animal spirits of the cycle change and how this really does alter the outlook."

The growth-friendly policies most likely to be green-lighted under Trump and a Republican Congress are tax cuts, probably based on the outline in House Speaker Paul Ryan's blueprint, and easing some of the federal regulations that were tightened under the Obama administration, Bank of America (BAC) economists said at a conference last week.

Ryan's plan, published in June, suggested cutting personal-income tax brackets from seven to three and capping rates at 33% instead of the current 39.6%. Corporations would fare even better, with rates lowered to 20% from the current 35%, the largest reduction in U.S. history.

That won't eliminate the overhang of generally slower growth in western economies than in the past three decades, however, a trend that consulting firm McKinsey & Co. has said is largely due to an aging population and declining productivity gains.

And while the stimulus will probably help overseas companies that supply U.S. businesses and consumers, it won't eliminate the political challenges in Europe, where the central bank has approved negative interest rates to encourage banks to lend.

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There, "2017 looks set to be a year to be endured rather than enjoyed, at least for the first half, when the heavy political calendar and related uncertainty" is likely to curb growth, Deutsche chief economist Mark Wall said in a note to clients on Wednesday.

Great Britain appears likely to start the process of leaving the European Union as soon as March, and "an economic cost seems unavoidable," Wall said. The clearer the cost, however, "the more salutary the warning to others tempted to exit. It will be some time before we know if the EU gets the balance right."

That could be of crucial importance in France, one of Europe's three biggest economies, where presidential candidate Marine Le Pen of the National Front is promising a referendum like Britain's on leaving the European Union.

Elections are also scheduled in Germany and the Netherlands, and an early election is possible in Italy, "each with different concerns over the influence of right-wing populists," Deutsche economist Patricia Wruuck said in a Wednesday note.

"Trump's win could further embolden nationalism in Europe, fueling fragmentation and bedeviling concise responses to Europe's challenges," she added.

The risks to the region's economy shouldn't be overstated, however. Its businesses are in much better shape than generally realized, Slok told reporters Thursday.

"There is an under-appreciation of the strength of Corporate Europe and the strength of the European economies simply because it's overshadowed so much by the political challenges that continue to be such a headwind," he said. "That doesn't mean political challenges are going to create recession."

READ MORE: Trump's Economic Dilemma: Delivering a 2017 Boom Without a Bust

By James Langford

Source: https://www.thestreet.com/story/13927630/1/deutsche-s-2017-outlook-weighs-trump-s-upside-against-brexit-downside.html