The Notion of a Fully Integrated Global Economy - Essay Example

The Notion of a Fully Integrated Global Economy Introduction The concept of economic integration on a global scale did not just emerge in the 20th and 21st centuries. More than eight centuries ago, nations had routes between them which allowed for regular trade. Marco Polo, the Italian adventurer who visited Kublai Khan’s China, left records detailing intricate trade routes that served many Asian empires. Moreover, economic integration in any part of the world did not materialise easily then, and still does not do so today. Furthermore, it does not always bring benefits to the different nations affected by it. In addition, its effectiveness can be affected by factors such as civil strife, or the downfall of empires. Moreover, since the existence of ancient Greece, economic integration has been facilitated in assorted ways by different communities. The development of technological advancements in the 21st century, though, has resulted in a virtual explosion of economic activity between different regions of the world. The development of a Fully Integrated Global Economy There are different factors that have propelled global economic integration forward. In the first place, it is important to identify the fact that multinational corporations, and not sovereign nations, are the main principles pushing forward economic integration on an international platform. Regional as well as national governments have always competed to attract multinational corporations because they are aware that their communities stand to gain from their activities. Multinational enterprises can result in increased employment opportunities, tax revenue, and economic activity (El Hedi, Boubaker, and Nguyen 2014). Governments may offer the multinational companies various incentives like political assistance, tax breaks, relaxed labour regulations, and subsidised infrastructure. Multinational corporations today are the main factor that contributes to financial development. They exert considerable power over social and political entities through their determination of the use of intellectual as well as political property. For example, the multinational corporation, Adidas has shoe patent designs, while Siemens A.G. has numerous infrastructures and equipment patents (Gratton 2011). These are patents that make it possible for multinational enterprises to monopolise local and national economies. Due to the fact that they are so huge, multinational corporations can even influence government policy by stating that they will withdraw from the market if their demands are not met. Multinational corporations facilitate increased economic interdependence of countries in various parts of the world by constantly moving technologically advanced implements, capital, end products, and services. They also create connections that promote integration between different nations; for example, they use financial capital from industrialised countries to create factories in developing nations where there are cheaper sources of labour, and raw materials. The finished products are then transported back to the industrialised nations where there is a ready consumer market. It is these connections that provide a foundation for increased integration and the subsequent emergence of a singular world market. Multinational corporations play a big role in improving the lives of citizens in developed as well as developing nations by promoting integration (Harttig 2010). This is because their financial exploits result in GDP growth, reduced poverty in developing nations, and the narrowing of the gap between poor and rich nations. For example, the increased investment of Western multinational corporations in China resulted in the poorest percentage of the nation’s population experiencing a 3.8% growth rate in terms of annual income (Kristensen and Lilja 2011). Multinational corporations that have end products that are popular among a diversity of customer groups have always been at the forefront of globalisation. The recognised global trade structure takes place over three stages. The first stage is that which concerns immobile production factors. This was mostly in existence during the 70s when production factors in factories were not mobile (Scullion, Collings, and Caligiuri 2010). Before the First World War, the only type of global trade was conducted within the colonies of specific European nations. There was restricted transportation of end products and raw materials. After the war, there was an increase in international trade, with principles such as quotas, tariffs, and restrictions in foreign ownership being the main existing impediments. Nations mainly traded in end products, as there were very few service industries in regional economies. International trade could also be hampered by high costs of transportation, and ineffective freight distribution. This essentially means that, from the 1920s to the early 1970s, international trade, at that time, was meant to prevent scarcity from resulting in casualties, and not to support global economic efficiency. The second stage of the development of global economic structure regards the development of mobility in production factors (Huselid and Becker 2011). In the 1980s, the movement of production factors such as capital became a distinct possibility. This is because the improvement of the physical and legal environment that supported international trade caused industrialists to begin to compare the benefits of operating from different locations. The 1980s also marked the emergence of trade agreements in different regions which reinforced the transactional and legal aspects of the international trade framework. Examples of such trade agreements include the ‘World Trade Organisation’ and ‘General Agreement on Trades and Tariffs’ (Chang, Bayhaqi, and Yuhua 2012). Such regional agreements facilitated long distance trade mechanisms which were mostly conducted through air transport. As a result of the increased costs of production in the old industrial outposts, entrepreneurs began to relocate all labour intensive manufacturing activities to cheaper locations. At first, corporations would only relocate to regions within national boundaries. Soon, however, they began to expand into adjacent nations. Through this process, direct foreign investment began to increase, and new regions of production emerged as multinational enterprises spread their assets to different regions of the globe. The third stage of the development of the global economic structure has to do with the establishment of production networks. After the establishment of international trade routes, entrepreneurs can then focus on the functional and geographical integration of manufacturing processes, consumption, and distribution. These processes are facilitated by the generation of information networks, and systems that ensure that raw materials and finished goods are distributed globally. The development of the global economic structure constitutes of several integrated services in the retail, finance, and manufacturing aspects. This is facilitated by improved logistics and transport structures which operate in a transactional environment that serves as a basis for international financial and legal elements. The generation of capital has greatly increased by growing trade between different nations and geographical regions. Factors such as trade facilitation, which concerns the improvement of international regulation movements, are being considered by numerous global stakeholders. Essentially, the ability to function as a contributor to the global economy is reliant on a strong transport system, as well as activities that allow trade facilitation. Trade facilitation processes are transaction, distribution, and regulation based. Distribution-based trade facilitation comprises of an intermodal or multimodal freight system of transport that has infrastructures, modes, and terminals that are positioned all over the world (Brazinkas and Beinoravičius 2014). This deals with the provision of trade support mechanisms which are facilitated by supply chains. The regulation based trade facilitation aspect is descriptive of tariffs, customs processes, and the regulations that determine documentation; and is basically concerned with ensuring that all trade processes follow legal procedures (Caligiuri and Tarique 2009). Where international trade processes with developing nations is concerned, factors such as border clearance can create considerable barriers or bottlenecks. Transaction-based trade facilitation processes have to do with insurance and banking activities in trade processes. The trading environment is dependent on the efficiency of all these processes. In the past few decades, the factors that have supported trade facilitation include integration processes, production systems, standardisation, transactional efficiency, and transport efficiency. Integration processes include functions such as decreased tariffs via agreements, and the use of economic blocks. Standardisation, on the other hand, has to do with the creation of a reference point for physical and information flows. Production systems involve the preservation of a system of diversified inputs which supports the exchange of services, parts, and products (Stutz and Warf 2011). Transport efficiency, in the development of a globally integrated economy, has been facilitated by improved infrastructure in regards to throughput and capacity. Transactional efficiency, on the other hand, has been ensured by the presence of credit, as well as investment capital for international commercial operations. An important trade flow that has increased trade flow concerns the increase of import resources in the world’s developing economies. The Processes increasing Global Economic Integration All these processes are intended to support social and economic development due to the fact that trade facilitation is dependent on the development of infrastructural, institutional, and human capabilities. Moreover, one of the principal changes that have resulted in global economic integration is advancements in the field of information technology (Chang, Bayhaqi, and Yuhua 2012). Today, different parts of the world are much more accessible due to the development of advanced communication channels. Citizens all over the globe can access the internet at low cost. According to Caligiuri and Tarique (2009), in 1931, a three minute telephone call between a person in New York and another in London would cost $293. By 2001, this cost had been reduced to a mere dollar. In 2006, it had been reduced further to a few cents. This was accompanied by tariff reductions. The reduction in non-tariff blockades allowed for closer integration. Manufactured good carried a tariff of 5% or less in industrialised nations. Moreover, in the nations within the European Union, there are no tariffs (Volz 2011). Today, a customer can order for products in a different geographical area of the world, and receive his or her purchase in hours, as a result of the use of the internet and airfreight. The incidence of international trade has greatly increased in the 21st century. According to Perry (2012), in 1950, approximately 45% of all goods being transported were agricultural, while 37% were manufactured goods. The rise in the trade of services was evident in 1980 when the services trade constituted of 15% of global trade, while agricultural products had fallen to 12% by the same year. In 1980, manufactured goods accounted for 45% of all global trade. By 2004, there was another significant change in these percentages as services accounted for 20% of global trade, agricultural produce took up only 7%, and manufactured products took up 59% (Brazinkas and Beinoravičius 2014). The living standards of developing as well as developed nations have also improved steadily through the decades; thus increasing opportunities for the expansion of business locally and regionally. It is this improvement in living standards that facilitated change in domestic policy aspects. For example, in European nations, there has been increased stability in terms of macro-economics since the 1980s (Bateman 2012). There has also been a marked decrease in rates of inflation in nations all over the world. The acceptance of policies which are market-friendly, along with the shift from central planning, has empowered resilient national economies while also provoking strong output responses that promote development. In the 1950s, the United States was the sole economic power in the world. However, by the 70s, Japan, along with European nations, had surged to the forefront as major economic powers. Three decades later, Asian nations such as India and China would also join this group as economic giants in the international economy (Balassa 2012). In today’s business setting, global production networks are responsible for the emergence of non-equity systems of international production such as outsourcing, contract manufacturing, and off-shoring. They have even contributed to the change of time dimensions in regards to international production corporations in that long-term commitments of investment are no longer deemed as being necessary for production operations to be conducted overseas. According to Bateman (2012), the term ‘born globals’ is often used to describe the rapid or instant internalisation of industrial ventures which are indicative of the dynamic business environment. While the creation of profits remains the main reason why economic integration is on the increase, there are also certain competitive factors that assist the process of investing in foreign production activities. For example, concerns such as cultural proximity, market closeness, and the extent to which business networks are embedded in the proposed new location are usually considered before multinational corporations decide to make investments in other nations. When interested in investing in business internationalisation, multinational corporations usually use either the Greenfield investment concept, or invest in cross-border mergers (Nakagawa 2012). The use of Greenfield investments involves the creation of new operations in the foreign nation without any input from local firms, while cross-border mergers allow for foreign firms to take control of under-performing companies in the nation to be invested in. Multinational corporations will also take into consideration the location of the proposed site for expansion, and the existing market size before making direct investments. Institutional changes like the creation of free-trade areas, and isomorphic organisational patterns within free trade areas can also contribute to increased foreign investment. Changes that will be triggered by Global Economic Integration As markets in the global setting become more integrated, financial capital as well as corporations will be able to operate more freely within and across borders. This means that policy makers will have to contend with new challenges in terms of regulations that are used to control business operations. Policy makers will have to focus on factors such as costs and benefits as companies are likely to have a diversity of locations in which to invest. Policy makers will also have to come up with ways through which they can make regulation evolve faster in reaction to market developments. This may call for increased cooperation with foreign governments, as mere national approaches may not be adequate. It is a recognised fact that more financial markets, apart from the United States, are now more liquid than they formerly were. This makes it easier for corporations operating within them to domestically raise capital at practical costs. It could be said that these markets are now at an early phase in the process of the development of their capital markets. This means that they will increasingly experience fast development in the role of derivatives, as well as securitisation. Public policy, in any nation, is meant to create a situation where there is a stable macroeconomic foundation that facilitates long term decision of investment (Balassa 2012). Due to increased global integration, it is evident that nations, and particularly those that are developed, will have to make fiscal policies that support the continuation of business operations within and outside their borders. In addition, it is likely that the business scene, in most nations, will have an increasingly larger role in determining the best policy responses to any emerging economic challenges. In the future, it is likely that business benefits will be broadly shared, and not captured in specific economy sectors. Conclusion The global economic integration that exists at present makes it almost impossible for any nation to remain self-sufficient. This is because every nation is involved in different stages of trade in the acquisition of the essential products that it lacks, and the sale of excess products, and the endeavour to perform better in various economic sectors than its partners in trade. Global economic integration has numerous benefits for nations such as the improved flow of manufactured products, financial labour, capital, and even business ideas. It is these factors that allow for improved negotiation in the global market scene. Global economic integration has been facilitated by the increased development of international trade systems between different developed and developing nations, and a substantial extent of containerisation in regards to commercial flow. Containerisation tends to increase faster than GDP growth and even trade. Another reason why global economic integration has increased is due to the increased growth in trade of developing economies. This trend, especially in Pacific Asia, has been facilitated by a concentration on export-oriented growth plans that are connected with an imbalance in commercial activities. Multinational corporations factor as the main international trade vectors that enable the economic integration of different markets. 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